##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|   |  |                                                                                            |  | 
|-- |  | ------------------------------------------------------------------------------------------ |  | 
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934     |  | 
|  
|   |  | For the Fiscal Year Ended September 29,
	2001                                              |  | 
|  
|or |  |                                                                                           
|  
|o  |  | 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 0-18623



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IKOS Systems, Inc.

(Exact name of registrant as specified in its
charter)




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|                                                                           |  |                                   
|-------------------------------------------------------------------------- |  | ----------------------------------
|Delaware                                                                   |  | 77-0100318                        
|(State or other jurisdiction of
	incorporation or organization)            |  | (IRS Employer
	Identification No.)
|                                                                          
|79 Great Oaks Blvd.
	San Jose, CA(Address of principal executive
	offices) |  | 95119(Zip Code)                   

(408) 284-0400

(Registrants telephone number, including
area code)




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Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock $.01 Par Value


Preferred Stock Purchase Rights


(Title of Class)




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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 such shorter period that
the registrant was required to file such report), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

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.     þ

The approximate aggregate market value of the
registrants Common Stock held by non-affiliates as of
December 14, 2001, was approximately $109,290,000.

As of December 14, 2001, approximately
9,341,000 shares of the registrants Common Stock were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2002
Annual Meeting of Stockholders are incorporated by reference in
Part III hereof.

This report (excluding exhibits) contains 48
pages. The Index to Exhibits begins on Page 24 of this
report.



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TABLE OF CONTENTS



|                                                  |                                                                                              |  |  |  |  |  |  | 
|------------------------------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | Item 1.Business                                                                             
|                                                  | Item 2.Properties                                                                           
|                                                  | Item 3.Legal Proceedings                                                                    
|                                                  | Item 4.Submission of Matters to a Vote of Security Holders                                  
|PART II                                          
|                                                  | Item 5.Market for Registrants Common Equity and Related Stockholder Matters                
|                                                  | Item 6.Selected Financial Data (In thousands, except per share data)                        
|                                                  | Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                  | Item 7a.Quantitative and Qualitative Disclosures About Market Risk                          
|                                                  | Item 8.Financial Statements and Supplementary Data                                          
|                                                  | Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                         
|                                                  | Item 10.Directors and Executive Officers of the Registrant                                  
|                                                  | Item 11.Executive Compensation                                                              
|                                                  | Item 12.Security Ownership of Certain Beneficial Owners and Management                      
|                                                  | Item 13.Certain Relationships and Related Transactions                                      
|PART IV                                          
|                                                  | Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                       
|REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
|CONSOLIDATED BALANCE SHEETS                      
|CONSOLIDATED STATEMENTS OF OPERATIONS            
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY  
|CONSOLIDATED STATEMENTS OF CASH FLOWS            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       
|EXHIBIT 10.22                                    
|EXHIBIT 10.23                                    
|EXHIBIT 10.24                                    
|EXHIBIT 10.25                                    
|EXHIBIT 10.26                                    
|EXHIBIT 10.27                                    
|EXHIBIT 21.1                                     
|EXHIBIT 23.1                                     



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PART I




Item 1.     Business

Forward-looking statements in this report are
made pursuant to the safe harbor provisions of Section 21E
of the Securities Exchange Act of 1934. In this report, the
words, anticipates, believes,
expects, future,
intends and similar expressions identify
forward-looking statements. Stockholders are cautioned that all
forward-looking statements pertaining to the Company involve
risks and uncertainties, including, without limitation, those
contained under the caption, Factors that May Affect
Future Results of Operations and other risks detailed from
time to time in the Companys periodic reports and other
information filed with the Securities and Exchange Commission.
Actual events and results may differ materially from the
Companys current expectations and beliefs.

General

IKOS develops, manufactures, markets, and
supports systems for the verification of complex electronic
system designs. IKOS has two primary product lines, hardware
simulation acceleration and emulation. IKOS mission is to
help customers verify the functional correctness of their high
complexity electronic system designs. IKOS differentiates its
hardware verification solutions from those of its competitors by
offering simulation-like ease of use coupled with the capacity
to handle very large semiconductor designs. IKOS also provides
services to customers to assist in the integration and
deployment of IKOS solutions.

IKOS sells its products and services to a broad
range of customers, including telecommunications, multimedia,
semiconductor, computer, and consumer electronics companies.
IKOS customers include Broadcom, TI, Phillips, Toshiba,
Lucent Technologies, ATI, Micron Technology, Infineon, nVIDIA
and SIS, who represent IKOS ten largest customers over the
last two years. Headquartered in San Jose, California, IKOS has
4 development centers worldwide located in: San Jose,
California, Waltham, Massachusetts, Noida, India and
Minneapolis, Minnesota. In addition, IKOS supports direct sales
operations in North America, the United Kingdom, the
Netherlands, France, Germany, and Japan. IKOS has a distributor
network covering the remainder of Europe and parts of Asia. IKOS
is publicly traded on the Nasdaq National Market under the
symbol IKOS. IKOS was incorporated in California in 1984 and
reincorporated in Delaware in May 1990.

On July 2, 2001, IKOS entered into an
Agreement and Plan of Merger and Reorganization with Synopsys,
Inc., or Synopsys, and Oak Merger Corporation, which was amended
on August 1, 2001, providing for the merger of IKOS with
Oak Merger Corporation, a subsidiary of Synopsys. Under the
terms of the proposed merger, subject to satisfaction of various
conditions, each share of IKOS common stock will be exchanged
for Synopsys common stock with a value between $6.00 and $20.00
per share, based on the financial performance of IKOS during the
twelve months ending June 30, 2002. Additional information
relating to the Synopsys merger can be found in the proxy
statement/ prospectus that is part of the Registration Statement
on Form S-4 filed with the Securities and Exchange
Commission (the SEC) by Synopsys on August 9,
2001 and amended on October 18, 2001.

On December 7, 2001 Fresno Corporation, a
wholly-owned subsidiary of Mentor Graphics Corporation, or
Mentor, commenced an unsolicited cash tender offer to purchase
all outstanding shares of IKOS common stock for $11.00 per
share, subject to certain conditions. The offer will expire on
January 25, 2002, unless extended at the sole discretion of
Mentor. Additional information relating to the Mentor offer can
be found in the Schedule 14D-9 filed with the SEC by IKOS
on December 20, 2001.

Background

The electronic design automation, or EDA,
industry provides tools and technology for the development and
testing of electronic designs. The testing process, known as
design verification, is a critical part of the electronic design
process and has a significant impact upon a design
engineers productivity. Design verification assesses the
functionality of a design prior to its mass production, which
reduces the costs and the time to market associated with
developing electronic designs and reduces the risk of launching
flawed devices.

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Computer-aided engineering, or CAE, and
Integrated circuit computer-aided design, or ICCAD, are the
largest segments in the EDA market. IKOS products are
focused on the design verification sub-segment of the CAE
market. Increasing design size and complexity and time to market
pressures in the industry create high demand for thorough
verification of electronic designs. As design sizes increase,
the amount of testing required to thoroughly verify the
functionality of an electronic design also increases. IKOS
customers estimate that up to 70% of their total design cycle
time is spent in the verification process. Design engineers are
looking for ways to cut design verification time and therefore
are moving toward a method of verifying a design by testing its
functionality in the earlier phases of the design cycle to boost
productivity, manage design complexity, and reduce the design
cycle times.

Traditionally, software simulators have been the
preferred tool for verifying semiconductor designs. However, the
verification processes required for highly-complex designs often
exceeds the performance capability of software simulators
running on general purpose workstations. In response to this
required level of performance, hardware tools were developed to
enhance verification performance by several orders of magnitude.
IKOS is focused on selling hardware products and solutions that
enable its customers to reduce design verification bottlenecks
and fix design errors earlier in the verification process. This
helps prevent the remanufacture of chips to correct design
errors that were missed in the design cycle. IKOS believes that
design complexity is increasing at a faster rate than design
engineering productivity and therefore, that the requirement for
hardware design verification will continue to grow.

In addition to the verification bottleneck
described above, system-on-chip, or SoC, design engineers who
need to integrate hardware and software systems face the
additional challenge of system integration verification. The
traditional approach to system integration verification was for
the designer to develop the hardware and software separately and
integrate the two at the end of the project when the actual
hardware is available to run the newly developed software. Using
this approach, designs cannot be verified until the end of a
project.

SoC design teams are looking for ways to provide
system integration verification and to prove system
functionality early in the design cycle, which accelerates the
overall time to market for the manufactured chip. A new method
of system integration verification, namely emulation, was
developed to address this problem. Using this method, an
emulation of the chip is used to verify system integration while
the chip is still being designed. For example, one design
requiring system integration verification is the development of
a 3D graphics chip used in personal computers. These chips
require software drivers to interface them to the personal
computers installed monitor. Rather than being tested at
the end of a project, if the software driver can be tested using
an emulation of the chip while it is still in the design
process, both the software and hardware developer will be able
to find bugs early in the design process, rather than at the end
of the process. This also allows the hardware developer to make
performance trade-offs before the chip is actually manufactured.
For example, while running his software on the emulator, the
software engineer may discover that he could improve the speed
of the graphics accelerator if the hardware engineer could make
some minor changes to the design, and the changes can then be
made prior to the manufacture of the chip.

IKOS emulation products address the
challenge of early system integration. One of the main
challenges of integrating hardware and software is the
performance of the test process itself. Software simulation has
proven to be too slow to allow for sufficient verification
within a reasonable time frame. IKOS emulation products
offer performance verification of up to 1 million cycles
per second, which helps to deliver the level of performance
necessary to test system operation and run system software for
an integrated view of the system.

IKOS products are comprised of patented
simulation acceleration technology and patented emulation
verification technology. IKOS emulation solutions are
differentiated from the competition through IKOS patented
VirtuaLogic compiler technology. VirtuaLogic allows IKOS to
deliver low cost, high capacity emulation solutions that provide
two to three orders of magnitude of higher performance than
hardware simulation. IKOS Vstation emulation platform
leverages the rapidly growing system-level verification
requirements created by the growth in silicon complexity by
providing high performance verification tools needed for the
complex designs that result from integrating entire systems onto
one chip. IKOS believes the

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emulation technology will provide the solutions
to the current complex design verification issues and as such
IKOS has focused it development, marketing and selling resources
towards it emulation technology.


The hardware simulation technology can be used
for sign-off level verification, which is the sign-off of a
design prior to manufacture after satisfactory completion of
agreed upon testing methodologies, and provides orders of
magnitude more performance than software simulation. IKOS
Nsim and ARES simulation platforms provide high performance
hardware simulation to leverage the growing verification
bottleneck created by the growth in silicon complexity.

In addition to its simulation and emulation
products, IKOS provides consulting services for on-site support
and design verification expertise to help customers achieve
project goals. Verification services allow the customer to
outsource the work needed to integrate new verification products
into their design flow or deliver new verification capabilities
to the design team. These services allow the customer to invest
and focus on what differentiates them while benefiting from the
custom integration of high performance verification to their
design flow.

Maintenance and Support

IKOS provides maintenance and support on a
contractual basis. Maintenance is provided on an on-site or on a
return and repair basis. IKOS also provides application support
via a toll-free telephone line. Customers with software
maintenance coverage also receive software updates, if any, from
IKOS. Foreign distributors generally provide customer training,
service and support for the products they sell. Maintenance
revenues, as a percent of total revenues, represented 36% in
fiscal 2001, 25% in fiscal 2000 and 27% in fiscal 1999.

Competition

IKOS main emulation competitors are the
Quickturn Design Systems unit of Cadence Design Systems, Inc.
and Mentor Graphics Corporation. Cadence/ Quickturn is the
market leader. Mentor Graphics offers emulation solutions in
Europe and Asia but is currently enjoined from selling in the
United States as a result of on-going litigation initiated by
Cadence/ Quickturn. The Cadence/ Quickturn and Mentor Graphics
legal proceedings await rulings from several courts. In 1998,
Cadence/ Quickturn announced their next generation emulator
Mercury and the end of life of their current System
Realizer product. In fiscal 2000 Cadence/ Quickturn announced an
upgrade to their Mercury product called Mercury Plus
and in 2001 Cadence/ Quickturn announced a new product called
Pallidium. IKOS believes the Cadence/ Quickturn products
generally have a higher cost per gate then the comparable IKOS
System.

Competitors in the chip-level and sign-off level
verification market include software simulation providers such
as Synopsys, Mentor Graphics and Cadence. Hardware simulation
providers include Axis Systems. For sign-off level verification,
IKOS strongest competition comes from static timing
analysis tools from providers such as Chrysalis, Synopsys and
Cadence.

IKOS expects competition in the verification
market to continue to expand and change. Moreover, IKOS
competes, and expects that it will continue to compete, with
established EDA companies. A number of these companies have
longer operating histories, significantly greater financial,
technical and marketing resources, greater name recognition and
larger installed customer bases than IKOS. In addition, many of
these competitors and potential competitors have established
relationships with current and potential customers of IKOS and
offer a broader and more comprehensive product line. Increased
competition could result in price reductions, reduced margins
and loss of market share, all of which could materially
adversely affect IKOS. In addition, current competitors or other
entities may develop other products that have significant
advantages over IKOS products. There can be no assurance
that IKOS will be able to compete successfully against current
and future competitors or that competitive pressures faced by
IKOS will not materially adversely affect its operating results.

IKOS competes on the basis of certain factors,
including product performance, price, support of industry
standards, technical support and customer service, timely
introduction of new products, ease of use and reputation. IKOS
believes that it currently competes favorably overall with
respect to these factors.

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Customers, Marketing and Sales

IKOS sells its products to a broad range of
companies including those in the communications, multimedia/
graphics, semiconductor, computer, aerospace and consumer
electronics industries. IKOS markets its products and services
primarily through its direct sales and service organization.
IKOS employs a technically oriented sales force and application
engineering team to serve the needs of existing and prospective
customers. IKOS consulting services provide customers with
a comprehensive solution that is tailored specifically to the
needs of the design team. These services include education,
application services, interface support, custom library
development and other on-site support through customized
consulting partnerships to assist the customer in accomplishing
key verification milestones.

IKOS direct sales strategy concentrates on
those companies that it believes are major users and designers
of complex electronic designs. For the fiscal year ended
September 29, 2001, two customers, Broadcom and nVIDIA
accounted for 16% and 14% of net revenues, respectively. For the
fiscal year ended September 30, 2000, one customer,
Broadcom Corporation, Inc., accounted for approximately 12% of
net revenues. For the fiscal year ended October 2, 1999,
one customer, Lucent Technologies, Inc., accounted for
approximately 14% of net revenues. While these customers
represent a significant portion of IKOS revenues during
the three fiscal years ended September 29, 2001, there can
be no assurance that revenues from these customers will equal or
exceed this level in future periods. Generally, IKOS
customers make large purchases in cycles that range from twelve
to eighteen months. All sales are derived from individual
customer purchase orders, which are delivered based on the terms
of that order.

Direct Sales

IKOS currently maintains direct sales and support
offices in the following states: Arizona, California, Illinois,
Massachusetts, New Jersey and Texas. IKOS makes direct sales
internationally in Canada, in Japan through its wholly-owned
subsidiary, IKOS K.K., in India through its wholly-owned
subsidiary IKOS India Pvt. Ltd., and in central Europe through
its wholly-owned subsidiaries, IKOS Systems GmbH in Germany,
IKOS Systems, Ltd. in England and IKOS Systems, S.A.R.L. in
France. Direct sales, including maintenance fees, accounted for
approximately 99% of IKOS net revenues in fiscal year
2001. Direct sales, including maintenance fees, accounted for
approximately 95% of IKOS net revenues in fiscal year
2000. Direct sales, including maintenance fees, accounted for
approximately 94% of IKOS net revenues in fiscal year 1999.

Distributors

IKOS believes that international markets are an
important source of its revenues and while the bulk of its sales
is through direct channels, IKOS has developed distributor or
outside sales relationships in ten foreign countries in Europe
and Asia. In fiscal 1997, IKOS terminated its distributor
relationship in Japan and began selling directly in that market.
In early fiscal 2000, IKOS entered into a new distributor
agreement for sales in Japan. The distributor relationship was
later terminated as management concluded this arrangement was
not in the best interest of IKOS. Revenues to distributors were
less than 1% and 5% of IKOS net revenues for the fiscal
year 2001 and 2000, respectively. Distributor revenues for
fiscal 1999 as a percentage of net revenues were approximately
6%.

International Sales

International sales, including export sales and
foreign operation net revenues, accounted for approximately 26%,
34% and 37% of IKOS net revenues during fiscal years 2001,
2000 and 1999, respectively. International revenues for the year
ended September 29, 2001 decreased 37% when compared to the
prior fiscal year as a result of the weakened global economy.
For fiscal year 2000, international revenues increased in
absolute dollars by approximately 19% but decreased as a
percentage of net revenues. The increase in sales dollars was a
direct result of increased demand in Europe and the Asia Pacific
territories. International revenues increased during fiscal 1999
due to increased demand for IKOS product, primarily in
Europe and the Asia Pacific territories.

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With the exception of sales to customers through
the Japan subsidiary, IKOS has attempted to reduce the risk of
fluctuations in exchange rates associated with international
revenues by selling its systems primarily denominated in
U.S. dollars. IKOS pays the expenses of its international
operations in local currencies and has not engaged in hedging
transactions with respect to such obligations. Sales through the
Japan subsidiary are denominated in Japanese Yen. For those
sales made in Japanese Yen, IKOS may enter into foreign exchange
contracts to minimize foreign exchange risk relating to the
Japanese subsidiarys sales.

Conducting business in international markets
requires compliance with applicable laws and regulations, such
as safety and telecommunication laws and regulations of foreign
jurisdictions and import duties and quotas. To date, IKOS has
not experienced any difficulty in obtaining export licenses from
the U.S. Department of Commerce for foreign sales; however,
there can be no assurance that IKOS will not experience
difficulties in the future.

Manufacturing and Suppliers

IKOS performs final assembly and test of all its
products in its San Jose, California facility and utilizes third
parties for all major subassembly manufacturing, including
printed circuit boards and custom ICs. IKOS has a testing and
qualification program to ensure that all subassemblies meet its
specifications before going into final assembly and test.

Certain key components used in IKOS
products are presently available from sole or limited sources,
including the Field Programmable Gate Arrays (FPGAs) used in its
emulation products and the semiconductor memories used in its
hardware simulators. IKOS generally purchases these components
pursuant to purchase orders placed from time to time in the
ordinary course of business and has no supply arrangements with
any of these source suppliers that require the suppliers to
provide components in guaranteed quantities or at set prices.
IKOS endeavors to maintain an ample supply of such components at
all times through order generation based on tracking of sales
projections, production and inventories, and by ordering
critical components for delivery over an extended period. The
inability to develop alternative sources for these sole or
limited source components or to obtain sufficient quantities of
these components could result in delays or reductions in product
shipments, which could adversely affect IKOS operating
results.

Product Development

IKOS ongoing product development activities
include the enhancement of current products, such as the ability
to simulate, emulate and verify the design of higher gate count
ICs and increased integration with other EDA tools. Furthermore
these product development activities include the development of
new product options and features, such as new library tools and
the research and development of new technologies for use in
future products.

IKOS research and product development
organization included 117 engineers at September 29,
2001. During fiscal 2001, 2000 and 1999, IKOS spent
approximately $17.2 million, $15.9 million and
$13.4 million, respectively, on research and development.
IKOS research and development costs, including costs of
software development before technological feasibility, are
expensed as incurred. Research and development expenses for the
year ended September 29, 2001 represented 28% of revenues
as compared to 22% of revenues for the year ended
September 30, 2000. The increase for the year ended
September 29, 2001, as a percentage of revenues was due to
the overall increase in research and development expenses
against lower than expected revenues for the twelve month
period. The increase in terms of absolute dollars for the
twelve-month period was primarily related to increased payroll
and related costs due to increased headcount and increased MIS
and rent as a result of the new facility. In light of the
current economic climate, IKOS is restricting hiring and capital
spending until the economic climate improves.

Proprietary Rights

Due to the rapid pace of technological
advancement, IKOS believes it is less dependent on the
protection of proprietary product information than on its
ability to develop and market new products. IKOS protects its
proprietary product information primarily through the use of
employee nondisclosure agreements and patents

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and by limiting access to confidential
information. IKOS presently has 15 issued United States
patents that cover various aspects and features of its products,
including its overall system architecture and certain features
in the systems hardware for both simulation and emulation
products. These patents expire between November 22, 2005
and April 24, 2018. IKOS also has licensed rights under
certain issued patents relating to VirtualWires technology from
MIT. This license continues through June 2015, and thereafter
becomes nonexclusive. MIT may terminate this license if IKOS
fails to meet certain minimum net sales milestones or upon
certain other material breaches of the license agreement that
remain uncured after 90 days notice of such breach.
Although IKOS may file additional patent applications in the
future, it does not expect to rely extensively on patents to
protect its products.


IKOS also relies on certain technology, which it
licenses from third parties, including technology, which is
integrated with IKOS technology and used in IKOS
systems.




Item 2.     Properties

The IKOS principal executive offices, as
well as its principal manufacturing, marketing, research and
development, and engineering facility, are located on
approximately 106,000 square feet of leased office building
space in San Jose, California. The lease on this facility
expires in January 2011. IKOS subleases approximately 30,000
square feet of this building space. In addition, IKOS leases
research and development and sales office space domestically in
Arizona, California, Illinois, Massachusetts, Minnesota, New
Jersey and Texas and internationally in England, France,
Germany, the Netherlands, Korea and Japan. IKOS believes that
its existing facilities are adequate for its current needs and
that additional space will be available as needed.




Item 3.     Legal
Proceedings

On February 9, 2001, IKOS filed a patent
infringement complaint against Axis Systems, Inc., (Axis) in the
United States District Court in the District of Delaware. The
complaint alleges infringement by Axis of four patents relating
to IKOS Virtual WiresTM technology, which
allows high resource utilization in FPGA-based emulators. In
August 2001, IKOS withdrew one of the patents originally
included in the lawsuit to focus IKOS efforts and to
simplify the issues for trial. IKOS is seeking both injunctive
relief and monetary damages. On September 18, 2001, the
Delaware Court ordered the case to be transferred to the Federal
District Court, Northern District of California, where it is now
currently pending. Discovery is still proceeding in the case and
the final amount of damages sought by IKOS has not yet been
determined.

On March 22, 2001, Axis filed a patent
infringement complaint against IKOS in the United States
District Court for the Northern District of California. The
complaint alleges infringement by IKOS of Axis patent
titled Simulation/ Emulation System and Method,
U.S. Patent No 6,009,256. The complaint alleges that
certain of IKOS emulation products infringe on the patent.
Axis is seeking both injunctive relief and monetary damages.
IKOS believes the claim is without merit and intends to
vigorously defend the action; however, such actions are
currently in the discovery phase only and there can be no
assurance that IKOS will prevail in either case. Furthermore,
the amount of damages sought by Axis has not yet been
determined. IKOS does not believe the outcome of this case will
have a material adverse impact on future results of operations
or cash flows.

On December 6, 2001, Mentor Graphics
Corporation, an Oregon corporation (Mentor) and
Fresno Corporation, a Delaware corporation (Fresno)
filed a lawsuit in the Court of Chancery of the State of
Delaware against IKOS, the IKOS Board, Synopsys, Inc.
(Synopsys) and Oak Merger Corporation
(Oak), C.A. No. 19299. This lawsuit
alleges, among other things, that the termination fee set forth
in the an Agreement and Plan of Merger and Reorganization by and
among Synopsys, Oak Merger Corporation and IKOS dated
July 2, 2001, as amended (the Merger Agreement)
is unreasonable, that certain operating restrictions and other
conditions set forth in the Merger Agreement impose onerous
restrictions on the authority of the IKOS Board to manage IKOS
and that the no-shop provision set forth in the Merger Agreement
insofar as it is operative after IKOS stockholders approve the
Merger Agreement is too onerous. This lawsuit further alleges
that the members of the IKOS Board breached their fiduciary
duties in connection

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with the Merger Agreement and that Synopsys and
Oak aided and abetted such breaches. This lawsuit seeks, among
other things, injunctive and declaratory relief, including, an
order enjoining the enforcement of the no-shop provisions and
termination fee in the Merger Agreement, and unspecified
damages. IKOS believes that this lawsuit is without merit and
intends to vigorously contest it.


On December 7, 2001, Mentor and Fresno filed
a lawsuit in the United States District Court for the District
of Delaware against IKOS, Case No. 01-809. This lawsuit
seeks an order and judgment from the Court declaring that the
cash tender offer to purchase all outstanding shares of IKOS
common stock (the Offer) and Tender Offer Statement
on Schedule TO (the Schedule TO) and
Mentors Schedule 13D are not in violation of the
federal securities laws and that Mentor did not violate federal
insider trading laws when it purchased from the open market
shares of IKOS stock beginning in July 2001 and when it
made the Offer. IKOS believes that this lawsuit is without merit
and intends to vigorously contest it.

On December 7, 2001, Sheldon Pittlemen, an
alleged stockholder of IKOS, filed an alleged class action
lawsuit in the Court of Chancery of the State of Delaware
against IKOS and the IKOS Board, C.A. No. 19300. This
lawsuit generally alleges that the members of the IKOS Board
breached their fiduciary duties in connection with the Merger
Agreement. It seeks injunctive relief and unspecified damages on
behalf of all stockholders of IKOS. IKOS believes that this
lawsuit is without merit and intends to vigorously contest it.

On December 10, 2001, Ernest Hack, an
alleged stockholder of IKOS, filed an alleged class action
lawsuit in the Court of Chancery of the State of Delaware
against IKOS, the IKOS Board and Synopsys,
C.A. No. 19305. While not identified as such in the
caption of the complaint, the body of the complaint describes
Mentor as a defendant. This lawsuit alleges that the members of
IKOS Board failed to properly consider and act upon the
Offer. It also alleges that IKOS failed to solicit offers before
entering the Merger Agreement. The lawsuit alleges that, as a
result of the foregoing among other things, the members of
IKOS Board breached their fiduciary duties and seeks
injunctive relief and unspecified damages. IKOS believes that
this lawsuit is without merit and intends to vigorously contest
it.

On December 10, 2001, Robert Ferronte, an
alleged stockholder of IKOS, filed an alleged class action
lawsuit in the Court of Chancery of the State of Delaware
against IKOS and the IKOS Board, C.A. No. 19307. This
lawsuit generally alleges, among other things, that the members
of the IKOS Board breached their fiduciary duties by allegedly
failing to fully inform themselves about Mentors interest
in acquiring IKOS. The complaint further alleges that IKOS
poison pill permits the IKOS Board to manipulate IKOS to the
detriment of IKOS stockholders and to perpetuate its
control over IKOS business and operations. The lawsuit
seeks injunctive relief. IKOS believes that this lawsuit is
without merit and intends to vigorously contest it.

On December 14, 2001, Scott Petler, an
alleged stockholder of IKOS, filed an alleged class action
lawsuit in the Santa Clara County, California Superior Court,
Case No. CV 803814, against IKOS, the members of IKOS
Board of Directors, Synopsys and Aart de Geus, Chairman and CEO
of Synopsys. This lawsuit generally alleges that the members of
the IKOS Board breached their fiduciary duties in connection
with the Merger Agreement and in its response to the Offer. The
lawsuit further alleges that Synopsys and Dr. de Deus
aided and abetted the alleged breach of fiduciary duties. The
lawsuit seeks injunctive relief and an order rescinding the
Merger Agreement. IKOS believes that this lawsuit is without
merit and intends to vigorously contest it.




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

No matters were submitted to a vote of security
holders during the fourth quarter of the fiscal year covered by
this report.

7



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##### Table of Contents



Executive Officers of the Registrant

Set forth below is certain information with
respect to age as of September 29, 2001 and background for
each of the officers of IKOS.

|                  |  |     |    |                    |  |                                                                                      
|----------------- |  | --- | -- | ------------------ |  | -------------------------------------------------------------------------------------
|Name              |  | Age |    | Position with IKOS
|                  |  |     |    |                   
|Gerald S. Casilli |  |     | 62 |                    |  | Chairman of the Board                                                                
|Ramon A. Nuñez    |  |     | 47 |                    |  | Chief Executive Officer, President and Director                                      
|Joseph W. Rockom  |  |     | 62 |                    |  | Chief Financial Officer, Vice President of
	Finance and Administration, and Secretary
|Daniel R. Hafeman |  |     | 52 |                    |  | Vice President of Advanced Research and Chief
	Technical Officer                     
|Robert Hum        |  |     | 49 |                    |  | Chief Operating Officer                                                              
|Tom Gardner       |  |     | 53 |                    |  | Vice President of Worldwide Sales                                                    
|Nader Fathi       |  |     | 42 |                    |  | Vice President of Sales Operations                                                   

Mr. Casilli has served as Chairman of the
Board of Directors of IKOS since July 1989 and served as Chief
Executive Officer from April 1989 to August 1995. He has served
as a Director since 1986. Mr. Casilli is also currently a
Director for Evans and Sutherland Computer Corporation. From
January 1986 to December 1989, he was a general partner of
Trinity Ventures, Ltd., a venture capital firm that was a former
investor in IKOS. Mr. Casilli was a general partner of
Genesis Capital, a venture capital firm, from February 1982 to
1990. Mr. Casilli founded Millennium Systems, a
manufacturer of microprocessor development systems, in 1973 and
served as its President and Chief Executive Officer until 1982.

Mr. Nuñez was appointed Chief Executive
Officer in August 1995. Mr. Nuñez had been President,
Chief Operating Officer and Director of IKOS since October 1994.
He had served as Vice President of Worldwide Sales since July
1993. Mr. Nuñez joined IKOS in April 1990 as Vice
President of North American Sales after five years in sales
management with Zycad Corporation. Earlier he was branch sales
manager for Cadnetix (now part of Intergraph) in Southern
California.

Mr. Rockom has served as Chief Financial
Officer and Vice President of Finance since September 1986.
Mr. Rockom has also served as IKOS Secretary since
April 1995. Before joining IKOS, Mr. Rockom spent seventeen
years at American Microsystems, Inc. (AMI), a semiconductor
manufacturer, where he held a variety of administrative,
operating and management positions, including Vice President of
Finance.

Mr. Hafeman, a founder of IKOS, has served
as Vice President of Advance Research and Chief Technical
Officer since March 1996. Mr. Hafeman served as Vice
President of Engineering from August 1989 to March 1996. From
December 1984 to August 1989, he served in various positions of
engineering management with IKOS. Mr. Hafeman was an
engineering manager at Scientific Micro Systems, Inc. for eight
years prior to his employment with IKOS.

Mr. Hum was promoted to Chief Operating
Officer in May of 2000. From January 1998 to May 2000,
Mr. Hum served as Senior Vice President of Product
Operations. He came to IKOS as Vice President of Engineering in
May of 1997 from Cadence Design Systems where he served in
several senior business and technical management positions.
Prior to joining Cadence, Mr. Hum held a variety of
technical and business management roles during an 18-year tenure
at Bell-Northern Research (NORTEL).

Mr. Gardner was promoted to Vice President
of North American Sales in June 1998. Earlier, he held senior
sales management positions in the eastern and central US regions
during the last two years. Most recently he held the position of
director of sales for the central region. Prior to joining IKOS,
Mr. Gardner held sales and sales management positions with
Mentor Graphics, Quickturn, Cadence and Zycad. During fiscal
2001, Mr. Gardner was promoted to Vice President of
Worldwide Sales.

Mr. Fathi was promoted to Vice President of
International Sales in June 1998. Prior to joining IKOS,
Mr. Fathi served in several sales, marketing, program
management and customer support management positions at Cadence,
Daisy (now part of Intergraph), Silicon General and Xerox
Microelectronics Center.

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##### Table of Contents



Subsequent to the end of fiscal year 2000,
Mr. Fathi was promoted to Vice President of World
Operations. Subsequent to the end of the fiscal year, former
executive officer, Mr. Fathi, terminated his position as an
executive officer of IKOS.





PART II




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

IKOS Common Stock is currently traded on
the Nasdaq National Market under the symbol IKOS. The following
table sets forth, for the fiscal period indicated, the high and
low closing sales prices for the Common Stock as reported by
Nasdaq.

|            |                |      |   |       |  |  |   |      | 
|----------- | -------------- | ---- | - | ----- |  |  | - | ---- | 
|            |                | High |   | Low  
|            |                |      |   |      
|Fiscal 2000 |                |      |   |       |  |  |   |     
|            | First Quarter  |      | $ | 9.69  |  |  | $ | 7.00 | 
|            | Second Quarter |      |   | 14.94 |  |  |   | 8.88 | 
|            | Third Quarter  |      |   | 12.38 |  |  |   | 8.63 | 
|            | Fourth Quarter |      |   | 13.00 |  |  |   | 9.69 | 
|Fiscal 2001 |                |      |   |       |  |  |   |     
|            | First Quarter  |      | $ | 14.88 |  |  | $ | 7.13 | 
|            | Second Quarter |      |   | 17.44 |  |  |   | 8.28 | 
|            | Third Quarter  |      |   | 11.38 |  |  |   | 6.43 | 
|            | Fourth Quarter |      |   | 8.24  |  |  |   | 2.95 | 

The approximate number of record holders of IKOS
stock as of November 16, 2001 was 160. The approximate
number of beneficial holders is estimated to be 3,900 as of that
same date.

IKOS has never declared or paid cash dividends on
its stock. IKOS currently anticipates that it will retain all
future earnings for use in the operation and expansion of its
business and does not anticipate paying any cash dividends in
the foreseeable future.

During fiscal 1998, IKOS announced its intention
to repurchase up to 1,000,000 shares of its outstanding common
stock on the open market. Through September 29, 2001, IKOS
had repurchased 516,500 shares at a weighted-average per share
price of $5.96 and all shares of this total have been reissued
through IKOS stock option and stock purchase plans.




Item 6.     Selected
Financial Data (In thousands, except per share
data)

The following selected financial data should be
read in conjunction with the more detailed consolidated
financial statements and related notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere
herein. The selected consolidated statement of operations data
for each of the three fiscal years ended September 29,
2001, September 30, 2000 and October 2, 1999 and
selected consolidated balance sheet data as of
September 29, 2001 and September 30, 2000 are derived
from, and qualified by reference to, the audited consolidated
financial statements included elsewhere herein. The selected
consolidated statement of operations data for the fiscal years
ended October 3,

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##### Table of Contents



1998 and September 27, 1997 and selected
consolidated balance sheet data as of October 2, 1999,
October 3, 1998 and September 27, 1997 are derived
from audited financial statements not included in this
Form 10-K.


|                                                                     |                   |                    |        |               |   |            |        |            |  |               |        |        |  |   |         |         |   |   |        |        | 
|-------------------------------------------------------------------- | ----------------- | ------------------ | ------ | ------------- | - | ---------- | ------ | ---------- |  | ------------- | ------ | ------ |  | - | ------- | ------- | - | - | ------ | ------ | 
|                                                                     |                   |                   
|                                                                     |                   | Fiscal Years Ended
|                                                                     |                   |                   
|                                                                     |                   | September 29,      |        | September 30, |   | October 2, |        | October 3, |  | September 27,
|                                                                     |                   | 2001               |        | 2000          |   | 1999       |        | 1998       |  | 1997         
|                                                                     |                   |                    |        |               |   |            |        |            |  |              
|Consolidated Statement of Operations
	Data:                          |                   |                    |        |               |   |            |        |            |  |               |        |        |  |   |         |         |   |   |        |       
|Net revenues                                                         |                   | $                  | 61,069 |               |   | $          | 72,796 |            |  | $             | 56,333 |        |  | $ | 40,893  |         |   | $ | 56,096 |       
|Cost of revenues                                                     |                   |                    | 16,340 |               |   |            | 16,031 |            |  |               | 13,778 |        |  |   | 14,734  |         |   |   | 12,452 |       
|                                                                     | Gross profit      |                    |        | 44,729        |   |            |        | 56,765     |  |               |        | 42,555 |  |   |         | 26,159  |   |   |        | 43,644 | 
|Operating expenses                                                   |                   |                    | 53,146 |               |   |            | 46,345 |            |  |               | 39,944 |        |  |   | 49,516  |         |   |   | 42,495 |       
|Income (loss) from operations                                        |                   |                    | (8,417 | )             |   |            | 10,420 |            |  |               | 2,611  |        |  |   | (23,357 | )       |   |   | 1,149  |       
|Other income                                                         |                   |                    | 1,802  |               |   |            | 618    |            |  |               | 495    |        |  |   | 1,031   |         |   |   | 1,269  |       
|Income (loss) before provision for income
	taxes                     |                   |                    | (6,615 | )             |   |            | 11,038 |            |  |               | 3,106  |        |  |   | (22,326 | )       |   |   | 2,418  |       
|Provision (benefit) for income taxes                                 |                   |                    | (2,010 | )             |   |            | 2,750  |            |  |               | 650    |        |  |   | 4,928   |         |   |   | 1,023  |       
|                                                                     | Net income (loss) |                    | $      | (4,605        | ) |            | $      | 8,288      |  |               | $      | 2,456  |  |   | $       | (27,254 | ) |   | $      | 1,395  | 
|Basic net income (loss) per share                                    |                   | $                  | (0.51  | )             |   | $          | 0.97   |            |  | $             | 0.30   |        |  | $ | (3.24   | )       |   | $ | 0.17   |       
|Weighted-average shares used in computing basic
	per share amounts   |                   |                    | 8,981  |               |   |            | 8,563  |            |  |               | 8,306  |        |  |   | 8,418   |         |   |   | 8,408  |       
|Diluted net income (loss) per share                                  |                   | $                  | (0.51  | )             |   | $          | 0.84   |            |  | $             | 0.27   |        |  | $ | (3.24   | )       |   | $ | 0.16   |       
|Weighted-average shares used in computing diluted
	per share amounts |                   |                    | 8,981  |               |   |            | 9,836  |            |  |               | 9,140  |        |  |   | 8,418   |         |   |   | 8,927  |       
|Consolidated Balance Sheet Data:                                     |                   |                    |        |               |   |            |        |            |  |               |        |        |  |   |         |         |   |   |        |       
|Working capital                                                      |                   | $                  | 13,319 |               |   | $          | 17,045 |            |  | $             | 8,278  |        |  | $ | 5,492   |         |   | $ | 31,608 |       
|Total assets                                                         |                   |                    | 46,283 |               |   |            | 52,005 |            |  |               | 31,790 |        |  |   | 33,344  |         |   |   | 56,550 |       
|Long-term debt, less current portion                                 |                   |                    |       |               |   |            |       |            |  |               |       |        |  |   |        |         |   |   |       |       
|Total stockholders equity                                           |                   |                    | 22,312 |               |   |            | 24,864 |            |  |               | 15,031 |        |  |   | 12,613  |         |   |   | 41,990 |       




Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

Cautionary Statement

The following discussion and analysis of
IKOS financial condition and results of operations should
be read in conjunction with IKOS Summary Selected
Consolidated Financial Data and IKOS consolidated
financial statements and notes thereto appearing elsewhere in
this document. This discussion and analysis contains
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements without limitation contain the words,
believes, anticipates,
estimates, expects,
projections, and words of similar import. These
forward-looking statements involve risks and uncertainties, and
the cautionary statements discussed under the caption
Factors that May Affect Future Results of
Operations, identify important factors that could cause
actual results to differ materially from those indicated in the
forward-looking statements.

Nature of Operations

IKOS develops, manufactures, markets and supports
electronic design automation tools for the verification of
integrated circuit designs. IKOS mission is to help
customers realize their high complexity electronic systems
through innovative design verification solutions. IKOS
products are designed to enable its customers to verify their
designs more rapidly and accurately than existing software-based
simulation tools. In 1996, IKOS broadened its spectrum of
verification solutions to extend from the design concept stage
to the prototype stage by introducing its first emulation
system. IKOS commercially released its first emulation

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system in 1997 and has completely redesigned its
original one-million gate emulation product to a two million
gate emulation solution. During fiscal 1999, IKOS released its
third generation emulation product, which provides a five
million-gate emulation solution. In March 2001, IKOS released
its fourth generation emulation product, which provides for
15 million gates of emulation capacity.


IKOS sells its products to a broad range of
customers in the communications, multimedia/ graphics,
semiconductor, computer, aerospace and consumer electronics
industries. IKOS markets its products and services primarily
through its direct sales and service organization as IKOS has
direct sales operations throughout the United States and in the
United Kingdom, France, Germany and Japan. IKOS also has a
distribution network covering the remainder of Europe and in
parts of Asia. In fiscal 1998, IKOS opened a research and
development operation in India.

Recent Trends

IKOS products are part of companies
capital equipment budgets, which have become very restricted
during the recent economic downturn. This has led to a deferral
of purchasing decisions and a decrease in sales to such
customers. IKOS expects that these economic factors may continue
to restrict its customers budgets and limit the demand for
IKOS products.

Impact of Recently Issued Accounting
Standards.On December 3, 1999,
the Securities Exchange Commission (SEC) Staff issued Staff
Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements. In addition, on
October 9, 2000, the SEC Staff issued SAB No. 101
Revenue Recognition in Financial Statements 
Frequently Asked Questions and Answers (SAB 101
FAQ). The SEC Staff addressed several issues in SAB
No. 101 and in the SAB 101 FAQ, including the timing
for recognizing revenue derived from selling arrangements that
involve customer acceptance provisions. During the fourth
quarter of fiscal 2001, IKOS adopted SAB No. 101. Due to
customary business practices in Japan, IKOS has revised its
revenue recognition policy to require formal written acceptance
from Japanese customers prior to recognition of revenue related
to these sales (See Note 1 in the Notes to Consolidated
Financial Statements). The adoption of SAB No. 101 did not
result in a cumulative effect adjustment as of
September 30, 2000, however, IKOS has revised its quarterly
financial data for the first three quarters of 2001, in order to
reflect the provisions of SAB No. 101, as if applied
consistently for all periods shown.

In July 2001, the FASB issued SFAS No. 141
Business Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets. These standards become
effective for fiscal years beginning after December 15,
2001. IKOS intends to early adopt these standards, such that
beginning in the first quarter of 2002, goodwill will no longer
be amortized but will be subject to annual impairment tests. As
of September 29, 2001, IKOS had a net balance of $715,000
of goodwill. The adoption of SFAS No. 141 is expected to
reduce IKOS amortization of intangibles for fiscal 2002 by
approximately $168,000. During fiscal 2002, IKOS will perform
the first of the required impairment tests of goodwill. This
test is not expected to have a material effect on IKOS
results of operations or financial position.

In October 2001, the FASB issued SFAS
No. 144, Accounting for Impairment or Disposal of
Long-lived Assets. SFAS No. 144 supersedes SFAS
No. 121, Accounting for the Impairment of Long-lived
Assets and for Long-Lived Assets to be Disposed Of, and
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement is effective
for fiscal years beginning after December 15, 2001.
Adoption of this statement will not have a material impact on
IKOS financial position or results of operations.

In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments
and hedging activities. It requires the Company to recognize all
derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. It further provides
criteria for derivative instruments to be designated as fair
value, cash flow, or foreign currency hedges, and establishes
accounting standards for reporting changes in the fair value of
the derivative instruments. Upon adoption, the Company was
required to adjust hedging instruments to fair value in the
balance sheet and recognize the offsetting gains or losses as
adjustments to be reported in net income or other comprehensive
income, as

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appropriate. The Company adopted SFAS
No. 133 as of October 1, 2000. The adoption of SFAS
No. 133 did not have a material effect on the
Companys results of operations or financial position.


Results of Operations

Net Revenues.For
the fiscal year ended September 29, 2001, net revenues
decreased 16% from $72,796,000 in fiscal 2000 to $61,069,000 in
fiscal 2001. For the fiscal year ended September 30, 2000,
net revenues increased 29% from $56,333,000 in fiscal 1999 to
$72,796,000 in fiscal 2000. The decrease in net revenues in
fiscal 2001 is a primarily due to the decline in product sales
partially offset by an increase in maintenance revenues. Product
revenues declined due to the downturn in the economy, resulting
in fewer orders being placed for IKOS products. While
IKOS customers have expressed interest in IKOS
products, these customers have not placed orders with IKOS due
to limited budgets for capital expenditures. The year to year
increase in net revenue from 1999 to 2000 was primarily the
result of increased sales of IKOS emulation product.
Emulation revenues increased over 66% from 1999 to 2000. The
increase in emulation revenue from 1999 to 2000 is the direct
result of increasing acceptance and demand for the emulation
product. During fiscal 2000, IKOS realized several significant
competitive wins in the market including a record
$11 million order from one customer. IKOS development
effort has resulted in the introduction of a new and more robust
emulation system every twelve to eighteen months since
IKOS initial emulation product introduction in 1997. This
track record has given customers confidence that IKOS can
deliver emulation solutions at a rate consistent with their own
development requirements. While emulation has grown over the
past three years, simulation has grown at a much slower rate
(approximately 5% in fiscal year 2000) and actually decreased by
39% in fiscal 2001. As IKOS continues to concentrate its efforts
on emulation, IKOS fully expects simulation revenues to continue
to decline. IKOS believes that until the economy improves,
visibility over future revenue growth, if any, will remain
unclear.

Maintenance revenues increased 20% from
$18,144,000 in fiscal 2000 to $21,805,000 in fiscal 2001.
Maintenance revenues increased 20% from $15,075,000 in fiscal
1999 to $18,144,000 in fiscal 2000. The growth in maintenance
revenues is due to the increasing installed based of emulation
system users to whom we provide maintenance coupled with the
on-going renewals of the simulation systems installed base. The
shifting base of simulation users and emulation users impacts
the maintenance revenue rate of growth. As the simulation
business declines, the base of users will decline, negatively
impacting the rate of growth for maintenance, however, this
impact is offset by the increasing base of emulation users.

International sales (export sales and sales by
the IKOS Japan and European operations) were $15,782,000,
$25,034,000 and $21,076,000 for fiscal years 2001, 2000 and
1999, respectively. These sales represent 26%, 34% and 37% of
net revenues, respectively. For fiscal 2001, international
revenues decreased 37% as a result of the weakened global
economy. IKOS operations in Europe, Japan and other Asia
were negatively impacted by the economic downturn. For fiscal
2000, international revenues increased by $3,958,000, but
decreased slightly as a percentage of revenues for the year. The
absolute dollar increase was primarily a result of the growth in
sales in IKOS European region and Asia. European revenues
grew from $12,818,000 in fiscal 1999 to $14,151,000 in fiscal
2000. IKOS had seen higher demand in the European marketplace
during fiscal 2000 resulting in the increase in revenues.
Revenues in Asia also increased significantly, increasing from
$8,258,000 in fiscal 1999 to $10,883,000 in fiscal 2000. The
increase was due to a short resurgence in the Asia marketplace
after several years of lower revenues due to problems in the
Asian economy and the reorganization of IKOS Japan
operations. IKOS will continue to focus its efforts on the
international market and consistent with domestic revenues IKOS
believes that until the economy improves, visibility over future
revenue growth, if any, will remain unclear.

Gross Profit

Gross profit was $44,729,000, $56,765,000 and
$42,555,000 or 73%, 78% and 76% of total net revenues for fiscal
years 2001, 2000 and 1999, respectively. Gross margins decreased
during fiscal 2001 from fiscal 2000 primarily as a result of
fixed costs of revenues being covered by decreasing revenues. As
previously discussed, the downturn in the economy reduced the
demand for IKOS products resulting in lower revenues.
Gross margins and more specifically, product margins for fiscal
2000 as compared to fiscal 1999 increased primarily

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as a result of higher revenues overall and
increased sales of higher margin products. Maintenance margins
improved in both fiscal 2001 and 2000 as a result of better
controls over maintenance spending generated from a new
technical support organization that was reorganized in fiscal
1999.


Research and Development Expenses

Research and development expenses were
$17,191,000, $15,912,000 and $13,443,000 in fiscal 2001, 2000
and 1999, respectively. As a percentage of net revenues,
research and development expenses were 28%, 22% and 24% for
fiscal 2001, 2000 and 1999, respectively. In general, the
increases in research and development expenses reflect our
continued development of our emulation technology. The increase
in fiscal 2001 from fiscal 2000, as a percentage of revenues,
was due to the overall increase in research and development
expenses against lower than expected revenues for the year. The
increases in absolute dollars for fiscal 2001 are related to
increased payroll and related costs due to increased headcount
and increased MIS and rent as a result of our relocation to a
new facility. Research and development expenses increased from
fiscal 1999 to fiscal 2000 as a result of increased spending for
consultants and temporary employees, salaries, profit sharing,
and hardware prototyping expenses. Spending increases related to
consultants and temporary help was directly related to
IKOS need to meet its resource needs using outside
sources. In addition, expenses increased in fiscal 2000 from
fiscal 1999 as a result of IKOS efforts to complete its
fourth generation emulator resulting in higher prototyping
expenses. In light of the current economic climate, IKOS is
restricting hiring and capital spending until the economic
climate improves.

Sales and Marketing Expenses

Sales and marketing expenses were $26,433,000,
$24,913,000 and $21,822,000 in fiscal 2001, 2000 and 1999, or
43%, 34% and 39% of net revenues, respectively. For fiscal 2001,
the increase as a percentage of sales, was due to the overall
increase in sales and marketing expenses against lower than
expected revenues. The increase in absolute dollars from fiscal
2000 to fiscal 2001 is primarily related to increased payroll,
recruiting, travel and trade show expenses. The increases in
absolute dollars from fiscal 1999 to fiscal 2000 are due to
salary and commission increases as a result of higher sales
levels. The increase is also a result of higher spending for
representative commissions, consultants, travel expenses and
other marketing expenditures for new product introductions. As a
percentage of revenues, sales and marketing expenses decreased
from 1999 to 2000, primarily due to the lower revenue base in
1999 when compared to the level of spending. Due to the current
economic conditions, IKOS is restricting hiring and capital
spending, as well as limiting other discretionary marketing
programs to ensure that sales and marketing expenses are in line
with its projected revenue levels.

General and Administrative Expenses

General and administrative expenses were
$9,354,000, $5,311,000 and $4,267,000 for fiscal 2001, 2000 and
1999, or 15%, 7% and 8% of net revenues, respectively. For
fiscal 2001, the increase as a percentage of net revenues was
due to the overall increase in general and administrative
expenses against lower than expected revenues for the year. The
general and administrative expenses were higher than the prior
year periods in terms of absolute dollars as a result of
increased legal and professional fees, salaries and related
expenses. In addition, general and administrative expenses
included over $2,500,000 in charges related to the impending
merger with Synopsys and legal fees associated with the Axis
lawsuit. For fiscal 2000, general and administrative expenses
increased in absolute dollars over the prior fiscal year
primarily due to increased headcount, salary adjustments, profit
sharing, professional services, and allocated MIS expenses. The
higher costs in fiscal 2000, while lower as a percentage of
revenues from the prior year, reflect IKOS efforts to
improve internal processes to increase on-going efficiencies.

Interest Income and Other Income,
Net

Interest income and other income in fiscal 2001
primarily consists of net interest income of approximately
$748,000 and other income of $1,054,000 primarily from the
sublease of a portion of its facility. The increase of 21% in
net interest income over the prior year is primarily a result of
the higher net cash, cash equivalents

13



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and short-term investment balances over the
course of the year. Net interest income in fiscal 2000 was
$618,000, representing a 25% increase from the $495,000 earned
in 1999. The increase in interest income is primarily
attributable to increased cash, cash equivalents and short-term
investments over the course of fiscal 2000. These balances
increased as result of higher sales bringing about higher cash
levels generated from operations in fiscal 2000.


Provision (Benefit) for Income Taxes

During fiscal 2001, IKOS recorded a net income
tax benefit of approximately $2,010,000 which primarily
consisted of a benefit on the loss before tax of $6,615,000 for
the year, offset partially by current year foreign income taxes.
During fiscal 2000, IKOS recorded a tax provision of $2,750,000,
which primarily consisted of federal and state alternative
minimum taxes and foreign taxes. For fiscal 1999, IKOS recorded
a tax provision of $650,000, which primarily consisted of
federal and state alternative minimum taxes and foreign taxes.

Other

IKOS has experienced minimal gains or losses on
foreign currency translation. With the exception of IKOS
Japan operations, substantially all of its international sales
to date have been billed and collected in U.S. dollars.
IKOS pays the expenses of its international operations in local
currencies and to date IKOS has not engaged in hedging
transactions with respect to such obligations. IKOS sales
in Japan are billed and collected in the Japanese local
currency. As such, IKOS periodically enters into foreign
exchange contracts to minimize foreign exchange risk relating to
the Japanese subsidiarys sales that are denominated in
yen. A forward exchange contract obligates IKOS to exchange
predetermined amounts of a specified foreign currency at a
specified exchange rate on a specified date or to make an
equivalent US dollar payment equal to the value of such
exchange. Through September 29, 2001, the impact of such
arrangements has been immaterial to IKOS operations and
results.

Liquidity and Capital Resources

Since inception, IKOS has financed its
operations, including increases in accounts receivable and
inventory and capital equipment acquisitions, primarily through
private and public sales of equity securities, a loan secured by
capital equipment and a working capital line of credit.
IKOS cash, cash equivalents and short-term investments
decreased to $15,590,000 at September 29, 2001 from
$19,803,000 at September 30, 2000. The decrease was a
result of $2,382,000 of cash used in operating activities and
$4,628,000 of cash used in investing activities (excluding
short-term investment activities) offset by $2,797,000 of cash
provided by financing activities.

Operating
Activities.IKOS operating
activities used cash of $2,382,000 in fiscal 2001 and $3,064,000
during fiscal 1999 and provided cash of $10,363,000 during
fiscal 2000. For fiscal 2001,the uses of cash for operating
activities were primarily from the net loss incurred in fiscal
2001 along with increases in inventory, income taxes receivable,
prepaid expenses and other assets and decreases in accrued
payroll and related expenses, accrued commissions, deferred
revenues and income taxes payable. Cash provided primarily from
adjustments to net loss for depreciation and amortization and
deferred rent along with a decrease in accounts receivable and
increases in accounts payable and other accrued liabilities
partially offset this use of cash in fiscal 2001. Accounts
receivable decreased from $19,716,000 at September 30, 2000
to $9,878,000 at September 29, 2001, or approximately 50%.
The decrease in accounts receivable is primarily the result of
product billings decreasing substantially during the year
partially offset by an increase in maintenance invoicing. The
cash provided by operating activities for fiscal 2000 was from
net income adjusted for depreciation and amortization, increases
in accounts payable, accrued payroll and related expenses,
accrued commissions, income taxes payable and deferred revenues
partially offset by increases in accounts receivable,
inventories and a decrease in other accrued liabilities. For
fiscal 1999, the use of cash for operating activities primarily
consisted of an increase in accounts receivable and decreases in
accounts payable, other accrued liabilities and deferred
revenues partially offset by net income adjusted for
depreciation and amortization and a decrease in inventories
along with increases in accrued payroll and accrued commissions.

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Investing
Activities.Net cash used in investing
activities for fiscal 2001 and 2000 was $1,834,000 and
$9,693,000, respectively, while net cash provided by investing
activities for fiscal 1999 was $2,417,000. Net cash used in
investment activities in fiscal 2001 related to the purchase of
equipment and leasehold improvements and the purchase of
short-term investments offset partially by the receipt of cash
from the maturity of short-term investments. Net cash used in
investment activities for fiscal 2000 related to the purchase of
equipment and leasehold improvements and purchases of short-term
investment instruments partially offset by maturities of
short-term investments. During fiscal 1999, cash provided by
investing activities related to the net maturities of short-term
investments that were converted to cash or cash equivalents
partially offset by purchases of capital equipment and leasehold
improvements as well as net purchase of investments. IKOS has
placed limits on its capital spending for fiscal 2002 in an
effort to reduce overall spending in light of the current
economic slowdown.

Financing
Activities.In fiscal years 2001, 2000
and 1999, net cash provided by financing activities of
$2,797,000, $3,698,000 and $146,000 was from sales of common
stock under IKOS Stock Option and Stock Purchase Plans.
During fiscal 1999, IKOS repurchased approximately 130,000
shares of commons stock for approximately $407,000. Also during
fiscal 2001, IKOS utilized $2,500,000 of the $5,000,000 working
capital line of credit to fund operations. During fiscal 2000,
IKOS utilized $1,809,000 of the line to fund leasehold
improvements to its new facilities.

IKOS primary unused sources of funds at
September 29, 2001 consisted of $10,613,000 of cash and
cash equivalents, in addition to $4,977,000 of short-term
investments. In March 2000, IKOS negotiated a $3,000,000 working
capital line of credit and $1,500,000 equipment line of credit
with its bank. The agreement expired in March of 2001 and a new
$5,000,000 working capital line was negotiated to replace the
existing line. The new line expires on March 31, 2002 and
is renewable at the option of both parties. The assets of IKOS
collateralize the lines. Any borrowings under the line of credit
bear interest at the prime rate or 6.0% at September 29,
2001. At September 29, 2001, the total amount utilized
under the lines was approximately $4,000,000. Of the total
amount utilized, approximately $1,500,000 of the working capital
line is reserved as collateral against certain letter of credit
arrangements IKOS has with its landlords and approximately
$2,500,000 was utilized to fund working capital requirements.
IKOS is currently in violation of certain of its financial
covenants and as such the outstanding balance is subject to call
by the bank at its option. Accordingly, the remaining $1,000,000
established under the line of credit is not currently available.
IKOS is currently renegotiating with the bank to obtain a waiver
and to revise the covenants.

IKOS believes that its current cash, cash
equivalents and short-term investments will be sufficient to
finance its operations for at least the next twelve months. In
addition to its current trade receivables balances, the Company
has an income tax receivable of approximately $2,900,000 which
should be collected during fiscal 2002. In addition, subsequent
to September 29, 2001, IKOS agreed to allow its sub lessee
to buyout its sublease at IKOS headquarters facility. IKOS
received approximately $3,400,000 as a part of the buyout.
However, there can be no assurances that should IKOS need
additional financing that such financing will be available on
terms favorable or acceptable to IKOS.

Factors that May Affect Future Results of
Operations

IKOS operating results have fluctuated
widely in the past from period to period, making it difficult to
rely on past quarters as indicators of future
performance.

IKOS quarterly operating results have
fluctuated widely in the past and IKOS expects them to continue
to fluctuate in the future as a result of a variety of factors,
including the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The timing of orders from customers, and the
	timing of shipments to customers, for IKOS products
	varies. Many of IKOS customers order on an as-needed basis
	and often delay issuance of firm purchase orders. As a result,
	quarterly revenue and operating results will depend on the
	volume and timing of orders that IKOS receives during the
	quarter, which are difficult to predict.
|
| |  | IKOS has a historical pattern of concentrated
	shipments in the last few weeks of the quarter. This pattern is
	exacerbated by the fact that IKOS recognizes product revenue
	when orders are delivered and                                                                                                                                                                                     

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | the earnings process is complete, rather than
	ratably over a term. This means that a failure to deliver
	product in a quarter deprives such quarter of all of the revenue
	attributable to such order. Therefore the timing of an order,
	and whether it is delivered in one quarter or the next, can have
	a significant effect on the revenue recognized for such quarter.
	In addition, any concentration of sales at the end of the
	quarter may limit IKOS ability to plan or adjust operating
	expenses and production and inventory levels. Consequently, if
	anticipated shipments in any quarter do not occur, expenditure
	levels could be disproportionately high, adversely affecting
	IKOS operating results for that quarter.
|
| |  | IKOS must develop, introduce and ship new
	products on a timely basis. Any failure to meet expected
	customer ship dates results in deferred sales (such that IKOS
	recognizes revenue in a quarter later than expected) or the
	failure to make a sale to a particular customer altogether.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | IKOS competes with other emulation vendors,
	potentially resulting in lost or deferred sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | IKOS must obtain key components used in its
	products, including field programmable gate arrays, (FPGAs), at
	acceptable prices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | IKOS success depends upon the health of the
	electronics industry and its impact on capital expenditures by
	customers who design complex semiconductors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

For all of the reasons above, IKOS
quarterly operating results have in the past been and may in the
future be different from the expectations of public market
analysts and investors. Because IKOS quarterly operating
results fluctuate, IKOS believes that quarter-to-quarter
comparisons of its operating results are not necessarily
meaningful and investors should not rely on them as indicators
of future performance.

A downturn in the electronics industry will
have a negative impact on IKOS business.

IKOS depends on the semiconductor industry, which
is historically volatile, for sales of its emulation products.
The electronics is driven by the semiconductor industry which is
characterized by rapid technological change, short product life
cycles, fluctuations in manufacturing capacity and pricing and
margin pressures. These factors can adversely affect sales of
IKOS products. For example, IKOS believes that the
electronics industry is currently in a downturn, which has
tightened capital expenditure budgets of IKOS customers
and led to a deferral of purchasing decisions and a decrease in
sales to such customers. In addition, since IKOS products
are used at the verification stage of new semiconductor designs,
any decrease in design starts by semiconductor customers would
result in lower demand for IKOS products and could have an
adverse effect on IKOS results of operations.

IKOS depends on a limited number of customers
for a significant part of its revenues, the loss of any of which
could have a material adverse effect on IKOS business,
results of operation and financial condition.

During fiscal 2001, 2000 and 1999, sales to
IKOS top ten customers accounted for approximately 63%,
66% and 60%, respectively, of IKOS net revenues. IKOS
expects that sales of its products to a limited number of
customers will continue to account for a high percentage of net
revenues for the foreseeable future. The loss of a major
customer or any reduction in orders by such customers, including
reductions due to market or competitive conditions in the
electronics or EDA industries, would have an adverse effect on
IKOS results of operations.

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The failure to continue to grow emulation
product revenues would have a material adverse effect on
IKOS business, financial condition and results of
operations.

Over the past several years IKOS sales of
simulation products have decreased and its sales of emulation
products have increased. As a result, any failure to continue to
grow its emulation revenues would have a material adverse effect
on IKOS business, financial condition and results of
operations. Increased emulation sales depend on a number of
factors, including:



| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | continued increase in demand for complex
	integrated circuits;                                                                                                                                                                     
|
| |  | IKOS ability to effectively integrate its
	emulation products with other vendors IC design tools;                                                                                                                                
|
| |  | the competitiveness of IKOS emulation
	products against emulation products offered by IKOS
	competitors, such as Cadence/ Quickturn Design Systems, Inc. and
	IKOS ability to win new customers for its emulation
	products; and
|
| |  | the capital expenditure budgets of IKOS
	customers, which are influenced by the financial condition of
	such customers and the overall market for semiconductor products.                                                         

Because the market for hardware verification
products is evolving, IKOS cannot be certain that the market for
its emulation solutions will continue to expand. Even if such
market expands, IKOS cannot be certain that its products will
achieve and maintain the market acceptance required to maintain
revenue growth and profitability in the future.

IKOS results of operations could be
adversely impacted if IKOS does not continue to develop new
products and enhance existing ones.

Over the past several years, the market for
emulation products has evolved substantially, requiring that
IKOS develop new, higher gate count emulation products in a
timely manner. While IKOS continues to develop new emulation
products based on IKOS understanding of customer
requirements, there can be no assurance that IKOS new
products, which require a substantial amount of time and
resources to develop, will meet customer requirements. In
addition, any delays in releasing new products can impact
customer acceptance and sales. For instance, IKOS encountered
several product related issues with the introduction of its
second-generation emulation product, which in turn resulted in
delays in releasing such product to its customers and severely
impacted financial results for the second half of fiscal 1998.
Any failure to meet customer deadlines or requirements could
have a material adverse effect on IKOS results of
operations. From time to time, IKOS may announce new products or
technologies that have the potential to replace IKOS
existing product offerings or cause customers to defer purchases
of existing IKOS products. For example, IKOS believes that
introduction of its Vstation 15M emulator product has
adversely affected sales of its Vstation 5M product. These
deferrals of customer purchasing decisions could adversely
affect IKOS results of operations for any particular
quarter. Finally, successfully releasing new emulation products
will require IKOS successful implementation of new
manufacturing processes, effective sales, marketing and customer
service efforts and identifying and resolving product
performance or quality issues at an early stage. If IKOS
encounters delays or difficulties in developing new products or
enhancing existing ones, its business, financial condition and
results of operations could be materially and adversely affected.

IKOS dependence on foreign sales could
adversely impact IKOS business, results of operations and
financial condition.

IKOS international sales, including export
sales and foreign operation net revenues, accounted for
approximately 26%, 34% and 37% of IKOS net revenues in
fiscal 2001, 2000 and 1999, respectively. While IKOS attempts to
reduce the risk of fluctuation in exchange rates associated with
international revenues by selling its products primarily
denominated in U.S. dollars, conducting sales overseas
entails numerous risks including regional or worldwide economic
or political difficulties and changes in foreign currency
exchange rates. For example, IKOS pays the expenses of its
international operations in local currencies and has not engaged
in hedging transactions with respect to such obligations. Any
significant deterioration in foreign economies could have a
material adverse effect on IKOS sales in such countries.
In addition, conducting

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business in international markets requires
compliance with applicable laws and regulations, such as safety
and telecommunication laws and regulations of foreign
jurisdictions and import duties and quotas, as well as
U.S. export control laws.


IKOS failure to compete effectively
would have a material adverse effect on its business, financial
condition and results of operations.

The EDA industry is constantly evolving and is
characterized by extremely rapid technological change in both
hardware and software development, frequent new product
introductions, evolving industry standards and changing customer
requirements.

Many of these factors are outside of IKOS
control and there can be no assurance that IKOS will be able to
compete effectively in the future. IKOS specifically targets its
products at the emerging portion of the industry relating to
complex designs. IKOS currently competes with traditional
software verification methodologies, including product offerings
sold by Quickturn Design Systems, a unit of Cadence Design
Systems, Synopsys and Mentor Graphics. IKOS main
competition for the sale of emulation systems is Quickturn/
Cadence and Mentor Graphics. IKOS expects competition in the
market for verification tools to increase as other companies
introduce new products and product enhancements. The risk of
competition is exacerbated because of the long product lives and
substantial expense of emulation products. In particular, if
IKOS fails to make a sale to a customer, such customer is
unlikely to seek a new emulation system for an extended period
of time.

Many of IKOS competitors have longer
operating histories, significantly greater financial, technical
and marketing resources, greater name recognition and larger
installed customer bases than IKOS. In addition, many of these
competitors and potential competitors have established
relationships with current and potential IKOS customers and
offer a broader and more comprehensive product line. Moreover,
IKOS competes with a number of smaller companies, including Axis
Systems, which can quickly gain market share. Increased
competition could result in price reductions, reduced margins
and loss of market share, all of which could materially
adversely affect IKOS business, financial condition and
results of operations.

Any failure to obtain sufficient quantities of
crucial components will adversely impact IKOS business,
results of operations and financial condition.

IKOS uses certain key components in its products
that are presently available from sole or limited sources. For
example, IKOS purchases FPGAs and other components
of its verification systems from only two suppliers. IKOS
generally purchases these components, including semiconductor
memories used in IKOS verification hardware, pursuant to
purchase orders placed from time to time in the ordinary course
of business. IKOS has no supply arrangements with any of its
suppliers that require the suppliers to provide components in
guaranteed quantities or at set prices. Moreover, the
manufacture of these components can be extremely complex.
IKOS reliance on the suppliers of these components exposes
IKOS to production difficulties and quality variations these
suppliers may experience. The inability to develop alternative
sources for these sole or limited source components or to obtain
sufficient quantities of these components could result in delays
or reductions in product shipments which could adversely affect
IKOS operating results.

Any claim of intellectual property
infringement against IKOS could have a material adverse effect
on its business.

From time to time IKOS has received, and may
receive in the future, notice of claims of infringement of other
parties proprietary rights. Although IKOS does not believe
that its products infringe the proprietary rights of any third
parties, third parties could assert, and have asserted,
infringement or invalidity claims (or claims for indemnification
resulting from infringement claims) against IKOS. Moreover,
there are numerous patents in the EDA industry and new patents
are being issued at a rapid rate. As a result, IKOS is exposed
to increased risk of involvement in costly and time consuming
patent infringement litigation, either as plaintiff or

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defendant. Adverse determinations in litigation
could result in one or more of the following materially adverse
effects:




| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | IKOS could be forced to pay damages to a party
	claiming infringement;                                                                                      
|
| |  | IKOS could lose its proprietary rights;                                                                                                                    
|
| |  | IKOS could become subject to significant
	liabilities;                                                                                                      
|
| |  | an adverse judgment could require IKOS to seek
	licenses from third parties, and such licenses may not be
	available on terms acceptable to IKOS, if at all;
|
| |  | an adverse judgement could prevent IKOS from
	licensing its technology; and                                                                                 
|
| |  | IKOS could be forced to redesign challenged
	technology, which, even if possible, could be time-consuming and
	costly.                                      

Infringement of intellectual property claims,
regardless of merit, could consume valuable management time,
result in costly litigation, or cause product shipment delays,
all of which could seriously harm IKOS business, operating
results, and financial condition.

A judgment adverse to IKOS in its ongoing
litigation with Axis Systems, Inc. could harm IKOS
business.

On February 9, 2001, IKOS filed a patent
infringement complaint against Axis Systems, Inc. (Axis) in the
United States District Court in the District of Delaware that
alleges infringement by Axis of four patents relating to
IKOS Virtual Wires technology. In August 2001, IKOS
withdrew one of the patents originally included in the lawsuit
to focus its efforts and to simplify the issues for trial. IKOS
is seeking both injunctive relief and monetary damages. On
March 22, 2001, Axis filed a patent infringement complaint
against IKOS in the United States District Court for the
Northern District of California alleging infringement by IKOS of
Axis patent titled a Simulation/ Emulation System
and Method, U.S. Patent No 6,009,256. Axis is
seeking both injunctive relief and monetary damages. IKOS
believes Axis claims are without merit and intends to
vigorously defend the action; however, such actions are
currently in the discovery phase only and there is no assurance
that IKOS will prevail in either case. A failure to prevail in
either case could result in IKOS being required to redesign
certain parts of its products or pay damages, which could
adversely affect future sales. In addition, such a failure to
prevail would allow Axis to continue to compete
against IKOS.

Irrespective of the validity or the successful
assertion of such claims, IKOS could incur significant costs and
diversion of management efforts with respect to the defending
the claims. Such efforts and costs could have a material adverse
effect on IKOS business, financial condition or results of
operations. If any other claims or actions are asserted against
IKOS, it may seek to obtain a license under a third partys
intellectual property rights. IKOS cannot assure you, however,
that under such circumstances, a license would be available
under reasonable terms or at all.

Uncertainty regarding the outcome of
Mentors offer and/or completion of the merger with
Synopsys may affect IKOS stock price and future business
and operations.

On July 2, 2001, IKOS entered into a merger
agreement with Synopsys. Under the terms of the merger
agreement, subject to various conditions, all outstanding shares
of IKOS will be exchanged for outstanding shares of Synopsys. On
December 7, 2001, Mentor commenced an unsolicited tender
offer to acquire all of IKOS outstanding shares. The
uncertainty as to the outcome of the two proposed transactions
may distract management from attention to execution of its
revenue plan and could have an adverse effect on employee
retention and on supplier and customer relationships. These
effects in turn could adversely impact IKOS ability to
satisfy the financial performance and employee retention
conditions in the merger.

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In addition, if neither the merger nor the tender
offer is consummated, IKOS may be subject to a number of
material risks, including the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | IKOS relationships with customers and
	suppliers may be adversely affected;                                                                                                                                                                                                                                                                                                                   
|
| |  | The perception of IKOS as a viable independent
	company may be damaged;                                                                                                                                                                                                                                                                                                                        
|
| |  | The price of IKOS common stock may decline
	to the extent that the current market price reflects a market
	assumption that either the merger or the tender offer will be
	completed;                                                                                                                                                                                                          
|
| |  | IKOS may be required to pay Synopsys a
	termination fee of up to $5,500,000 if the merger agreement is
	terminated under certain circumstances;                                                                                                                                                                                                                                                
|
| |  | The possibility that Synopsys may become a
	competitor of IKOS;                                                                                                                                                                                                                                                                                                                                
|
| |  | IKOS costs related to the merger and the
	tender offer, such as legal, accounting and financial advisor
	fees, must be paid even if the merger is not completed; and                                                                                                                                                                                                                          
|
| |  | IKOS would face risks of operating as a
	stand-alone company or finding another merger partner or
	acquirer, with no assurance that IKOS would be successful as a
	stand-alone company or find another merger partner or acquirer
	or be able to complete an alternative merger or sale of the
	company on terms as favorable to IKOS and its stockholders as
	the merger and the tender offer.

Events occurring in the period between
execution of the merger agreement and the closing of the merger
could harm IKOS business and impair IKOS ability to
meet the financial and employee retention conditions to the
merger.

The merger with Synopsys is not expected to close
until August 2002. Prior to the closing of the merger, customers
and suppliers may defer or cancel pending purchases, delay
purchasing decisions, or decline to make future purchases from
IKOS. The pre-closing period could also adversely affect
IKOS ability to attract, retain and motivate key
technical, management and sales personnel. In addition, the
merger agreement contains customary interim covenants that
restrict IKOS ability to take specified actions during the
pre-closing period without Synopsys consent. Since the
signing of the merger agreement, economic conditions have
continued to deteriorate significantly; the worsening economic
conditions may require IKOS at some time during the pre-closing
period to take actions outside the ordinary course of business
to preserve or promote its business not anticipated at the date
of signing of the merger agreement and which would require the
consent of Synopsys. IKOS cannot assure you that Synopsys would
give its consent to any such proposed actions. The occurrence of
any of these events could adversely affect IKOS ability to
meet the closing conditions contained in the merger agreement,
including conditions relating to IKOS financial
performance and the retention of IKOS employees. If these
closing conditions are not met, Synopsys will not be required to
effect the merger.




Item 7a.     Quantitative
and Qualitative Disclosures About Market Risk

As of September 29, 2001, IKOS
investment portfolio consists of money market funds,
corporate-backed debt obligations and mortgaged-backed
government obligations generally due within one year. IKOS
primary objective with its investment portfolio is to invest
available cash while preserving principal and meeting liquidity
needs. In accordance with IKOS investment policy, IKOS
places investments with high credit quality issuers and limits
the amount of credit exposure to any one issuer. These
securities, which approximate $6,891,000 and have an average
interest rate of approximately 4.50%, are subject to interest
rate risks. However, based on the investment portfolio contents
and the ability of IKOS to hold these investments until
maturity, IKOS believes that if a significant change in interest
rates were to occur, it would not have a material effect on
IKOS financial condition, although there can be no
assurance of this.

In addition to its cash equivalents and
short-term investments, IKOS enters into derivative financial
instruments such as forward exchange contracts to limit the
exposure to receivables denominated in Japanese yen against
fluctuations in exchange rates until such receivables are
collected. The Company does not enter into forward foreign
contracts for speculative or trading purposes. As of
September 29, 2001, the notional

20



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amount of our forward contracts was approximately
$892,000. A +/- 10% movement in the levels of foreign
currency exchange rates would result in an increase in the fair
value of our forward contracts by approximately $83,000 or a
decrease in fair value of our forward contracts by approximately
$101,000, respectively. The quantification of exposure to the
market risk associated with foreign financial instruments does
not take into account the offsetting impact of changes in the
fair value of our foreign denominated receivables.





Item 8.     Financial
Statements and Supplementary Data

IKOS Financial Statements and Schedules,
and the report of the independent auditors appear on
pages F-1 through F-21 and S-1 of this Form 10-K.

IKOS Supplementary Data 
Unaudited Selected Quarterly Financial Data appears on F-18 of
this Form 10-K.




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

Not applicable.




PART III




Item 10.     Directors
and Executive Officers of the Registrant

The information required by this Item with
respect to the directors of IKOS is incorporated herein by
reference to the definitive proxy statement. Information with
respect to executive officers of IKOS is contained in
Part I of this report.

The information required by this Item with
respect to compliance with Section 16(a) of Securities
Exchange Act of 1934 is incorporated by reference to the
information set forth in the definitive proxy statement.




Item 11.     Executive
Compensation

The information required by this Item is
incorporated by reference to the section captioned
EXECUTIVE COMPENSATION AND OTHER MATTERS contained
in the proxy statement.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this Item is
incorporated by reference to the section captioned GENERAL
INFORMATION  Security Ownership of Certain Beneficial
Owners and Management contained in the Proxy Statement.




Item 13.     Certain
Relationships and Related Transactions

Not applicable.

21



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##### Table of Contents






PART IV




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

(a) The following financial documents of the
Registrant are filed as part of this report:

(1) Financial Statements:

|                                                                                                                                        |  |      |     | 
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                        |  | Page
|                                                                                                                                        |  |     
|Report of Ernst & Young LLP, Independent
	Auditors                                                                                      |  |      | F-1 | 
|Consolidated Balance Sheets, September 29,
	2001 and September 30, 2000                                                                 |  |      | F-2 | 
|Consolidated Statements of Operations for the
	fiscal years ended September 29, 2001, September 30,
	2000 and October 2, 1999           |  |      | F-3 | 
|Consolidated Statements of Stockholders
	Equity for the fiscal years ended September 29, 2001,
	September 30, 2000 and October 2, 1999 |  |      | F-4 | 
|Consolidated Statements of Cash Flows for the
	fiscal years ended September 29, 2001, September 30,
	2000 and October 2, 1999           |  |      | F-5 | 
|Notes to Consolidated Financial Statements                                                                                              |  |      | F-6 | 

(2) Financial Statement Schedule:

|                                                                                                                                                                               |  |  |     | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | --- | 
|Schedule II  Valuation and
	Qualifying Accounts                                                                                                                               |  |  | S-1 | 
|All other schedules are omitted because they are
	not applicable or the required information is shown in the
	Financial Statements or notes thereto which are included herein. |  |  |     | 

(3) Exhibits:

See Index to Exhibits beginning on Page 24 of
this report.

(b) Reports on Form 8-K

Form 8-K/ A filed on August 9, 2001
regarding Amendment No. 1 to Amended and Restated Rights
Plan by and between IKOS and Bank of Boston NA dated
July 2, 2001

22



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##### Table of Contents






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.



| |                                                        
| | -------------------------------------------------------
| | IKOS SYSTEMS, INC.                                     
|
| | /s/ RAMON NUÑEZ                                        
| |                                                        
| | Ramon Nuñez,                                           
| | Chief Executive Officer, President and
        Director

December 28, 2001

POWER OF ATTORNEY

Each of the officers and directors of IKOS
Systems, Inc. whose signature appears below hereby constitutes
and appoints Ramon A. Nuñez and Joseph W. Rockom and each
of them, their true and lawful attorneys and agents, with full
power of substitution, each with power to act alone, to sign and
execute on behalf of the undersigned any amendment or amendments
to this Report on Form 10-K and to perform any acts necessary in
order to file such amendment or amendments and each of the
undersigned does hereby ratify and confirm all that said
attorneys and agents or their or his substitutes, shall do or
cause to be done by virtue hereof.

Pursuant to requirements of the Securities
Exchange Act of 1934, this report has been signed on behalf of
the Registrant and in the capacities and on the date indicated.

|                                         |  |                                                                                                                                  |  |                  
|---------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | -----------------
|Signature                                |  | Title                                                                                                                            |  | Date             
|                                         |  |                                                                                                                                  |  |                  
|/s/ RAMON NUÑEZ(Ramon Nuñez)             |  | Chief Executive Officer, President and Director                                                                                  |  | December 28, 2001
|/s/ GERALD S. CASILLI(Gerald S. Casilli) |  | Chairman of the Board                                                                                                            |  | December 28, 2001
|/s/ JOSEPH W. ROCKOM(Joseph W. Rockom)   |  | Vice President of Finance and Chief Financial
        Officer (Principal Accounting and Financial Officer) and
        Secretary |  | December 28, 2001
|/s/ JAMES R. OYLER(James R. Oyler)       |  | Director                                                                                                                         |  | December 28, 2001
|/s/ GLENN E. PENISTEN(Glenn E. Penisten) |  | Director                                                                                                                         |  | December 28, 2001
|/s/ JACKSON HU(Jackson Hu)               |  | Director                                                                                                                         |  | December 28, 2001
|/s/ WILLIAM STEVENS(William Stevens)     |  | Director                                                                                                                         |  | December 28, 2001

23



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##### Table of Contents



INDEX TO EXHIBITS

|        |      |             |  |                                                                                                                                                                                                                                                                                  
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 2.1  |             |  | Agreement and Plan of Reorganization among IKOS,
	VMW Acquisition Corporation and VMW dated May 14, 1996
	(Incorporated by reference to Exhibit 2.1 of IKOS
	registration statement on Form S-3 filed on June 26,
	1996).                                                       
|        | 2.2  |             |  | Technology Purchase Agreement dated May 12,
	1998 by and between IKOS and Interra, Inc. (Incorporated by
	reference to Exhibit 2.1 of IKOS Current Report on
	Form 8-K filed May 20, 1998).                                                                                     
|        | 2.3  |             |  | Agreement and Plan of Merger and Reorganization
	by and among Synopsys, Inc., Oak Merger Corporation and IKOS
	Systems, Inc. dated as of July 2, 2001, as amended
	August 1, 2001 (Incorporated by reference to
	Exhibit 2.3 of IKOS Report on Form 10-Q filed
	August 14, 2001)
|        | 3.1  |             |  | Certificate of Incorporation (Incorporated by
	reference to Exhibit 4.1 of IKOS registration
	statement on Form S-1 effective July 25, 1990).                                                                                                                                   
|        | 3.2  |             |  | Certificate of Amendment of Certificate of
	Incorporation filed May 5, 1994 (Incorporated by reference
	to Exhibit 4.2 of IKOS registration statement on
	Form S-2 effective October 12, 1995).                                                                                 
|        | 3.3  |             |  | Certificate of Amendment of Certificate of
	Incorporation filed April 24, 1995 (Incorporated by
	reference to Exhibit 4.1 of IKOS registration
	statement on Form S-2 effective October 12, 1995).                                                                              
|        | 3.4  |             |  | Certificate of Amendment of Certificate of
	Incorporation filed February 3, 1997 (Incorporated by
	reference to Exhibit 3.4 of IKOS quarterly report on
	Form 10-Q filed on May 12, 1997).                                                                                      
|        | 3.5  |             |  | By laws (Incorporated by reference to
	Exhibit 3.2 of IKOS registration statement on
	Form S-1 effective July 25, 1990).                                                                                                                                                        
|        | 3.6  |             |  | Amendment to Bylaws (incorporated by reference to
	Exhibit 7 to IKOS Form 8-A12G/A filed on
	February 3, 1999).                                                                                                                                                                 
|        | 4.1  |             |  | Rights Agreement dated as of January 27,
	1992 between IKOS and Manufacturers Hanover Trust Company of
	California, Rights Agent. (Incorporated by reference to
	Exhibit (C)1, in IKOS report on Form 8-K filed
	February 10, 1992).                                            
|        | 4.2  |             |  | IKOS Amended and Restated Rights Plan by
	and between IKOS and Bank of Boston NA dated January 22,
	1999 (Incorporated by reference to Exhibit 1 of IKOS
	report on Form 8-K/A filed February 3, 1999).                                                                        
|        | 4.3  |             |  | Amendment No. 1 to Amended and Restated
	Rights Plan by and between IKOS and Bank of Boston NA dated
	July 2, 2001 (Incorporated by reference to Exhibit 4.2
	of IKOS Form 8-K/A filed on August 9, 2001.                                                                       
|        | 10.1 |             |  | Form of Director and Officer Indemnity Agreement.
	(Incorporated by reference to Exhibit 10.6 of IKOS
	registration statement on Form S-1 effective July 25,
	1990).                                                                                                            
|        | 10.2 |             |  | 1988 Stock Option Plan. (Incorporated by
	reference to Exhibit 10.14 of IKOS registration
	statement on Form S-1 effective July 25, 1990).                                                                                                                                      
|        | 10.3 |             |  | OEM Software License Agreement between CAD
	Language Systems, Inc. and IKOS Systems, Inc. dated
	June 22, 1989 and amendment dated September 1991
	(Incorporated by reference to Exhibit 10.18 of IKOS
	Annual Report for the year ended September 28, 1991).                   
|        | 10.4 |             |  | Software License Agreement with Compass Design
	Automation dated December 31, 1993 (Incorporated by
	reference to Exhibit 10.17 of IKOS quarterly report
	on Form 10-Q for the quarter ended January 1, 1994).                                                                  
|        | 10.5 |             |  | Agreement dated June 2, 1994, by and between
	IKOS and Gerald S. Casilli (Incorporated by reference to
	Exhibit 10.17 of IKOS quarterly report on
	Form 10-Q for the quarter ended July 2, 1994).                                                                               
|        | 10.6 |             |  | Agreement dated June 2, 1994, by and between
	IKOS and Daniel R. Hafeman (Incorporated by reference to
	Exhibit 10.19 of IKOS quarterly report on
	Form 10-Q for the quarter ended July 2, 1994).                                                                               
|        | 10.7 |             |  | Agreement dated June 2, 1994, by and between
	IKOS and Ramon A. Nuñez (Incorporated by reference to
	Exhibit 10.22 of IKOS quarterly report on
	Form 10-Q for the quarter ended July 2, 1994).                                                                                  

24



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                         
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.8  |             |  | Agreement dated June 2, 1994, by and between
	IKOS and Joseph W. Rockom (Incorporated by reference to
	Exhibit 10.23 of IKOS quarterly report on
	Form 10-Q for the quarter ended July 2, 1994).                                                                                                       
|        | 10.9  |             |  | IKOS 1995 Outside Directors Stock Option
	Plan (Incorporated by reference to Exhibit 10.22 of
	IKOS registration statement on Form S-2 effective
	October 12, 1995).                                                                                                                                  
|        | 10.10 |             |  | Amendment to OEM Agreement for the acquisition of
	certain software technology, by and between Compass Design
	Automation, Inc. and IKOS dated December 27, 1995
	(Incorporated by reference to Exhibit 10.20 of IKOS
	quarterly report on Form 10-Q filed on February 12,
	1996).                     
|        | 10.11 |             |  | Amended and Restated Employment Agreement dated
	August 1, 1995 by and between IKOS and Ramon Nuñez
	(Incorporated by reference to Exhibit 10.21 of IKOS
	quarterly report on Form 10-Q filed on February 12,
	1996).                                                                                  
|        | 10.12 |             |  | Patent License Agreement dated December 22,
	1993 between Massachusetts Institute of Technology and IKOS
	(Incorporated by reference to Exhibit 10.20 of IKOS
	quarterly report on Form 10-Q filed on August 13,
	1996). Confidential treatment has be granted as to certain
	portions of this Exhibit.
|        | 10.13 |             |  | IKOS 1995 Stock Option Plan, as amended
	(Incorporated by reference to Exhibit 10.21 of IKOS
	Quarterly Report on Form 10-Q filed on May 11, 1998).                                                                                                                                                   
|        | 10.14 |             |  | IKOS 1996 Employee Stock Purchase Plan, as
	amended (Incorporated by reference to Exhibit 10.22 of
	IKOS Quarterly Report on Form 10-Q filed on
	May 11, 1998).                                                                                                                                       
|        | 10.15 |             |  | Agreement dated April 11, 1997, by and
	between IKOS and Robert Hum (Incorporated by reference to
	Exhibit 10.24 to the Quarterly Report on Form 10-Q
	filed by IKOS on August 16, 1999).                                                                                                               
|        | 10.16 |             |  | Agreement dated February 2, 1999, by and
	between IKOS and Thomas N. Gardner (Incorporated by reference to
	Exhibit 10.25 of IKOS quarterly report on
	Form 10-Q filed on August 16, 1999).                                                                                                            
|        | 10.17 |             |  | Agreement dated February 3, 1999, by and
	between IKOS and Nader Fathi (Incorporated by reference to
	Exhibit 10.26 of IKOS quarterly report on
	Form 10-Q filed on August 16, 1999).                                                                                                                  
|        | 10.18 |             |  | Revolving Credit and Security Agreement dated as
	of March 31, 2000 by and between IKOS Systems, Inc. and
	Comerica Bank  California. (Incorporated by reference
	to Exhibit 10.27 of IKOS quarterly report on
	Form 10-Q filed on August 14, 2000).                                                  
|        | 10.19 |             |  | Lease Agreement for IKOS principal facility
	dated January 14, 2000, by and between IKOS and Pepper
	Lane  Great Oaks, LLC. (Incorporated by reference to
	Exhibit 10.28 of IKOS Annual Report on Form 10-K
	filed on December 21, 2000).                                                            
|        | 10.20 |             |  | Lease Agreement for IKOS Waltham Research
	and Development facility dated July 28, 2000 by and between
	IKOS and LGP Limited Partnership. (Incorporated by reference to
	Exhibit 10.28 of IKOS Annual Report on Form 10-K
	filed on December 21, 2000).                                               
|        | 10.21 |             |  | Modification to Revolving Credit and Security
	Agreement dated March 27, 2001 by and between IKOS Systems,
	Inc. Comerica Bank. (Incorporated by reference to
	Exhibit 10.21 of IKOS quarterly report on Form 10-Q
	filed on August 14, 2001).                                                          
|        | 10.22 |             |  | Amendment Number One to Agreement dated
	February 2, 1999 by and between IKOS and Thomas N.
	Gardner, dated June 26, 2001                                                                                                                                                                               
|        | 10.23 |             |  | Amendment Number One to Agreement dated
	June 2, 1994 between IKOS Systems, Inc. and Dan Hafeman,
	dated June 26, 2001                                                                                                                                                                                  
|        | 10.24 |             |  | Amendment Number One to Agreement dated
	June 2, 1994 between IKOS Systems, Inc. and Ramon
	Nuñez, dated June 26, 2001                                                                                                                                                                                  
|        | 10.25 |             |  | Amendment Number One to Agreement dated
	June 2, 1994 between IKOS Systems, Inc. and Joseph Rockom,
	dated June 26, 2001                                                                                                                                                                                
|        | 10.26 |             |  | Amendment Number One to Agreement dated
	February 3, 1999 between IKOS Systems, Inc. and Nader
	Fathi, dated June 26, 2001                                                                                                                                                                              
|        | 10.27 |             |  | First Amendment and Settlement Agreement
	effective October 1, 2001 by and between IKOS Systems, Inc.
	and Massachusetts Institute of Technology.                                                                                                                                                       
|        | 21.1  |             |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                   
|        | 23.1  |             |  | Consent of Ernst & Young LLP, Independent
	Auditors.                                                                                                                                                                                                                                                    
|        | 24.1  |             |  | Power of Attorney (Included on page 23 of
	this report).                                                                                                                                                                                                                                                

25



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##### Table of Contents






REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

Board of Directors and Stockholders

IKOS Systems, Inc.


We have audited the accompanying consolidated
balance sheets of IKOS Systems, Inc., as of September 29,
2001 and September 30, 2000, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three fiscal years in the period ended
September 29, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
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 financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of IKOS Systems, Inc., at
September 29, 2001 and September 30, 2000, and the
consolidated results of its operations and its cash flows for
each of the three fiscal years in the period ended
September 29, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

San Jose, California

October 29, 2001, except for the last six
paragraphs of Note 11,


as to which the date is December 14, 2001,
and the last


paragraph of Note 12 as to which the date is
December 7, 2001.


F-1



---



##### Table of Contents



IKOS SYSTEMS, INC.






CONSOLIDATED BALANCE SHEETS


|                                      |                                                                                                                                       |                                 |                                                   |               |       |         |        |         |        |         |  
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------------------- | ------------- | ----- | ------- | ------ | ------- | ------ | ------- | -
|                                      |                                                                                                                                       | September 29,                   |                                                   | September 30,
|                                      |                                                                                                                                       | 2001                            |                                                   | 2000         
|                                      |                                                                                                                                       |                                 |                                                   |              
|                                      |                                                                                                                                       |                                
|                                      |                                                                                                                                       | (In thousands, except per-share
|                                      |                                                                                                                                       | amounts)                       
|ASSETS                               
|Current assets:                       |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|                                      | Cash and cash equivalents                                                                                                             |                                 | $                                                 | 10,613        |       |         | $      | 12,032  |       
|                                      | Short-term investments                                                                                                                |                                 |                                                   | 4,977         |       |         |        | 7,771   |       
|                                      | Accounts receivable (net of allowances for
	doubtful accounts of $927 and $645, respectively)                                         |                                 |                                                   | 9,878         |       |         |        | 19,716  |       
|                                      | Inventories                                                                                                                           |                                 |                                                   | 7,700         |       |         |        | 3,997   |       
|                                      | Income tax receivable                                                                                                                 |                                 |                                                   | 2,900         |       |         |        |        |       
|                                      | Prepaid expenses and other assets                                                                                                     |                                 |                                                   | 641           |       |         |        | 578     |       
|                                      |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|                                      |                                                                                                                                       |                                 | Total current assets                              |               |       | 36,709  |        |         |        | 44,094  |  
|                                      | Equipment and leasehold improvements                                                                                                  |                                 |                                                   |               |       |         |        |         |       
|                                      |                                                                                                                                       | Office and evaluation equipment |                                                   |               | 6,339 |         |        |         | 6,782  |        
|                                      |                                                                                                                                       | Machinery and equipment         |                                                   |               | 7,572 |         |        |         | 11,487 |        
|                                      |                                                                                                                                       | Leasehold improvements          |                                                   |               | 3,797 |         |        |         | 2,640  |        
|                                      |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|                                      |                                                                                                                                       |                                 | 17,708                                            |               |       |         | 20,909 |        
|                                      |                                                                                                                                       |                                 | Less allowances for depreciation and amortization |               |       | (10,076 | )      |         |        | (14,534 | )
|                                      |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|                                      |                                                                                                                                       |                                 | 7,632                                             |               |       |         | 6,375  |        
|                                      | Intangible assets (net of amortization of $1,092
	and $924, respectively)                                                             |                                 |                                                   | 715           |       |         |        | 883     |       
|                                      | Other assets                                                                                                                          |                                 |                                                   | 1,227         |       |         |        | 653     |       
|                                      |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|                                      |                                                                                                                                       | $                               | 46,283                                            |               |       | $       | 52,005 |        
|                                      |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|LIABILITIES AND STOCKHOLDERS
	EQUITY
|Current liabilities:                  |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|                                      | Notes payable                                                                                                                         |                                 | $                                                 | 2,500         |       |         | $      | 1,809   |       
|                                      | Accounts payable                                                                                                                      |                                 |                                                   | 5,958         |       |         |        | 5,446   |       
|                                      | Accrued payroll and related expenses                                                                                                  |                                 |                                                   | 2,491         |       |         |        | 3,549   |       
|                                      | Accrued commissions                                                                                                                   |                                 |                                                   | 705           |       |         |        | 2,094   |       
|                                      | Income taxes payable                                                                                                                  |                                 |                                                   | 730           |       |         |        | 3,252   |       
|                                      | Other accrued liabilities                                                                                                             |                                 |                                                   | 3,249         |       |         |        | 2,511   |       
|                                      | Deferred revenues                                                                                                                     |                                 |                                                   | 7,757         |       |         |        | 8,388   |       
|                                      |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|                                      |                                                                                                                                       |                                 | Total current liabilities                         |               |       | 23,390  |        |         |        | 27,049  |  
|Deferred rent                         |                                                                                                                                       |                                 | 581                                               |               |       |         | 92     |        
|Commitments and contingencies         |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|Stockholders equity:                 |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|                                      | Preferred stock, $.01 par value; 10,000 shares
	authorized, none issued and outstanding                                               |                                 |                                                   |              |       |         |        |        |       
|                                      | Common stock, $.01 par value; 50,000 shares
	authorized, 9,225 and 8,797 shares issued and 9,225 and 8,778
	outstanding, respectively |                                 |                                                   | 92            |       |         |        | 88      |       
|                                      | Additional paid-in capital                                                                                                            |                                 |                                                   | 59,767        |       |         |        | 57,791  |       
|                                      | Treasury stock, at cost, no shares in treasury in
	2001 and 19 in 2000                                                                |                                 |                                                   |              |       |         |        | (126    | )     
|                                      | Accumulated adjustments to comprehensive income
	(loss)                                                                               |                                 |                                                   | (895          | )     |         |        | (842    | )     
|                                      | Accumulated deficit                                                                                                                   |                                 |                                                   | (36,652       | )     |         |        | (32,047 | )     
|                                      |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|                                      |                                                                                                                                       |                                 | Total stockholders equity                        |               |       | 22,312  |        |         |        | 24,864  |  
|                                      |                                                                                                                                       |                                 |                                                   |               |       |         |        |        
|                                      |                                                                                                                                       | $                               | 46,283                                            |               |       | $       | 52,005 |        
|                                      |                                                                                                                                       |                                 |                                                   |               |       |         |        |        

See Accompanying Notes.

F-2



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##### Table of Contents



IKOS SYSTEMS, INC.






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |        |        | 
|-------------------------------------------------------------------------------- | ---------------------------------- | ---------------------------------------- | ------ | ------------- | ------ | ---------- | ------ | ------ | ------ | - | ----- | ------ | ------ | 
|                                                                                 |                                    |                                         
|                                                                                 |                                    | Fiscal Years Ended                      
|                                                                                 |                                    |                                         
|                                                                                 |                                    | September 29,                            |        | September 30, |        | October 2,
|                                                                                 |                                    | 2001                                     |        | 2000          |        | 1999      
|                                                                                 |                                    |                                          |        |               |        |           
|                                                                                 |                                    |                                         
|                                                                                 |                                    | (In thousands, except per share amounts)
|Net revenues                                                                     |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|                                                                                 | Product                            |                                          | $      | 39,264        |        |            | $      | 54,652 |        |   | $     | 41,258 |       
|                                                                                 | Maintenance                        |                                          |        | 21,805        |        |            |        | 18,144 |        |   |       | 15,075 |       
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|                                                                                 |                                    | Total net revenues                       |        |               | 61,069 |            |        |        | 72,796 |   |       |        | 56,333 | 
|Cost of revenues                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|                                                                                 | Product                            |                                          |        | 11,977        |        |            |        | 11,545 |        |   |       | 9,578  |       
|                                                                                 | Maintenance                        |                                          |        | 4,363         |        |            |        | 4,486  |        |   |       | 4,200  |       
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|                                                                                 |                                    | Total cost of revenues                   |        |               | 16,340 |            |        |        | 16,031 |   |       |        | 13,778 | 
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|                                                                                 |                                    | Gross profit                             |        |               | 44,729 |            |        |        | 56,765 |   |       |        | 42,555 | 
|Operating expenses:                                                              |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|                                                                                 | Research and development           |                                          |        | 17,191        |        |            |        | 15,912 |        |   |       | 13,443 |       
|                                                                                 | Sales and marketing                |                                          |        | 26,433        |        |            |        | 24,913 |        |   |       | 21,822 |       
|                                                                                 | General and administration         |                                          |        | 9,354         |        |            |        | 5,311  |        |   |       | 4,267  |       
|                                                                                 | Amortization of intangibles assets |                                          |        | 168           |        |            |        | 209    |        |   |       | 412    |       
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|                                                                                 |                                    | Total operating expenses                 |        |               | 53,146 |            |        |        | 46,345 |   |       |        | 39,944 | 
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|Income (loss) from operations                                                    |                                    |                                          | (8,417 | )             |        |            | 10,420 |        |        |   | 2,611 |       
|Interest income and other, net:                                                  |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|                                                                                 | Interest income, net               |                                          |        | 748           |        |            |        | 618    |        |   |       | 495    |       
|                                                                                 | Other income                       |                                          |        | 1,054         |        |            |        |       |        |   |       |       |       
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|                                                                                 |                                    | Interest income and other, net           |        |               | 1,802  |            |        |        | 618    |   |       |        | 495    | 
|Income (loss) before (benefit) provision for
	income taxes                       |                                    |                                          | (6,615 | )             |        |            | 11,038 |        |        |   | 3,106 |       
|(Benefit) provision for income taxes                                             |                                    |                                          | (2,010 | )             |        |            | 2,750  |        |        |   | 650   |       
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|                                                                                 |                                    | Net income (loss)                        |        | $             | (4,605 | )          |        | $      | 8,288  |   |       | $      | 2,456  | 
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|Earnings (loss) per share:                                                       |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|Basic net income (loss)                                                          |                                    | $                                        | (0.51  | )             |        | $          | 0.97   |        |        | $ | 0.30  |       
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|Common and common equivalent shares used in
	computing basic per share amounts   |                                    |                                          | 8,981  |               |        |            | 8,563  |        |        |   | 8,306 |       
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|Diluted net income (loss)                                                        |                                    | $                                        | (0.51  | )             |        | $          | 0.84   |        |        | $ | 0.27  |       
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       
|Common and common equivalent shares used in
	computing diluted per share amounts |                                    |                                          | 8,981  |               |        |            | 9,836  |        |        |   | 9,140 |       
|                                                                                 |                                    |                                          |        |               |        |            |        |        |        |   |       |       

See Accompanying Notes.

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##### Table of Contents



IKOS SYSTEMS, INC.






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


|                                                 |                            |                |        |              |   |            |       |                |  |                |    |             |  |               |        |         |  |        |      |   |  |   |        |   |  |   |      |   |  |   |         |   |  |   |        |   | 
|------------------------------------------------ | -------------------------- | -------------- | ------ | ------------ | - | ---------- | ----- | -------------- |  | -------------- | -- | ----------- |  | ------------- | ------ | ------- |  | ------ | ---- | - |  | - | ------ | - |  | - | ---- | - |  | - | ------- | - |  | - | ------ | - | 
|                                                 |                            |                |        |              |   |            |       |                |  | Accumulated    |    |             |  |              
|                                                 |                            |                |        | Common Stock |   | Additional |       | Treasury Stock |  | Adjustments to |    |             |  | Total        
|                                                 |                            | Comprehensive  |        |              |   | Paid-in    |       |                |  | Comprehensive  |    | Accumulated |  | Stockholders
|                                                 |                            | Income         |        | Shares       |   | Amount     |       | Capital        |  | Shares         |    | Amount      |  | Income (Loss) |        | Deficit |  | Equity
|                                                 |                            |                |        |              |   |            |       |                |  |                |    |             |  |               |        |         |  |       
|                                                 |                            |               
|                                                 |                            | (In thousands)
|Balance at October 3, 1998                       |                            |                |       |              |   |            | 8,797 |                |  | $              | 87 |             |  | $             | 58,775 |         |  |        | (436 | ) |  | $ | (3,144 | ) |  | $ | (314 | ) |  | $ | (42,791 | ) |  | $ | 12,613 |  
|Net issuance of stock under employee stock plans |                            |                |       |              |   |            |      |                |  |                | 1  |             |  |               | (463   | )       |  |        | 170  |   |  |   | 1,015  |   |  |   |     |   |  |   |        |   |  |   | 553    |  
|Acquisition of treasury stock                    |                            |                |       |              |   |            |      |                |  |                |   |             |  |               |       |         |  |        | (130 | ) |  |   | (407   | ) |  |   |     |   |  |   |        |   |  |   | (407   | )
|Net loss                                         |                            | $              | 2,456  |              |   |            |      |                |  |                |   |             |  |               |       |         |  |        |     |   |  |   |       |   |  |   |     |   |  |   | 2,456   |   |  |   | 2,456  |  
|Net translation losses                           |                            |                | (184   | )            |   |            |      |                |  |                |   |             |  |               |       |         |  |        |     |   |  |   |       |   |  |   | (184 | ) |  |   |        |   |  |   | (184   | )
|                                                 |                            |                |        |              |   |            |       |                |  |                |    |             |  |               |        |         |  |        |      |   |  |   |        |   |  |   |      |   |  |   |         |   |  |   |        |  
|                                                 | Total comprehensive income |                | $      | 2,272        |   |            |       |                |  |                |    |             |  |               |        |         |  |        |      |   |  |   |        |   |  |   |      |   |  |   |         |   |  |   |        |   | 
|                                                 |                            |                |        |              |   |            |       |                |  |                |    |             |  |               |        |         |  |        |      |   |  |   |        |   |  |   |      |   |  |   |         |   |  |   |        |  
|Balance at October 2, 1999                       |                            |                |       |              |   |            | 8,797 |                |  |                | 88 |             |  |               | 58,312 |         |  |        | (396 | ) |  |   | (2,536 | ) |  |   | (498 | ) |  |   | (40,335 | ) |  |   | 15,031 |  
|Net issuance of stock under employee stock plans |                            |                |       |              |   |            |      |                |  |                |   |             |  |               | (521   | )       |  |        | 377  |   |  |   | 2,410  |   |  |   |     |   |  |   |        |   |  |   | 1,889  |  
|Net loss                                         |                            | $              | 8,288  |              |   |            |      |                |  |                |   |             |  |               |       |         |  |        |     |   |  |   |       |   |  |   |     |   |  |   | 8,288   |   |  |   | 8,288  |  
|Net translation losses                           |                            |                | (344   | )            |   |            |      |                |  |                |   |             |  |               |       |         |  |        |     |   |  |   |       |   |  |   | (344 | ) |  |   |        |   |  |   | (344   | )
|                                                 |                            |                |        |              |   |            |       |                |  |                |    |             |  |               |        |         |  |        |      |   |  |   |        |   |  |   |      |   |  |   |         |   |  |   |        |  
|                                                 | Total comprehensive income |                | $      | 7,944        |   |            |       |                |  |                |    |             |  |               |        |         |  |        |      |   |  |   |        |   |  |   |      |   |  |   |         |   |  |   |        |   | 
|                                                 |                            |                |        |              |   |            |       |                |  |                |    |             |  |               |        |         |  |        |      |   |  |   |        |   |  |   |      |   |  |   |         |   |  |   |        |  
|Balance at September 30, 2000                    |                            |                |       |              |   |            | 8,797 |                |  |                | 88 |             |  |               | 57,791 |         |  |        | (19  | ) |  |   | (126   | ) |  |   | (842 | ) |  |   | (32,047 | ) |  |   | 24,864 |  
|Net issuance of stock under employee stock plans |                            |                |       |              |   |            | 428   |                |  |                | 4  |             |  |               | 1,976  |         |  |        | 19   |   |  |   | 126    |   |  |   |     |   |  |   |        |   |  |   | 2,106  |  
|Net loss                                         |                            | $              | (4,605 | )            |   |            |      |                |  |                |   |             |  |               |       |         |  |        |     |   |  |   |       |   |  |   |     |   |  |   | (4,605  | ) |  |   | (4,605 | )
|Net translation losses                           |                            |                | (53    | )            |   |            |      |                |  |                |   |             |  |               |       |         |  |        |     |   |  |   |       |   |  |   | (53  | ) |  |   |        |   |  |   | (53    | )
|                                                 |                            |                |        |              |   |            |       |                |  |                |    |             |  |               |        |         |  |        |      |   |  |   |        |   |  |   |      |   |  |   |         |   |  |   |        |  
|                                                 | Total comprehensive loss   |                | $      | (4,658       | ) |            |       |                |  |                |    |             |  |               |        |         |  |        |      |   |  |   |        |   |  |   |      |   |  |   |         |   |  |   |        |   | 
|                                                 |                            |                |        |              |   |            |       |                |  |                |    |             |  |               |        |         |  |        |      |   |  |   |        |   |  |   |      |   |  |   |         |   |  |   |        |  
|Balance at September 29, 2001                    |                            |                |        |              |   |            | 9,225 |                |  | $              | 92 |             |  | $             | 59,767 |         |  |        |     |   |  |   |       |   |  | $ | (895 | ) |  | $ | (36,652 | ) |  | $ | 22,312 |  
|                                                 |                            |                |        |              |   |            |       |                |  |                |    |             |  |               |        |         |  |        |      |   |  |   |        |   |  |   |      |   |  |   |         |   |  |   |        |  

See Accompanying Notes.

F-4



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##### Table of Contents



IKOS SYSTEMS, INC.






CONSOLIDATED STATEMENTS OF CASH
FLOWS


Increase (decrease) in cash and cash
equivalents


|                                                                   |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |        |        |        |  
|------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------- | ------------- | ------ | ---------- | ------ | ------ | ------ | ------ | ----- | ------ | ------ | ------ | -
|                                                                   |                                                                                                      |                                          
|                                                                   |                                                                                                      | Fiscal Years Ended                       
|                                                                   |                                                                                                      |                                          
|                                                                   |                                                                                                      | September 29,                             |                                                      | September 30, |        | October 2,
|                                                                   |                                                                                                      | 2001                                      |                                                      | 2000          |        | 1999      
|                                                                   |                                                                                                      |                                           |                                                      |               |        |           
|                                                                   |                                                                                                      |                                          
|                                                                   |                                                                                                      | (In thousands)                           
|Operating activities:                                              |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |       
|                                                                   | Net income (loss)                                                                                    |                                           | $                                                    | (4,605        | )      |            | $      | 8,288  |        |        | $     | 2,456  |       
|                                                                   | Adjustments to reconcile net income
	(loss) to net cash provided by (used in) operating
	activities: |                                           |                                                      |               |        |            |        |        |        |        |       |        |       
|                                                                   |                                                                                                      | Depreciation and amortization             |                                                      |               | 3,453  |            |        |        | 3,688  |        |       |        | 2,903  |       
|                                                                   |                                                                                                      | Loss on disposal of fixed assets          |                                                      |               | 86     |            |        |        |       |        |       |        |       |       
|                                                                   |                                                                                                      | Deferred rent                             |                                                      |               | 489    |            |        |        | 28     |        |       |        | (92    | )     
|                                                                   | Changes in operating assets and liabilities:                                                         |                                           |                                                      |               |        |            |        |        |        |        |       |        |       
|                                                                   |                                                                                                      | Accounts receivable                       |                                                      |               | 9,838  |            |        |        | (9,167 | )      |       |        | (4,516 | )     
|                                                                   |                                                                                                      | Inventories                               |                                                      |               | (3,703 | )          |        |        | (542   | )      |       |        | 361    |       
|                                                                   |                                                                                                      | Income tax receivable                     |                                                      |               | (2,900 | )          |        |        |       |        |       |        |       |       
|                                                                   |                                                                                                      | Prepaid expenses and other current assets |                                                      |               | (63    | )          |        |        | (143   | )      |       |        | 101    |       
|                                                                   |                                                                                                      | Other assets                              |                                                      |               | (574   | )          |        |        | (44    | )      |       |        | (213   | )     
|                                                                   |                                                                                                      | Accounts payable                          |                                                      |               | 512    |            |        |        | 1,683  |        |       |        | (1,026 | )     
|                                                                   |                                                                                                      | Accrued payroll and related expenses      |                                                      |               | (1,058 | )          |        |        | 840    |        |       |        | 855    |       
|                                                                   |                                                                                                      | Accrued commissions                       |                                                      |               | (1,389 | )          |        |        | 1,042  |        |       |        | 251    |       
|                                                                   |                                                                                                      | Income taxes payable                      |                                                      |               | (2,522 | )          |        |        | 2,233  |        |       |        | (166   | )     
|                                                                   |                                                                                                      | Other accrued liabilities                 |                                                      |               | 738    |            |        |        | (250   | )      |       |        | (1,535 | )     
|                                                                   |                                                                                                      | Deferred revenues                         |                                                      |               | (631   | )          |        |        | 3,051  |        |       |        | (2,259 | )     
|                                                                   |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |       
|                                                                   |                                                                                                      |                                           | Net cash provided by (used in) operating
	activities |               |        | (2,329     | )      |        |        | 10,707 |       |        |        | (2,880 | )
|Investing activities:                                              |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |       
|                                                                   | Purchases of equipment and leasehold improvements                                                    |                                           |                                                      | (4,628        | )      |            |        | (4,792 | )      |        |       | (2,230 | )     
|                                                                   | Purchases of short-term investments                                                                  |                                           |                                                      | (14,640       | )      |            |        | (8,744 | )      |        |       | (4,465 | )     
|                                                                   | Maturities of short-term investments                                                                 |                                           |                                                      | 17,434        |        |            |        | 3,843  |        |        |       | 9,112  |       
|                                                                   |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |       
|                                                                   |                                                                                                      |                                           | Net cash provided by (used in) investing
	activities |               |        | (1,834     | )      |        |        | (9,693 | )     |        |        | 2,417  |  
|Financing activities:                                              |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |       
|                                                                   | Principal payments on short-term borrowings                                                          |                                           |                                                      | (1,809        | )      |            |        |       |        |        |       |       |       
|                                                                   | Proceeds on short-term borrowings                                                                    |                                           |                                                      | 2,500         |        |            |        | 1,809  |        |        |       |       |       
|                                                                   | Net sale of common stock                                                                             |                                           |                                                      | 2,106         |        |            |        | 1,889  |        |        |       | 553    |       
|                                                                   | Acquisition of treasury stock                                                                        |                                           |                                                      |              |        |            |        |       |        |        |       | (407   | )     
|                                                                   |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |       
|                                                                   |                                                                                                      |                                           | Net cash provided by financing activities            |               |        | 2,797      |        |        |        | 3,698  |       |        |        | 146    |  
|Effect of exchange rate fluctuations on cash and
	cash equivalents |                                                                                                      |                                           | (53                                                  | )             |        |            | (344   | )      |        |        | (184  | )     
|                                                                   |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |       
|Increase (decrease) in cash and cash
	equivalents                  |                                                                                                      |                                           | (1,419                                               | )             |        |            | 4,368  |        |        |        | (501  | )     
|Cash and cash equivalents at beginning of period                   |                                                                                                      |                                           | 12,032                                               |               |        |            | 7,664  |        |        |        | 8,165 |       
|                                                                   |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |       
|Cash and cash equivalents at end of period                         |                                                                                                      | $                                         | 10,613                                               |               |        | $          | 12,032 |        |        | $      | 7,664 |       
|                                                                   |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |       
|Supplemental disclosures of cash flow information:                 |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |       
|                                                                   | Net cash paid for income taxes                                                                       |                                           | $                                                    | 3,393         |        |            | $      | 322    |        |        | $     | 817    |       
|Supplemental disclosure of noncash financing
	activity:            |                                                                                                      |                                           |                                                      |               |        |            |        |        |        |        |       |       
|                                                                   | Proceeds from bank under credit lines for
	purchase of leasehold improvements                        |                                           |                                                      |              |        |            | $      | 1,809  |        |        |       |       |       

See Accompanying Notes.

F-5



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##### Table of Contents



IKOS SYSTEMS, INC






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


September 29, 2001


1.     Nature of
Operations and Summary of Significant Accounting
Policies

Nature of
operations.The Company develops,
manufactures, markets and supports verification systems for
integrated circuit designs. The Companys strategy is to
serve the needs of a growing universe of IC designers for fast,
accurate verification of complex IC designs through its family
of hardware simulation and emulation systems. The Company
performs final assembly and test of all of its products in its
San Jose, California facility and utilizes third parties for all
major subassembly manufacturing. Certain key components used in
the Companys products are presently available from sole or
limited sources. The Company is dependent upon these suppliers
to provide these components on a timely basis. The Company sells
its products to a broad range of customers in the
communications, multimedia/graphics, semiconductor, computer,
aerospace and consumer electronics industries.

Basis of
presentation.The accompanying
consolidated financial statements include the Company and its
wholly owned subsidiaries after elimination of all significant
inter-company accounts and transactions.

Fiscal year.The
Company is on a 52-53 week fiscal year. Accordingly,
September 29, 2001, September 30, 2000 and
October 2, 1999 are the fiscal year-ends for 2001, 2000 and
1999, respectively. Fiscal 2001, 2000 and 1999 were 52 week
fiscal years.

Cash Equivalents and Short-Term Investments.All liquid investments with original
maturities of three months or less when purchased are considered
to be cash equivalents and are stated at cost, which
approximates their fair market value. At September 29,
2001, cash equivalents consisted of money market funds,
certificates of deposits and U.S. corporate overnight
securities. Short-term investments are stated at cost, which
approximates fair market value, and consist primarily of U.S.
corporate-backed securities and mortgage-backed government
obligations all due within one year. The Company is exposed to
credit risks in the event of default by the financial
institutions or issuers of investments to the extent of amounts
recorded on the balance sheet.

Under Statements of Financial Accounting
Standards No. 115 (FAS 115), Accounting for Certain
Investments in Debt and Equity Securities, debt securities
that the Company has both positive intent and ability to hold to
maturity are carried at amortized cost. Debt securities that the
Company does not have the positive intent and ability to hold to
maturity and all marketable equity securities are classified as
available-for-sale or trading and carried at fair value.
Unrealized holding gains and losses on securities classified as
available-for-sale are reported as part of equity while
unrealized holding gains and losses on securities classified as
trading are reported in earnings. At September 29, 2001,
all securities are designated as held to maturity.

The fair values for marketable debt securities
are based on quoted market prices. The fair value of marketable
securities is substantially equal to their carrying values as of
September 29, 2001 and September 30, 2000.

F-6



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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a summary of held-to-maturity
securities at September 29, 2001 and September 30,
2000 (in thousands):

|                                              |  |               |       |               |  |   |        | 
|--------------------------------------------- |  | ------------- | ----- | ------------- |  | - | ------ | 
|                                              |  | September 29, |       | September 30,
|                                              |  | 2001          |       | 2000         
|                                              |  |               |       |              
|U.S. Treasury Securities                      |  | $             |      |               |  | $ | 2,060  | 
|U.S. Corporate Securities                     |  |               | 5,874 |               |  |   | 6,804  | 
|Mortgage-Backed Securities                    |  |               | 1,017 |               |  |   | 4,026  | 
|                                              |  |               |       |               |  |   |        | 
|                                              |  | $             | 6,891 |               |  | $ | 12,890 | 
|                                              |  |               |       |               |  |   |        | 
|Amounts included in short-term investments    |  | $             | 4,977 |               |  | $ | 7,771  | 
|                                              |  |               |       |               |  |   |        | 
|Amounts included in cash and cash equivalents |  | $             | 1,914 |               |  | $ | 5,119  | 
|                                              |  |               |       |               |  |   |        | 

Inventories.Inventories are stated at the lower of cost (first-in, first-out
method) or market (estimated net realizable value). Inventories
consist of the following (in thousands):

|                |  |               |       |               |  |   |       | 
|--------------- |  | ------------- | ----- | ------------- |  | - | ----- | 
|                |  | September 29, |       | September 30,
|                |  | 2001          |       | 2000         
|                |  |               |       |              
|Raw materials   |  | $             | 681   |               |  | $ | 951   | 
|Work-in-process |  |               | 4,004 |               |  |   | 1,386 | 
|Finished goods  |  |               | 3,015 |               |  |   | 1,660 | 
|                |  |               |       |               |  |   |       | 
|                |  | $             | 7,700 |               |  | $ | 3,997 | 
|                |  |               |       |               |  |   |       | 

Equipment and Leasehold
Improvements.Equipment and leasehold
improvements are stated at cost and are depreciated or amortized
using the straight-line method over the estimated useful life
(generally two to five years) of the related asset, or in the
case of leasehold improvements, the term of the lease, if
shorter.

Goodwill, Software Development Costs and Other
Long-Lived Assets.The Company
periodically reviews and evaluates its recorded goodwill and
other long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. An impairment loss would be
recognized when the sum of the undiscounted future net cash
flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. Such an
impairment loss would be measured as the difference between the
carrying amount of the asset and its fair value based on the
present value of estimated future cash flows. There were no
write-downs of intangible assets or long-lived assets in fiscal
2001, 2000 or 1999.

The Company capitalizes software development
costs upon achievement of technological feasibility, subject to
net realizable value considerations in accordance with Statement
of Financial Accounting Standards No. 86. The Company has
defined technological feasibility as completion of a working
model. Such capitalized costs are amortized upon product release
on a straight-line basis over the estimated useful life of two
years or the ratio of current revenue to the total of current
and anticipated future revenues, whichever is greater. For each
of the three fiscal years in the period ended September 29,
2001 capitalizable costs were insignificant and thus charged to
research and development expenses for the respective periods in
the accompanying financial statements.

Revenue.The Company
changed its revenue recognition policy effective October 1,
2000 based on guidance provided in SEC Staff Accounting Bulletin
No. 101 (SAB 101), Revenue Recognition in
Financial Statements (see Impact of Recently Issued
Accounting Standards). Revenue is derived primarily from the
sale of products and product maintenance and to a lessor degree
rental of products. The Company also derives revenue from
delivery of professional services, including consulting and
training. The Company sells its

F-7



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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

products and services primarily through its
direct sales organization. In those instances where the Company
sells product through distributors, the distributors do not hold
inventory.

Product revenue is recognized when the following
criteria have been met:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | persuasive evidence of an arrangement exists;                               
|
| |  | delivery has occurred or services have been
	rendered; and                  
|
| |  | collection of a fixed or determinable fee is
	considered reasonably assured.

Product revenue is recognized upon delivery
unless customer specific acceptance provisions exist, in which
case revenue is recognized upon the customers acceptance
of all provisions. Due to customary business practices in Japan,
revenue relating to Japanese customers is recognized upon formal
written acceptance. Product maintenance revenue is recognized
ratably over the duration of the related contracts. Professional
services revenue is recognized as the services are performed. In
arrangements that include product sales and maintenance and/or
professional services (multiple elements), the
Company allocates and defers revenue for the undelivered
elements based on objective evidence of fair value, and
recognizes the difference between the total arrangement fee and
the amount deferred for the undelivered elements as revenue in
accordance with Statement of Position (SOP) 98-9
Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions, as provided for under
SAB 101, Revenue Recognition in Financial Statements.

Warranty.The
Company warrants products sold to customers for ninety days from
shipment and such warranty covers repairs or replacement due to
defects in the delivered product. A provision for the estimated
future cost of warranty is recorded upon the recognition of
revenue.

Employee Stock
Plans.The Company accounts for its
employee stock option and employee stock purchase plans in
accordance with provisions of the Accounting Principles
Boards Opinion No. 25 (APB 25), Accounting
for Stock Issued to Employees. In addition the Company
applies the provisions of Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of
APB No. 25, where applicable. The Company provides
additional pro forma disclosures as required under Statement of
Financial Accounting Standard No. 123 Accounting for
Stock Based Compensation.

Use of Estimates.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 liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Such estimates related to the useful lives of fixed
assets, allowances for doubtful accounts and customer returns,
inventory write-downs, other reserves and income tax valuation
allowances. Actual results inevitably will differ from those
estimates, and such differences may be material to the financial
statements.

Translation of Foreign Currencies.For foreign operations with the local
currency as the functional currency, the translation of the
applicable foreign currencies into U.S. dollars is
performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate during the
period. The gains or losses resulting from translation are
included in accumulated other comprehensive income (loss) in the
accompanying balance sheets. The Company also recognizes foreign
currency transaction gains and losses from its international
operations. Such gains or losses are charged to operations and
have been immaterial to the Companys operating results.

Derivative Financial
Instruments.Financial Accounting
Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS
No. 133), requires companies to recognize all of their
derivative financial instruments as either assets or liabilities
in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or
losses) of a derivative financial

F-8



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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and
further, on the type of hedging relationship. For those
derivative financial instruments that are designated and qualify
as hedging instruments, a company must designate the hedging
instrument, based upon the exposure being hedged, as either a
fair value hedge, cash flow hedge or a hedge of a net investment
in a foreign operation. The Company enters into derivative
financial instruments such as forward exchange contracts to
limit the exposure to receivables denominated in Japanese yen
against fluctuations in exchange rates until such receivables
are collected. The notional amount of contracts outstanding at
September 29, 2001 was approximately $892,000. The Company
does not enter into forward foreign contracts for speculative or
trading purposes. In addition, the fair value of these contracts
is not significant to the Companys financial position or
results of operations. The Company has elected not to use hedge
accounting and, therefore, has not designated these forward
exchange contracts as hedging instruments under
SFAS No. 133. For derivative instruments not
designated as hedging instruments, the gain or loss is
recognized in current earnings during the period of the change
in the fair value of the derivative instrument.

Net Income (Loss) Per
Share.The Company computes earnings
per share in accordance with the Financial Accounting Standards
Board (FASB) Statement of Financial Accounting
Standards No. 128, Earnings Per Share. Basic
earnings per share is computed using weighted options
outstanding for the period and excluding the dilutive effect of
stock options and warrants. Dilutive per share data is computed
using the weighted-average common and dilutive common equivalent
shares outstanding. The following table sets forth the
computation of basic and dilutive per share data:

|                                                                          |                                            |                    |       |               |   |            |       |       |  |  |       |       | 
|------------------------------------------------------------------------- | ------------------------------------------ | ------------------ | ----- | ------------- | - | ---------- | ----- | ----- |  |  | ----- | ----- | 
|                                                                          |                                            |                   
|                                                                          |                                            | Fiscal Years Ended
|                                                                          |                                            |                   
|                                                                          |                                            | September 29,      |       | September 30, |   | October 2,
|                                                                          |                                            | 2001               |       | 2000          |   | 1999      
|                                                                          |                                            |                    |       |               |   |           
|Basic Earnings (Loss) Per Share:                                          |                                            |                    |       |               |   |            |       |       |  |  |       |      
|                                                                          | Net income (loss)                          |                    | $     | (4,605        | ) |            | $     | 8,288 |  |  | $     | 2,456 | 
|                                                                          |                                            |                    |       |               |   |            |       |       |  |  |       |      
|                                                                          | Weighted-average common shares outstanding |                    |       | 8,981         |   |            |       | 8,563 |  |  |       | 8,306 | 
|                                                                          |                                            |                    |       |               |   |            |       |       |  |  |       |      
|                                                                          | Basic net income (loss) per share          |                    | $     | (0.51         | ) |            | $     | 0.97  |  |  | $     | 0.30  | 
|                                                                          |                                            |                    |       |               |   |            |       |       |  |  |       |      
|Dilutive Earnings (Loss) Per Share:                                       |                                            |                    |       |               |   |            |       |       |  |  |       |      
|                                                                          | Net income (loss)                          |                    | $     | (4,605        | ) |            | $     | 8,288 |  |  | $     | 2,456 | 
|                                                                          |                                            |                    |       |               |   |            |       |       |  |  |       |      
|                                                                          | Weighted-average common shares outstanding |                    |       | 8,981         |   |            |       | 8,563 |  |  |       | 8,306 | 
|Common equivalent shares attributable to options
	(treasury stock method) |                                            |                    |      |               |   |            | 1,273 |       |  |  | 834   |      
|                                                                          |                                            |                    |       |               |   |            |       |       |  |  |       |      
|Total weighted-average common shares outstanding                          |                                            |                    | 8,981 |               |   |            | 9,836 |       |  |  | 9,140 |      
|                                                                          |                                            |                    |       |               |   |            |       |       |  |  |       |      
|                                                                          | Dilutive net income (loss) per share       |                    | $     | (0.51         | ) |            | $     | 0.84  |  |  | $     | 0.27  | 
|                                                                          |                                            |                    |       |               |   |            |       |       |  |  |       |      

Outstanding options and warrants to purchase
approximately 735,000, 68,000 and 214,000 shares, for the fiscal
years 2001, 2000 and 1999, respectively, were not included in
the treasury stock calculation to derive diluted net income
(loss) per share as their inclusion would have had an
anti-dilutive effect.

Impact of Recently Issued Accounting
Standards.During the fourth quarter
of fiscal 2001, the Company adopted Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in
Financial Statements. The adoption of SAB No. 101
did not result in a cumulative effect adjustment as of
September 30, 2000, however, the Company has revised the
first three fiscal quarters of fiscal 2001 to reflect the
provisions of SAB No. 101, as if applied as of
October 1, 2000.

In July 2001, the FASB issued
SFAS No. 141 Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible
Assets. These standards become effective for fiscal years
beginning after December 15, 2001.

F-9



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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

IKOS intends to early adopt these standards, such
that beginning in the first quarter of 2002, goodwill will no
longer be amortized but will be subject to annual impairment
tests. As of September 29, 2001, IKOS had a net balance of
$715,000 of goodwill. The adoption of SFAS No. 141 is
expected to reduce IKOS amortization of intangibles for
fiscal 2002 by approximately $168,000. During fiscal 2002, IKOS
will perform the first of the required impairment tests of
goodwill. This test is not expected to have a material effect on
IKOS results of operations or financial position.

In October 2001, the FASB issued
SFAS No. 144, Accounting for Impairment or Disposal
of Long-lived Assets. SFAS No. 144 supersedes
SFAS No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-Lived Assets to be Disposed
Of, and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement is
effective for fiscal years beginning after December 15,
2001. Adoption of this statement will not have a material impact
on IKOS financial position or results of operations.

In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires the Company to
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. It
further provides criteria for derivative instruments to be
designated as fair value, cash flow, or foreign currency hedges,
and establishes accounting standards for reporting changes in
the fair value of the derivative instruments. Upon adoption, the
Company was required to adjust hedging instruments to fair value
in the balance sheet and recognize the offsetting gains or
losses as adjustments to be reported in net income or other
comprehensive income, as appropriate. The Company adopted
SFAS No. 133 as of October 1, 2000. The adoption
of SFAS No. 133 did not have a material effect on the
Companys results of operations or financial position.

2.     Acquisition

In May 1998, the Company acquired certain
technology and research and development expertise from Interra,
Inc. and its affiliate, Delsoft India Pvt. Limited. The purchase
price paid, including costs of the transaction, was
approximately $9,040,000. All amounts due under this purchase
agreement have been paid. During 1998, the Company recorded a
charge of approximately $7,600,000 related to the acquired
technology to in-process research and development. The
evaluation of the underlying technology acquired considered the
inherent difficulties and uncertainties in completing the
development of the technology, and thereby achieving
technological feasibility, and the risks related to the
viability of and potential changes in future target markets. The
underlying technology had no alternative use (in other research
and development projects or otherwise) since the technology was
acquired for the sole purpose of developing simulation and
emulation products. In connection with the technology
acquisition, the Company recorded an asset approximately
$1,400,000 for the acquired workforce and other intangibles,
which were to be amortized over 8 years. As of
September 29, 2001, approximately $715,000 remains on the
balance sheet and will be reviewed periodically for impairment.

3.     Borrowing
Arrangements

In March 2000, the Company negotiated a
$3,000,000 working capital line of credit and $1,500,000
equipment line of credit with its bank. The agreement expired in
March of 2001 whereby a new $5,000,000 working capital line was
negotiated to replace the existing line. The new line expires on
March 31, 2002 and is renewable at the option of both
parties. The lines are collateralized by the assets of the
Company. Any borrowings under the line of credit bear interest
at the prime rate or 6.0% at September 29, 2001. At
September 29, 2001, the total amount utilized under the
lines was approximately $4,000,000. Of the total amount
utilized, approximately $1,500,000 of the working capital line
is reserved as collateral against certain letter of credit
arrangements the Company has with its landlords and
approximately $2,500,000 was utilized to fund working capital
requirements. The Company is currently in violation of certain
of its financial covenants and as such the outstanding balance
is subject to call by the bank at its option. Accordingly, the
remaining

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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$1,000,000 established under the line of credit
is not currently available. The Company is currently
renegotiating with the bank to obtain a waiver and to revise
certain covenants.

4.     Operating
Leases

During fiscal 2001, the Company moved into its
new headquarters. The new building lease is a ten-year lease and
is scheduled to expire in December 2010. The Company has the
option to renew this building lease at its principal offices for
up to an additional ten years, at approximately the fair market
value at the time of renewal. The Company has other building
leases which expire at various times.

Rent expense approximated $3,960,000, $1,961,885
and $1,632,000, in fiscal 2001, 2000 and 1999, respectively.

Future minimum payments under non cancelable
operating leases exclusive of sub-lease income at
September 29, 2001 are as follows (in thousands):

|                    |       |        |        |        | 
|------------------- | ----- | ------ | ------ | ------ | 
|Fiscal Year         |       | Amount
|                    |       |       
|2002                |       | $      | 3,228  |       
|2003                |       |        | 3,111  |       
|2004                |       |        | 3,364  |       
|2005                |       |        | 3,314  |       
|2006                |       |        | 3,402  |       
|2007 and thereafter |       |        | 13,843 |       
|                    |       |        |        |       
|                    | Total |        | $      | 30,262 | 
|                    |       |        |        |       

In connection with the leasing of the new
headquarters, IKOS subleased approximately 30,000 square feet.
Rents associated with the sublease amounted to approximately
$829,000 at September 29, 2001 and is included with
interest and other income in the Statement of Operations.
Subsequent to September 29, 2001, the sub lessee executed a
buyout of the sublease and IKOS recorded approximately
$3,000,000 of other income associated with the buyout.

5.     Stockholders
Equity

Preferred Stock Purchase Rights
Plan.The Company has a Preferred
Stock Purchase Rights Plan (the Rights Plan), which
provides existing shareholders with the right to
purchase  1/100 preferred share for each common share held
in the event of certain changes in the Companys ownership.
The Rights Plan may serve as a deterrent to takeover tactics,
which are not in the best interests of shareholders. Of the
10,000,000 preferred shares authorized, the Board of Directors
of the Company has designated 500,000 shares as Series G
Preferred Stock, $0.01 par value per share, and has reserved
such shares for issuance pursuant to the Companys Rights
Plan. On July 2, 2001, the Rights Plan was amended to waive
its enforcement in connection with the proposed merger agreement
with Synopsys. See Note 12.

Stock Repurchase.During fiscal 1998, the Company announced its intention to
repurchase up to 1,000,000 shares of its outstanding common
stock on the open market. Through September 29, 2001, the
Company had repurchased 516,500 shares at a
weighted-average per share price of $5.96. All shares
repurchased under the Stock Repurchase plan were subsequently
issued under the Company Stock Option and Stock Purchase
agreements. In connection with proposed merger agreement with
Synopsys, the Company is restricted from changing its
capitalization structure and thus no additional shares can be
repurchased. See Note 12.

F-11



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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock Option Plans.In 1988, the Company established a Stock Option Plan (the Plan)
which provides for the granting of options to employees or
directors to purchase shares of the Companys common stock.
During fiscal 1996, the Company replaced the 1988 Stock Option
Plan by establishing the 1995 Stock Option Plan (the 1995
Plan). The terms of the 1995 Plan are similar to the 1988
Plan. Any shares remaining available for grant under the 1988
Plan were converted to the 1995 Plan, and an additional
750,000 shares were reserved for future grants under the
1995 Plan. In connection with its 1997 Annual Shareholders
meeting, the Company obtained approval whereby on the first day
of each fiscal year of the Company beginning after
October 4, 1998, the maximum aggregate number of shares of
common stock issuable under the Companys 1995 plan will
increase automatically by that number of shares of common stock
of the Company equal to 4.9% of the number of shares of the
Company issued and outstanding on the last day of the preceding
fiscal year. During fiscal 1999, 2000 and 2001 an additional
410,000, 412,000 and 430,000, shares were reserved for future
grants under the 1995 Plan, respectively.

The following table summarizes the activity for
the stock option plans (in thousands, except per share data):

|                              |             |                                       |       |                |   |           |        |        |   |   |              |              | 
|----------------------------- | ----------- | ------------------------------------- | ----- | -------------- | - | --------- | ------ | ------ | - | - | ------------ | ------------ | 
|                              |             |                                      
|                              |             | Options and Rights Outstanding       
|                              |             |                                      
|                              |             | Number                                |       | Aggregate      |   | Price    
|                              |             | of Shares                             |       | Exercise Price |   | Per Share
|                              |             |                                       |       |                |   |          
|                              |             |                                      
|                              |             | (In thousands, except per share data)
|Balance at October 3, 1998    |             |                                       | 1,921 |                |   | $         | 7,857  |        |   | $ | 0.850-28.375 |             
|                              | Granted     |                                       |       | 777            |   |           |        | 2,863  |   |   |              | 1.406-11.000 | 
|                              | Exercised   |                                       |       | (29            | ) |           |        | (59    | ) |   |              | 0.850-9.125  | 
|                              | Forfeitures |                                       |       | (260           | ) |           |        | (1,111 | ) |   |              | 1.438-28.375 | 
|                              |             |                                       |       |                |   |           |        |        |   |   |              |             
|Balance at October 2, 1999    |             |                                       | 2,409 |                |   |           | 9,550  |        |   |   | 0.850-25.00  |             
|                              | Granted     |                                       |       | 589            |   |           |        | 5,565  |   |   |              | 7.375-14.938 | 
|                              | Exercised   |                                       |       | (226           | ) |           |        | (849   | ) |   |              | 0.850-9.6875 | 
|                              | Forfeitures |                                       |       | (250           | ) |           |        | (1,227 | ) |   |              | 1.438-10.875 | 
|                              |             |                                       |       |                |   |           |        |        |   |   |              |             
|Balance at September 30, 2000 |             |                                       | 2,522 |                |   |           | 13,039 |        |   |   | 0.850-25.00  |             
|                              | Granted     |                                       |       | 1,006          |   |           |        | 11,015 |   |   |              | 6.900-15.438 | 
|                              | Exercised   |                                       |       | (304           | ) |           |        | (1,040 | ) |   |              | 3.140-16.000 | 
|                              | Forfeitures |                                       |       | (94            | ) |           |        | (930   | ) |   |              | 1.750-15.250 | 
|                              |             |                                       |       |                |   |           |        |        |   |   |              |             
|Balance at September 29, 2001 |             |                                       | 3,130 |                |   | $         | 22,084 |        |   | $ | 0.850-25.000 |             
|                              |             |                                       |       |                |   |           |        |        |   |   |              |             

F-12



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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information about
options outstanding at September 29, 2001:

|                  |  |                     |           |             |  |           |      |                     |  |           |       |  |  |  |           |  |  |   |       | 
|----------------- |  | ------------------- | --------- | ----------- |  | --------- | ---- | ------------------- |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                  |  |                     |           |             |  |          
|                  |  | Options Outstanding |           |             |  |          
|                  |  |                     |           |            
|                  |  |                     |           | Weighted-   |  |           |      | Options Exercisable
|                  |  |                     |           | Average     |  |           |      |                    
|                  |  | Number              |           | Remaining   |  | Weighted- |      | Number              |  | Weighted-
|                  |  | Outstanding         |           | Contractual |  | Average   |      | Exercisable         |  | Average  
|Range of          |  | at September 29,    |           | Life        |  | Exercise  |      | at September 29,    |  | Exercise 
|Exercise Prices   |  | 2001                |           | (Years)     |  | Price     |      | 2001                |  | Price    
|                  |  |                     |           |             |  |           |      |                     |  |          
|$0.8500-$1.7500   |  |                     | 198,478   |             |  |           | 6.91 |                     |  | $         | 1.73  |  |  |  | 8,484     |  |  | $ | 1.46  | 
|$1.7813-$1.7813   |  |                     | 339,492   |             |  |           | 6.95 |                     |  |           | 1.78  |  |  |  | 339,492   |  |  |   | 1.78  | 
|$1.8125-$3.9063   |  |                     | 322,356   |             |  |           | 5.76 |                     |  |           | 3.11  |  |  |  | 280,830   |  |  |   | 3.04  | 
|$4.1250-$5.3750   |  |                     | 245,052   |             |  |           | 6.87 |                     |  |           | 4.75  |  |  |  | 155,866   |  |  |   | 4.69  | 
|$5.5000-$5.7500   |  |                     | 394,718   |             |  |           | 6.12 |                     |  |           | 5.74  |  |  |  | 372,979   |  |  |   | 5.74  | 
|$6.0000-$7.7500   |  |                     | 332,205   |             |  |           | 8.04 |                     |  |           | 7.39  |  |  |  | 149,126   |  |  |   | 7.49  | 
|$7.8750-$9.6875   |  |                     | 440,831   |             |  |           | 8.64 |                     |  |           | 9.11  |  |  |  | 111,600   |  |  |   | 9.43  | 
|$9.8000-$11.9375  |  |                     | 213,450   |             |  |           | 8.80 |                     |  |           | 10.71 |  |  |  | 48,809    |  |  |   | 10.47 | 
|$12.0000-$12.0000 |  |                     | 533,114   |             |  |           | 9.06 |                     |  |           | 12.00 |  |  |  | 114,303   |  |  |   | 12.00 | 
|$12.1875-$25.0000 |  |                     | 109,763   |             |  |           | 8.71 |                     |  |           | 14.07 |  |  |  | 30,841    |  |  |   | 15.14 | 
|                  |  |                     |           |             |  |           |      |                     |  |           |       |  |  |  |           |  |  |   |       | 
|$0.8500-$25.0000  |  |                     | 3,129,459 |             |  |           | 7.61 |                     |  | $         | 7.06  |  |  |  | 1,612,330 |  |  | $ | 5.50  | 
|                  |  |                     |           |             |  |           |      |                     |  |           |       |  |  |  |           |  |  |   |       | 

Exercisable options were approximately 1,612,000,
1,030,000 and 745,000 at fiscal year end for 2001, 2000 and
1999, respectively. At September 29, 2001, there were no
shares that were exercised and subject to repurchase.

Vesting provisions with respect to the Stock
Option Plans are determined by the Board of Directors at the
date of grant. Generally, shares issued pursuant to the Plan
vest at 12 1/2% upon an employees six-month
employment date and ratably thereafter in monthly installments
over three and one-half years.

Included in the table above are options to
purchase approximately 73,000 shares of common stock, which were
granted outside of the Plans during fiscal 1995. These options
were granted to various employees and have rights and vesting
provisions which are the same as those granted pursuant to the
Plan. At September 29, 2001, options to purchase
approximately 8,000 shares of common stock remain outstanding
that were granted outside of the Plans.

Also included in the table above are options to
purchase approximately 400,000 shares of common stock which were
available for grant outside of the Plans during fiscal 2001.
383,700 were granted from this total during fiscal 2001. These
options were granted to various employees and have rights and
vesting provisions which are the same as those granted pursuant
to the Plan. At September 29, 2001, options to purchase
approximately 362,000 shares of common stock remain outstanding
that were granted outside of the Plans.

Total shares reserved for grant under option
plans total 5,024,000 (excluding options subject to grant under
the 1995 Outside Directors Stock Option Plan), of which
approximately 4,935,000 shares were granted, leaving
approximately 89,000 shares available for grant at
September 29, 2001 prior to the automatic replenishment
noted above.

The Company has reserved 3,099,000 shares of
common stock for future issuance under the stock option plans
for outstanding options and options available for grant at
September 29, 2001 and for future issuance of shares
granted outside of the option plans.

1995 Outside Directors Stock Plan.Under its 1995 Directors Stock Option
Plan (the Directors Plan), the Company has
established an option pool of 200,000 shares for granting to
outside directors. The Company

F-13



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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

has reserved 200,000 shares of common stock for
issuance under the plan. As of September 29, 2001,
approximately 176,000 shares had been granted to Directors, no
shares had been exercised and 18,000 shares had been canceled.
As of September 29, 2001 options to purchase 158,000 shares
are outstanding and are included in the table presented above.

1996 Stock Purchase Plan.In fiscal 1996, the 1996 Employee
Stock Purchase Plan (ESPP) was approved and shares of
common stock were reserved for issuance under this plan. The
ESPP provides that substantially all employees may purchase
stock at 85% of the lower price on either the first or last day
of the six-month offering period via a payroll deduction plan..
Through September 29, 2001, approximately 616,000 shares
have been issued under this plan and approximately 434,000
remain available under the ESPP. A summary of stock purchased
under the plan is shown below (in thousands, except employee
participants).

|                         |  |      |           |      |  |      |           |  |  |   |         | 
|------------------------ |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | ------- | 
|                         |  | 2001 |           | 2000 |  | 1999
|                         |  |      |           |      |  |     
|Aggregate purchase price |  | $    | 1,066,000 |      |  | $    | 1,039,000 |  |  | $ | 470,000 | 
|Shares purchased         |  |      | 143,935   |      |  |      | 149,787   |  |  |   | 141,216 | 
|Employee participants    |  |      | 127       |      |  |      | 134       |  |  |   | 123     | 

Stock Based
Compensation.Pro forma information
regarding net income (loss) and net income (loss) per
share is required by Statement of Financial Accounting Standards
No. 123 (SFAS 123) for awards granted after October 1,
1995 as if the Company had accounted for its stock-based awards
to employees under the fair value method of SFAS 123. The fair
value of the Companys stock-based awards to employees was
estimated using a Black-Scholes option-pricing model. The
Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition,
the Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility.
Because the Companys stock-based awards to employees have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its stock-based awards to employees. The fair value of the
Companys stock-based awards to employees was estimated
assuming no expected dividends and the following
weighted-average assumptions:

|                                |  |         |       |        |  |      |       |      |  |      |       |      |  |  |       |   |  |  |       |   |  |  |       |  
|------------------------------- |  | ------- | ----- | ------ |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | - |  |  | ----- | -
|                                |  |         |       |       
|                                |  | Options |       | ESPP  
|                                |  |         |       |       
|                                |  |         |       |       
|                                |  | Fiscal  |       | Fiscal
|                                |  |         |       |       
|                                |  | 2001    |       | 2000   |  | 1999 |       | 2001 |  | 2000 |       | 1999
|                                |  |         |       |        |  |      |       |      |  |      |       |     
|Expected life (years)           |  |         | 3.94  |        |  |      | 3.49  |      |  |      | 3.40  |      |  |  | 0.5   |   |  |  | 0.5   |   |  |  | 0.5   |  
|Expected stock price volatility |  |         | 80.66 | %      |  |      | 83.47 | %    |  |      | 81.28 | %    |  |  | 86.17 | % |  |  | 82.31 | % |  |  | 88.62 | %
|Risk-free interest rate         |  |         | 5.22  | %      |  |      | 6.22  | %    |  |      | 4.95  | %    |  |  | 5.39  | % |  |  | 6.19  | % |  |  | 4.95  | %

For pro forma purposes, the estimated fair value
of the Companys stock based awards to employees is
amortized over the options vesting period (for options)
and the six month purchase period (for stock purchased under the
ESPP). The weighted-average fair value of stock options and
employee stock purchase rights granted during fiscal 2001 was
$6.68 and $4.51 per share, respectively. The weighted-average
fair value of stock options and employee stock purchase rights
granted during fiscal 2000 was $5.64 and $2.97 per share,
respectively. The weighted-average fair value of stock options
and employee stock purchase rights granted during fiscal 1999
was $2.24 and $1.57 per share, respectively.

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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys pro forma information follows
(in thousands, except per share amounts):

|                                                   |  |        |        |      |  |      |       |  |  |   |       | 
|-------------------------------------------------- |  | ------ | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                   |  |       
|                                                   |  | Fiscal
|                                                   |  |       
|                                                   |  | 2001   |        | 2000 |  | 1999
|                                                   |  |        |        |      |  |     
|Net income (loss)  as reported                    |  | $      | (4,605 | )    |  | $    | 8,288 |  |  | $ | 2,456 | 
|Net income (loss)  pro forma                      |  |        | (8,465 | )    |  |      | 6,389 |  |  |   | 123   | 
|Diluted net income (loss) per
	share  as reported |  |        | (0.51  | )    |  |      | 0.84  |  |  |   | 0.27  | 
|Diluted net income (loss) per
	share  pro forma   |  | $      | (0.94  | )    |  | $    | 0.65  |  |  | $ | 0.01  | 

6.     Employee
Savings and Investment Plan

The Company offers all of its employees the
opportunity to participate in its 401(k) savings and investment
plan. The amended plan allows for the Company to make matching
contributions based on an employees elective deferrals.
For fiscal 2001, the matching contributions could not exceed
$1,800 per employee, and for the three fiscal years ended
September 29, 2001, the matching contributions were
approximately $314,000, $317,000 and $290,000, respectively.

7.     Income
Taxes

The tax provision (benefit) consists of the
following (in thousands):

|         |          |                   |        |               |   |            |       |       |  |   |     |     | 
|-------- | -------- | ----------------- | ------ | ------------- | - | ---------- | ----- | ----- |  | - | --- | --- | 
|         |          |                  
|         |          | Fiscal Year Ended
|         |          |                  
|         |          | September 29,     |        | September 30, |   | October 2,
|         |          | 2001              |        | 2000          |   | 1999      
|         |          |                   |        |               |   |           
|Federal: |          |                   |        |               |   |            |       |       |  |   |     |    
|         | Current  |                   | $      | (2,171        | ) |            | $     | 2,210 |  |   | $   | 110 | 
|         | Deferred |                   |        |              |   |            |       |      |  |   |     |    | 
|         |          |                   |        |               |   |            |       |       |  |   |     |    
|         |          |                   | (2,171 | )             |   |            | 2,210 |       |  |   | 110 |    
|State:   |          |                   |        |               |   |            |       |       |  |   |     |    
|         | Current  |                   |        |              |   |            |       | 40    |  |   |     | 40  | 
|         | Deferred |                   |        |              |   |            |       |      |  |   |     |    | 
|         |          |                   |        |               |   |            |       |       |  |   |     |    
|         |          |                   |       |               |   |            | 40    |       |  |   | 40  |    
|Foreign: |          |                   |        |               |   |            |       |       |  |   |     |    
|         | Current  |                   |        | 161           |   |            |       | 500   |  |   |     | 500 | 
|         |          |                   |        |               |   |            |       |       |  |   |     |    
|         |          | $                 | (2,010 | )             |   | $          | 2,750 |       |  | $ | 650 |    
|         |          |                   |        |               |   |            |       |       |  |   |     |    

Pretax income (loss) from foreign operations
was $(198,000) in 2001, $(1,330,000) in 2000 and $360,000 in
1999.

F-15



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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation between the Companys
effective tax rate and the U.S. statutory rate of 35% follows
(in thousands):

|                                                |             |                   |        |               |  |            |        |     |  |   |       |    | 
|----------------------------------------------- | ----------- | ----------------- | ------ | ------------- |  | ---------- | ------ | --- |  | - | ----- | -- | 
|                                                |             |                  
|                                                |             | Fiscal Year Ended
|                                                |             |                  
|                                                |             | September 29,     |        | September 30, |  | October 2,
|                                                |             | 2001              |        | 2000          |  | 1999      
|                                                |             |                   |        |               |  |           
|Tax provision (benefit) at
	U.S. statutory rate |             | $                 | (2,315 | )             |  | $          | 3,863  |     |  | $ | 1,087 |   
|Utilization of losses not previously benefited  |             |                   |       |               |  |            | (2,001 | )   |  |   | (756  | ) 
|Foreign taxes                                   |             |                   | 161    |               |  |            | 500    |     |  |   | 240   |   
|                                                | Other       |                   |        | 144           |  |            |        | 362 |  |   |       | 53 | 
|                                                | State taxes |                   |        |              |  |            |        | 26  |  |   |       | 26 | 
|                                                |             |                   |        |               |  |            |        |     |  |   |       |   
|                                                |             | $                 | (2,010 | )             |  | $          | 2,750  |     |  | $ | 650   |   
|                                                |             |                   |        |               |  |            |        |     |  |   |       |   

As of September 29, 2001 the Company has
federal and California research and development tax credit
carryforwards of approximately $3,200,000 and $900,000. The
Company also has federal tax credits and alternative minimum tax
credit carryforwards of approximately $600,000 and $300,000. The
state research credit carryforwards and alternative minimum tax
credit carryforwards have no expiration date. The federal
research and development credit expires beginning in the year
2005. The foreign tax credits expire beginning in the year 2003.

Utilization of the net operating losses and
credits may be subject to an annual limitation due to the
ownership change limitations provided by the Internal Revenue
Code of 1986, as amended, and similar state provisions. The
annual limitation could result in the expiration of net
operating losses and credits before utilization.

Significant components of the Companys
deferred tax assets and liabilities are as follows (in
thousands):

|                                            |                                  |                           |         |               |        |            |         |       |        |   |         |       |        | 
|------------------------------------------- | -------------------------------- | ------------------------- | ------- | ------------- | ------ | ---------- | ------- | ----- | ------ | - | ------- | ----- | ------ | 
|                                            |                                  | September 29,             |         | September 30, |        | October 2,
|                                            |                                  | 2001                      |         | 2000          |        | 1999      
|                                            |                                  |                           |         |               |        |           
|Deferred tax assets:                        |                                  |                           |         |               |        |            |         |       |        |   |         |      
|                                            | Net operating loss carryforwards |                           | $       |              |        |            | $       |      |        |   | $       | 2,320 |       
|                                            | Tax credit carryforwards         |                           |         | 5,000         |        |            |         | 1,390 |        |   |         | 3,130 |       
|                                            | Capitalized software             |                           |         | 260           |        |            |         | 350   |        |   |         | 450   |       
|                                            | Deferred revenue                 |                           |         | 2,990         |        |            |         | 2,870 |        |   |         | 1,820 |       
|                                            | Purchased technology             |                           |         | 5,180         |        |            |         | 5,110 |        |   |         | 5,640 |       
|                                            | Accrued expenses and reserves    |                           |         | 5,420         |        |            |         | 5,500 |        |   |         | 3,936 |       
|                                            |                                  |                           |         |               |        |            |         |       |        |   |         |      
|                                            |                                  | Total deferred tax assets |         |               | 18,850 |            |         |       | 15,220 |   |         |       | 17,296 | 
|Valuation allowance for deferred tax assets |                                  |                           | (18,850 | )             |        |            | (15,220 | )     |        |   | (17,296 | )    
|                                            |                                  |                           |         |               |        |            |         |       |        |   |         |      
|Net deferred tax assets                     |                                  | $                         |        |               |        | $          |        |       |        | $ |        |      
|                                            |                                  |                           |         |               |        |            |         |       |        |   |         |      

As of September 29, 2001, the Company had
fully offset deferred tax assets by a valuation allowance.
Management believes that such net deferred tax assets are not
realizable on a more likely than not basis. The valuation
allowance increased by $3,630,000 for the year ended
September 29, 2001 and decreased by $2,076,000 for the year
ended September 30, 2000. Approximately $4,500,000 of the
valuation allowance is attributable to stock options, which will
be credited to equity when realized.

F-16



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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Segment
Information

The Company operates and tracks its results in
one operating segment. The Companys operating segment is
principally the development, manufacture, sale and service of
high performance systems for design verification of integrated
circuits (ICs) and IC-based electronic systems.

Geographic revenue information for the fiscal
years 2001, 2000 and 1999 is based on the shipping destination.
Long-lived assets include primarily property, plant and
equipment as well as, intangible assets including goodwill.
Property, plant and equipment information is based on the
physical location of the asset at the end of each fiscal year
while the intangibles are based on the location of the owning
entity.

Net revenues from unaffiliated customers by
geographic region are as follows (in thousands):

|              |  |                   |        |               |  |            |        |  |  |   |        | 
|------------- |  | ----------------- | ------ | ------------- |  | ---------- | ------ |  |  | - | ------ | 
|              |  |                  
|              |  | Fiscal Year Ended
|              |  |                  
|              |  | September 29,     |        | September 30, |  | October 2,
|              |  | 2001              |        | 2000          |  | 1999      
|              |  |                   |        |               |  |           
|North America |  | $                 | 45,287 |               |  | $          | 47,762 |  |  | $ | 35,257 | 
|Far East      |  |                   | 6,956  |               |  |            | 10,883 |  |  |   | 8,258  | 
|Europe        |  |                   | 8,826  |               |  |            | 14,151 |  |  |   | 12,818 | 
|              |  |                   |        |               |  |            |        |  |  |   |        | 
|              |  | $                 | 61,069 |               |  | $          | 72,796 |  |  | $ | 56,333 | 
|              |  |                   |        |               |  |            |        |  |  |   |        | 

Net long-lived assets by country are as follows
(in thousands):

|               |  |               |       |               |  |   |       | 
|-------------- |  | ------------- | ----- | ------------- |  | - | ----- | 
|               |  | September 29, |       | September 30,
|               |  | 2001          |       | 2000         
|               |  |               |       |              
|United States  |  | $             | 6,812 |               |  | $ | 5,266 | 
|India          |  |               | 336   |               |  |   | 542   | 
|France         |  |               | 152   |               |  |   | 95    | 
|United Kingdom |  |               | 121   |               |  |   | 173   | 
|Germany        |  |               | 102   |               |  |   | 92    | 
|Japan          |  |               | 109   |               |  |   | 207   | 
|               |  |               |       |               |  |   |       | 
|               |  | $             | 7,632 |               |  | $ | 6,375 | 
|               |  |               |       |               |  |   |       | 

For fiscal 2001, two customers, Broadcom and
nVIDIA accounted for 16% and 14% of net revenues, respectively.
For fiscal 2000, one customer, Broadcom Corporation, Inc.,
accounted for approximately 12% of net revenues. For fiscal,
1999, one customer, Lucent Technologies, Inc., accounted for
approximately 14% of net revenues.

9.     Concentration
of Credit Risks and Other Risks

The Company sells its products to a broad range
of customers in the communications, multimedia/ graphics,
semiconductor, computer, aerospace and consumer electronics
industries. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral.

The Company maintains reserves for potential
credit losses and such losses have been within managements
expectations.

The electronic design automation (EDA) industry
is characterized by rapid technological changes, intense
competitive pressures and cyclical market patterns. The
Companys results are affected by a wide variety of
factors, including general economic patterns, conditions
specifically relating to technology companies and the
semiconductor and EDA industries.

F-17



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##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys results are also affected by
decreases in average selling prices over the life of any
particular product, the timing of new product introductions (by
the Company, its competitors and others), the evolution of the
electronic design community, the ability to manufacture new
products, and the ability to safeguard patents and intellectual
property from competitors. Based on the factors noted herein,
the Company may experience substantial period-to-period
fluctuations in future operating results.

10.     Unaudited
Quarterly Consolidated Financial Data

On December 3, 1999, the SEC staff issued
SAB No. 101, Revenue Recognition in Financial
Statements. In addition, on October 9, 2000, the SEC
issued Staff Accounting Bulletin No. 101: Revenue
Recognition in Financial Statements  Frequently Asked
Questions and Answers (SAB 101 FAQ). The
SEC Staff addresses several issues in SAB No. 101 and the
SAB 101 FAQ, including the timing for recognizing revenue
derived from selling arrangements that involve customer
acceptance provisions. Due to customary business practices in
Japan the Company has revised its revenue recognition policy to
require formal written acceptance from Japanese customers prior
to recognition of revenue related to these sales. The Company
has included the following information below to demonstrate the
effect on Q1 through Q3, 2001 as if provisions of SAB
No. 101 had been applied as of the beginning fiscal year
2001.

|                                                                   |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |        | 
|------------------------------------------------------------------ | ------------------------------------------------------------------ | --------------------- | ----- | --------- |  | -------- | ----- | ------------- | - |  | ----- | ------ | - |  | ----- | ------ | 
|                                                                   |                                                                    |                      
|                                                                   |                                                                    | Fiscal Quarters Ended
|                                                                   |                                                                    |                      
|                                                                   |                                                                    | December 30,          |       | March 31, |  | June 30, |       | September 29,
|                                                                   |                                                                    | 2000                  |       | 2001      |  | 2001     |       | 2001         
|                                                                   |                                                                    |                       |       |           |  |          |       |              
|Net revenues                                                       |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       
|                                                                   | As previously reported                                             |                       | $     | 21,009    |  |          | $     | 17,410        |   |  | $     | 11,060 |   |  | $     | 14,896 | 
|                                                                   | Effect of change in accounting principle                           |                       |       |          |  |          |       | (1,709        | ) |  |       | (1,597 | ) |  |       |       | 
|                                                                   |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       
|                                                                   | As revised in first three quarters and reported
	in fourth quarter |                       | $     | 21,009    |  |          | $     | 15,701        |   |  | $     | 9,463  |   |  | $     | 14,896 | 
|                                                                   |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       
|Gross profit                                                       |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       
|                                                                   | As previously reported                                             |                       |       | 16,540    |  |          |       | 13,348        |   |  |       | 7,326  |   |  |       | 10,505 | 
|                                                                   | Effect of change in accounting principle                           |                       |       |          |  |          |       | (1,517        | ) |  |       | (1,473 | ) |  |       |       | 
|                                                                   |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       
|                                                                   | As revised in first three quarters and reported
	in fourth quarter |                       | $     | 16,540    |  |          | $     | 11,831        |   |  | $     | 5,853  |   |  | $     | 10,505 | 
|                                                                   |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       
|Net income (loss)                                                  |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       
|                                                                   | As previously reported                                             |                       |       | 2,487     |  |          |       | 347           |   |  |       | (5,190 | ) |  |       | 741    | 
|                                                                   | Effect of change in accounting principle                           |                       |       |          |  |          |       | (1,517        | ) |  |       | (1,473 | ) |  |       |       | 
|                                                                   |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       
|                                                                   | As revised in first three quarters and reported
	in fourth quarter |                       | $     | 2,487     |  |          | $     | (1,170        | ) |  | $     | (6,663 | ) |  | $     | 741    | 
|                                                                   |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       
|Basic income (loss) per share(*)                                   |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       
|                                                                   | As previously reported                                             |                       | $     | 0.28      |  |          | $     | 0.04          |   |  | $     | (0.57  | ) |  | $     | 0.08   | 
|                                                                   | Effect of change in accounting principle                           |                       |       |          |  |          |       | (0.17         | ) |  |       | (0.17  | ) |  |       |       | 
|                                                                   | As revised in first three quarters and reported
	in fourth quarter |                       | $     | 0.28      |  |          | $     | (0.13         | ) |  | $     | (0.74  | ) |  | $     | 0.08   | 
|                                                                   |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       
|Weighted-average shares used in computing basic
	per share amounts |                                                                    |                       | 8,805 |           |  |          | 8,924 |               |   |  | 9,053 |        |   |  | 9,140 |       
|                                                                   |                                                                    |                       |       |           |  |          |       |               |   |  |       |        |   |  |       |       

F-18



---



##### Table of Contents



IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                     |                                                                    |                       |        |           |  |          |       |               |   |  |       |       |   |  |       |      | 
|-------------------------------------------------------------------- | ------------------------------------------------------------------ | --------------------- | ------ | --------- |  | -------- | ----- | ------------- | - |  | ----- | ----- | - |  | ----- | ---- | 
|                                                                     |                                                                    |                      
|                                                                     |                                                                    | Fiscal Quarters Ended
|                                                                     |                                                                    |                      
|                                                                     |                                                                    | December 30,          |        | March 31, |  | June 30, |       | September 29,
|                                                                     |                                                                    | 2000                  |        | 2001      |  | 2001     |       | 2001         
|                                                                     |                                                                    |                       |        |           |  |          |       |              
|Diluted income (loss) per share(*)                                   |                                                                    |                       |        |           |  |          |       |               |   |  |       |       |   |  |       |     
|                                                                     | As previously reported                                             |                       | $      | 0.25      |  |          | $     | 0.03          |   |  | $     | (0.57 | ) |  | $     | 0.08 | 
|                                                                     | Effect of change in accounting principle                           |                       |        |          |  |          |       | (0.16         | ) |  |       | (0.17 | ) |  |       |     | 
|                                                                     | As revised in first three quarters and reported
	in fourth quarter |                       | $      | 0.25      |  |          | $     | (0.13         | ) |  | $     | (0.74 | ) |  | $     | 0.08 | 
|                                                                     |                                                                    |                       |        |           |  |          |       |               |   |  |       |       |   |  |       |     
|Weighted-average shares used in computing diluted
	per share amounts |                                                                    |                       | 10,024 |           |  |          | 8,924 |               |   |  | 9,053 |       |   |  | 9,835 |     
|                                                                     |                                                                    |                       |        |           |  |          |       |               |   |  |       |       |   |  |       |     

Amounts as reported for fiscal year ending
September 30, 2000 are as follows:

|                                                             |  |                       |        |          |  |         |        |               |  |   |        |  |  |   |        | 
|------------------------------------------------------------ |  | --------------------- | ------ | -------- |  | ------- | ------ | ------------- |  | - | ------ |  |  | - | ------ | 
|                                                             |  |                      
|                                                             |  | Fiscal Quarters Ended
|                                                             |  |                      
|                                                             |  | January 1,            |        | April 1, |  | July 1, |        | September 30,
|                                                             |  | 2000                  |        | 2000     |  | 2000    |        | 2000         
|                                                             |  |                       |        |          |  |         |        |              
|Net revenues                                                 |  | $                     | 15,405 |          |  | $       | 16,799 |               |  | $ | 18,443 |  |  | $ | 22,149 | 
|Gross profit                                                 |  |                       | 11,677 |          |  |         | 13,128 |               |  |   | 14,507 |  |  |   | 17,453 | 
|Total operating expenses                                     |  |                       | 10,311 |          |  |         | 11,043 |               |  |   | 11,632 |  |  |   | 13,359 | 
|Income from operations                                       |  |                       | 1,366  |          |  |         | 2,085  |               |  |   | 2,875  |  |  |   | 4,094  | 
|Net income                                                   |  |                       | 1,093  |          |  |         | 1,644  |               |  |   | 2,303  |  |  |   | 3,248  | 
|Basic income per share(*)                                    |  | $                     | 0.13   |          |  | $       | 0.19   |               |  | $ | 0.27   |  |  | $ | 0.37   | 
|Weighted-average shares used in computing per
	share amounts |  |                       | 8,417  |          |  |         | 8,531  |               |  |   | 8,611  |  |  |   | 8,694  | 
|Diluted income per share(*)                                  |  | $                     | 0.11   |          |  | $       | 0.17   |               |  | $ | 0.23   |  |  | $ | 0.32   | 
|Weighted-average shares used in computing per
	share amounts |  |                       | 9,519  |          |  |         | 9,926  |               |  |   | 9,897  |  |  |   | 10,000 | 



---



|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|(*) | Quarterly per share amounts do not equal the
	annual per share total as a result of rounding.

11.     Litigation
and Contingencies

On February 9, 2001, IKOS filed a patent
infringement complaint against Axis Systems, Inc., (Axis) in the
United States District Court in the District of Delaware. The
complaint alleges infringement by Axis of four patents relating
to IKOS Virtual WiresTM technology, which
allows high resource utilization in FPGA-based emulators. In
August 2001, IKOS withdrew one of the patents originally
included in the lawsuit to focus IKOS efforts and to
simplify the issues for trial. On September 18, 2001, the
Delaware Court ordered the case to be transferred to the Federal
District Court, Northern District of California, where it is now
currently pending. IKOS is seeking both injunctive relief and
monetary damages. Discovery is still proceeding in the case and
the final amount of damages sought by IKOS has not yet been
determined.

On March 22, 2001, Axis filed a patent
infringement complaint against IKOS in the United States
District Court for the Northern District of California. The
complaint alleges infringement by IKOS of Axis patent
titled Simulation/ Emulation System and Method, U.S.
Patent No 6,009,256. Axis claims that this patent covers
technology for a single system that provides simulation,
acceleration, and emulation of complex electronic integrated
circuit and system-on-chip designs. The complaint alleges that
certain of IKOS emulation products infringe on the patent.
Axis is seeking both injunctive relief and monetary damages.
IKOS believes the claim is without merit and intends to
vigorously defend the action; however, such actions are
currently in the discovery phase only and there can be no
assurance that IKOS will prevail in either case.

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IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Furthermore, the amount of damages sought by Axis
has not yet been determined. IKOS does not believe the outcome
of this case will have a material adverse impact on future
results of operations or cash flows.

On December 6, 2001, Mentor Graphics
Corporation, an Oregon corporation (Mentor) and
Fresno Corporation, a Delaware corporation (Fresno)
filed a lawsuit in the Court of Chancery of the State of
Delaware against IKOS, the IKOS Board, Synopsys, Inc.
(Synopsys) and Oak Merger Corporation
(Oak), C.A. No. 19299. This lawsuit alleges,
among other things, that the termination fee set forth in the an
Agreement and Plan of Merger and Reorganization by and among
Synopsys, Oak Merger Corporation and IKOS dated July 2,
2001, as amended (the Merger Agreement) is
unreasonable, that certain operating restrictions and other
conditions set forth in the Merger Agreement impose onerous
restrictions on the authority of the IKOS Board to manage IKOS
and that the no-shop provision set forth in the Merger Agreement
insofar as it is operative after IKOS stockholders approve the
Merger Agreement is too onerous. This lawsuit further alleges
that the members of the IKOS Board breached their fiduciary
duties in connection with the Merger Agreement and that Synopsys
and Oak aided and abetted such breaches. This lawsuit seeks,
among other things, injunctive and declaratory relief,
including, an order enjoining the enforcement of the no-shop
provisions and termination fee in the Merger Agreement, and
unspecified damages. IKOS believes that this lawsuit is without
merit and intends to vigorously contest it.

On December 7, 2001, Mentor and Fresno filed
a lawsuit in the United States District Court for the District
of Delaware against IKOS, Case No. 01-809. This lawsuit
seeks an order and judgment from the Court declaring that the
Offer and Tender Offer Statement on Schedule TO(the
Schedule TO) and Mentors
Schedule 13D are not in violation of the federal securities
laws and that Mentor did not violate federal insider trading
laws when it purchased from the open market shares of IKOS
stock beginning in July 2001 and when it made the Offer. IKOS
believes that this lawsuit is without merit and intends to
vigorously contest it.

On December 7, 2001, Sheldon Pittlemen, an
alleged stockholder of IKOS, filed an alleged class action
lawsuit in the Court of Chancery of the State of Delaware
against IKOS and the IKOS Board, C.A. No. 19300. This
lawsuit generally alleges that the members of the IKOS Board
breached their fiduciary duties in connection with the Merger
Agreement. It seeks injunctive relief and unspecified damages on
behalf of all stockholders of IKOS. IKOS believes that this
lawsuit is without merit and intends to vigorously contest it.

On December 10, 2001, Ernest Hack, an
alleged stockholder of IKOS, filed an alleged class action
lawsuit in the Court of Chancery of the State of Delaware
against IKOS, the IKOS Board and Synopsys, C.A. No. 19305 .
While not identified as such in the caption of the complaint,
the body of the complaint describes Mentor as a defendant. This
lawsuit alleges that the members of IKOS Board failed to
properly consider and act upon the Offer. It also alleges that
IKOS failed to solicit offers before entering the Merger
Agreement. The lawsuit alleges that, as a result of the
foregoing among other things, the members of IKOS Board
breached their fiduciary duties and seeks injunctive relief and
unspecified damages. IKOS believes that this lawsuit is without
merit and intends to vigorously contest it.

On December 10, 2001, Robert Ferronte, an
alleged stockholder of IKOS, filed an alleged class action
lawsuit in the Court of Chancery of the State of Delaware
against IKOS and the IKOS Board, C.A. No. 19307. This
lawsuit generally alleges, among other things, that the members
of the IKOS Board breached their fiduciary duties by allegedly
failing to fully inform themselves about Mentors interest
in acquiring IKOS. The complaint further alleges that IKOS
poison pill permits the IKOS Board to manipulate IKOS to the
detriment of IKOS stockholders and to perpetuate its
control over IKOS business and operations. The lawsuit
seeks injunctive relief. IKOS believes that this lawsuit is
without merit and intends to vigorously contest it.

On December 14, 2001, Scott Petler, an
alleged stockholder of IKOS, filed an alleged class action
lawsuit in the Santa Clara County, California Superior Court,
Case No. CV 803814, against IKOS, the members of

F-20



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IKOS SYSTEMS, INC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

IKOS Board of Directors, Synopsys and Aart
de Geus, Chairman and CEO of Synopsys. This lawsuit
generally alleges that the members of the IKOS Board breached
their fiduciary duties in connection with the Merger Agreement
and in its response to the Offer. The lawsuit further alleges
that Synopsys and Dr. de Geus aided and abetted the
alleged breach of fiduciary duties. The lawsuit seeks injunctive
relief and an order rescinding the Merger Agreement. IKOS
believes that this lawsuit is without merit and intends to
vigorously contest it.

12.     Merger

On July 2, 2001, IKOS entered into an
Agreement and Plan of Merger and Reorganization with Synopsys,
Inc., or Synopsys, and Oak Merger Corporation, which was amended
on August 1, 2001, providing for the merger of IKOS with
Oak Merger Corporation, a subsidiary of Synopsys. Under the
terms of the proposed merger, subject to satisfaction of various
conditions, each share of IKOS common stock will be exchanged
for Synopsys common stock with a value between $6.00 and $20.00
per share, based on the financial performance of IKOS during the
twelve months ending June 30, 2002. Additional information
relating to the Synopsys merger can be found in the proxy
statement/ prospectus that is part of the Registration Statement
on Form S-4 filed with the Securities and Exchange
Commission (the SEC) by Synopsys on August 9,
2001 and amended on October 18, 2001.

On December 7, 2001 Fresno Corporation, a
wholly-owned subsidiary of Mentor Graphics Corporation, or
Mentor, commenced an unsolicited cash tender offer to purchase
all outstanding shares of IKOS common stock for $11.00 per
share, subject to certain conditions. The offer will expire on
January 25, 2002, unless extended at the sole discretion of
Mentor. Additional information relating to the Mentor offer can
be found in the Schedule 14D-9 filed with the SEC by IKOS
on December 20, 2001.

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IKOS SYSTEMS, INC.

SCHEDULE
II.     VALUATION AND QUALIFYING
ACCOUNTS

|                                 |  |                |     |            |  |            |     |           |  |   |     |  |  |   |     | 
|-------------------------------- |  | -------------- | --- | ---------- |  | ---------- | --- | --------- |  | - | --- |  |  | - | --- | 
|                                 |  | Balance at     |     | Charged to |  |            |     | Balance  
|                                 |  | Beginning      |     | Costs and  |  | Deduction  |     | at End of
|                                 |  | of Period      |     | Expenses   |  | Write-offs |     | Period   
|                                 |  |                |     |            |  |            |     |          
|                                 |  |               
|                                 |  | (In thousands)
|Allowance for doubtful accounts: |  |                |     |            |  |            |     |           |  |   |     |  |  |   |     | 
|Year ended October 2, 1999       |  | $              | 801 |            |  | $          | 108 |           |  | $ | 108 |  |  | $ | 801 | 
|                                 |  |                |     |            |  |            |     |           |  |   |     |  |  |   |     | 
|Year ended September 30, 2000    |  | $              | 801 |            |  | $          | 100 |           |  | $ | 256 |  |  | $ | 645 | 
|                                 |  |                |     |            |  |            |     |           |  |   |     |  |  |   |     | 
|Year ended September 29, 2001    |  | $              | 645 |            |  | $          | 400 |           |  | $ | 118 |  |  | $ | 927 | 
|                                 |  |                |     |            |  |            |     |           |  |   |     |  |  |   |     | 

S-1



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##### Table of Contents



INDEX TO EXHIBITS

|        |      |             |  |                                                                                                                                                                                                                                                                                  
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 2.1  |             |  | Agreement and Plan of Reorganization among IKOS,
	VMW Acquisition Corporation and VMW dated May 14, 1996
	(Incorporated by reference to Exhibit 2.1 of IKOS
	registration statement on Form S-3 filed on June 26,
	1996).                                                       
|        | 2.2  |             |  | Technology Purchase Agreement dated May 12,
	1998 by and between IKOS and Interra, Inc. (Incorporated by
	reference to Exhibit 2.1 of IKOS Current Report on
	Form 8-K filed May 20, 1998).                                                                                     
|        | 2.3  |             |  | Agreement and Plan of Merger and Reorganization
	by and among Synopsys, Inc., Oak Merger Corporation and IKOS
	Systems, Inc. dated as of July 2, 2001, as amended
	August 1, 2001 (Incorporated by reference to
	Exhibit 2.3 of IKOS Report on Form 10-Q filed
	August 14, 2001)
|        | 3.1  |             |  | Certificate of Incorporation (Incorporated by
	reference to Exhibit 4.1 of IKOS registration
	statement on Form S-1 effective July 25, 1990).                                                                                                                                   
|        | 3.2  |             |  | Certificate of Amendment of Certificate of
	Incorporation filed May 5, 1994 (Incorporated by reference
	to Exhibit 4.2 of IKOS registration statement on
	Form S-2 effective October 12, 1995).                                                                                 
|        | 3.3  |             |  | Certificate of Amendment of Certificate of
	Incorporation filed April 24, 1995 (Incorporated by
	reference to Exhibit 4.1 of IKOS registration
	statement on Form S-2 effective October 12, 1995).                                                                              
|        | 3.4  |             |  | Certificate of Amendment of Certificate of
	Incorporation filed February 3, 1997 (Incorporated by
	reference to Exhibit 3.4 of IKOS quarterly report on
	Form 10-Q filed on May 12, 1997).                                                                                      
|        | 3.5  |             |  | By laws (Incorporated by reference to
	Exhibit 3.2 of IKOS registration statement on
	Form S-1 effective July 25, 1990).                                                                                                                                                        
|        | 3.6  |             |  | Amendment to Bylaws (incorporated by reference to
	Exhibit 7 to IKOS Form 8-A12G/A filed on
	February 3, 1999).                                                                                                                                                                 
|        | 4.1  |             |  | Rights Agreement dated as of January 27,
	1992 between IKOS and Manufacturers Hanover Trust Company of
	California, Rights Agent. (Incorporated by reference to
	Exhibit (C)1, in IKOS report on Form 8-K filed
	February 10, 1992).                                            
|        | 4.2  |             |  | IKOS Amended and Restated Rights Plan by
	and between IKOS and Bank of Boston NA dated January 22,
	1999 (Incorporated by reference to Exhibit 1 of IKOS
	report on Form 8-K/A filed February 3, 1999).                                                                        
|        | 4.3  |             |  | Amendment No. 1 to Amended and Restated
	Rights Plan by and between IKOS and Bank of Boston NA dated
	July 2, 2001 (Incorporated by reference to Exhibit 4.2
	of IKOS Form 8-K/A filed on August 9, 2001.                                                                       
|        | 10.1 |             |  | Form of Director and Officer Indemnity Agreement.
	(Incorporated by reference to Exhibit 10.6 of IKOS
	registration statement on Form S-1 effective July 25,
	1990).                                                                                                            
|        | 10.2 |             |  | 1988 Stock Option Plan. (Incorporated by
	reference to Exhibit 10.14 of IKOS registration
	statement on Form S-1 effective July 25, 1990).                                                                                                                                      
|        | 10.3 |             |  | OEM Software License Agreement between CAD
	Language Systems, Inc. and IKOS Systems, Inc. dated
	June 22, 1989 and amendment dated September 1991
	(Incorporated by reference to Exhibit 10.18 of IKOS
	Annual Report for the year ended September 28, 1991).                   
|        | 10.4 |             |  | Software License Agreement with Compass Design
	Automation dated December 31, 1993 (Incorporated by
	reference to Exhibit 10.17 of IKOS quarterly report
	on Form 10-Q for the quarter ended January 1, 1994).                                                                  
|        | 10.5 |             |  | Agreement dated June 2, 1994, by and between
	IKOS and Gerald S. Casilli (Incorporated by reference to
	Exhibit 10.17 of IKOS quarterly report on
	Form 10-Q for the quarter ended July 2, 1994).                                                                               
|        | 10.6 |             |  | Agreement dated June 2, 1994, by and between
	IKOS and Daniel R. Hafeman (Incorporated by reference to
	Exhibit 10.19 of IKOS quarterly report on
	Form 10-Q for the quarter ended July 2, 1994).                                                                               
|        | 10.7 |             |  | Agreement dated June 2, 1994, by and between
	IKOS and Ramon A. Nuñez (Incorporated by reference to
	Exhibit 10.22 of IKOS quarterly report on
	Form 10-Q for the quarter ended July 2, 1994).                                                                                  



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                         
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.8  |             |  | Agreement dated June 2, 1994, by and between
	IKOS and Joseph W. Rockom (Incorporated by reference to
	Exhibit 10.23 of IKOS quarterly report on
	Form 10-Q for the quarter ended July 2, 1994).                                                                                                       
|        | 10.9  |             |  | IKOS 1995 Outside Directors Stock Option
	Plan (Incorporated by reference to Exhibit 10.22 of
	IKOS registration statement on Form S-2 effective
	October 12, 1995).                                                                                                                                  
|        | 10.10 |             |  | Amendment to OEM Agreement for the acquisition of
	certain software technology, by and between Compass Design
	Automation, Inc. and IKOS dated December 27, 1995
	(Incorporated by reference to Exhibit 10.20 of IKOS
	quarterly report on Form 10-Q filed on February 12,
	1996).                     
|        | 10.11 |             |  | Amended and Restated Employment Agreement dated
	August 1, 1995 by and between IKOS and Ramon Nuñez
	(Incorporated by reference to Exhibit 10.21 of IKOS
	quarterly report on Form 10-Q filed on February 12,
	1996).                                                                                  
|        | 10.12 |             |  | Patent License Agreement dated December 22,
	1993 between Massachusetts Institute of Technology and IKOS
	(Incorporated by reference to Exhibit 10.20 of IKOS
	quarterly report on Form 10-Q filed on August 13,
	1996). Confidential treatment has be granted as to certain
	portions of this Exhibit.
|        | 10.13 |             |  | IKOS 1995 Stock Option Plan, as amended
	(Incorporated by reference to Exhibit 10.21 of IKOS
	Quarterly Report on Form 10-Q filed on May 11, 1998).                                                                                                                                                   
|        | 10.14 |             |  | IKOS 1996 Employee Stock Purchase Plan, as
	amended (Incorporated by reference to Exhibit 10.22 of
	IKOS Quarterly Report on Form 10-Q filed on
	May 11, 1998).                                                                                                                                       
|        | 10.15 |             |  | Agreement dated April 11, 1997, by and
	between IKOS and Robert Hum (Incorporated by reference to
	Exhibit 10.24 to the Quarterly Report on Form 10-Q
	filed by IKOS on August 16, 1999).                                                                                                               
|        | 10.16 |             |  | Agreement dated February 2, 1999, by and
	between IKOS and Thomas N. Gardner (Incorporated by reference to
	Exhibit 10.25 of IKOS quarterly report on
	Form 10-Q filed on August 16, 1999).                                                                                                            
|        | 10.17 |             |  | Agreement dated February 3, 1999, by and
	between IKOS and Nader Fathi (Incorporated by reference to
	Exhibit 10.26 of IKOS quarterly report on
	Form 10-Q filed on August 16, 1999).                                                                                                                  
|        | 10.18 |             |  | Revolving Credit and Security Agreement dated as
	of March 31, 2000 by and between IKOS Systems, Inc. and
	Comerica Bank  California. (Incorporated by reference
	to Exhibit 10.27 of IKOS quarterly report on
	Form 10-Q filed on August 14, 2000).                                                  
|        | 10.19 |             |  | Lease Agreement for IKOS principal facility
	dated January 14, 2000, by and between IKOS and Pepper
	Lane  Great Oaks, LLC. (Incorporated by reference to
	Exhibit 10.28 of IKOS Annual Report on Form 10-K
	filed on December 21, 2000).                                                            
|        | 10.20 |             |  | Lease Agreement for IKOS Waltham Research
	and Development facility dated July 28, 2000 by and between
	IKOS and LGP Limited Partnership. (Incorporated by reference to
	Exhibit 10.28 of IKOS Annual Report on Form 10-K
	filed on December 21, 2000).                                               
|        | 10.21 |             |  | Modification to Revolving Credit and Security
	Agreement dated March 27, 2001 by and between IKOS Systems,
	Inc. Comerica Bank. (Incorporated by reference to
	Exhibit 10.21 of IKOS quarterly report on Form 10-Q
	filed on August 14, 2001).                                                          
|        | 10.22 |             |  | Amendment Number One to Agreement dated
	February 2, 1999 by and between IKOS and Thomas N.
	Gardner, dated June 26, 2001                                                                                                                                                                               
|        | 10.23 |             |  | Amendment Number One to Agreement dated
	June 2, 1994 between IKOS Systems, Inc. and Dan Hafeman,
	dated June 26, 2001                                                                                                                                                                                  
|        | 10.24 |             |  | Amendment Number One to Agreement dated
	June 2, 1994 between IKOS Systems, Inc. and Ramon
	Nuñez, dated June 26, 2001                                                                                                                                                                                  
|        | 10.25 |             |  | Amendment Number One to Agreement dated
	June 2, 1994 between IKOS Systems, Inc. and Joseph Rockom,
	dated June 26, 2001                                                                                                                                                                                
|        | 10.26 |             |  | Amendment Number One to Agreement dated
	February 3, 1999 between IKOS Systems, Inc. and Nader
	Fathi, dated June 26, 2001                                                                                                                                                                              
|        | 10.27 |             |  | First Amendment and Settlement Agreement
	effective October 1, 2001 by and between IKOS Systems, Inc.
	and Massachusetts Institute of Technology.                                                                                                                                                       
|        | 21.1  |             |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                   
|        | 23.1  |             |  | Consent of Ernst & Young LLP, Independent
	Auditors.                                                                                                                                                                                                                                                    
|        | 24.1  |             |  | Power of Attorney (Included on page 23 of
	this report).