IKOS SYSTEMS INC, DEF 14A, 1998-12-18

IKOS SYSTEMS INC
DEF 14A, 1998-12-18
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE>

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement

[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))

[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

IKOS SYSTEMS, INC.
(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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<PAGE>

[LOGO APPEARS HERE]

19050 PRUNERIDGE AVENUE
CUPERTINO, CALIFORNIA 95014

----------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 22, 1999

----------------

Dear Stockholder:

You are invited to attend the Annual Meeting of the Stockholders of IKOS
Systems, Inc. (the "Company"), which will be held Friday, January 22, 1999, at
10:00 a.m. Pacific Standard Time, at the Hilton Inn, Cupertino, California for
the following purposes:

1. To elect six directors of the Company to serve for the ensuing year.

2. To approve amendments to the Company's 1995 Outside Directors Stock
Option Plan to (i) increase by 100,000 the maximum number of shares of
the Company's common stock that may be issued thereunder; (ii) increase
the size of initial options granted to newly elected or appointed
outside directors on or after the date of the 1999 annual meeting of
stockholders from 10,000 shares to 24,000 shares; (iii) increase the
size of annual options granted on or after the date of the 1999 annual
meeting of stockholders from 2,500 shares to 6,000 shares; and (iv)
provide for the grant of a special option on the date of the 1999 annual
meeting of stockholders for 10,500 shares to vest in three annual
installments of 33 1/3% on the dates immediately preceding the date of
each of the annual meetings of stockholders in 2000, 2001 and 2002.

3. To approve an amendment to the Company's 1996 Employee Stock Purchase
Plan increasing by 400,000 the maximum number of shares of the Company's
common stock that may be issued thereunder.

4. To ratify the appointment of Ernst & Young LLP as the Company's
independent accountants for the fiscal year ending October 2, 1999.

5. To transact such other business as may properly come before the meeting.

Stockholders of record at the close of business on December 16, 1998 are
entitled to notice of, and to vote at, this meeting and any continuations or
adjournments thereof. For ten days prior to the meeting, a complete list of
stockholders entitled to vote at the meeting will be available for examination
by any stockholder for any purpose germane to the meeting during ordinary
business hours at the principal executive offices of IKOS Systems, Inc., 19050
Pruneridge Avenue, Cupertino, California 95014.

By Order of the Board of Directors,
/s/ Joseph W. Rockom
Joseph W. Rockom, Secretary

Cupertino, California
December 18, 1998

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY IN THE RETURN ENVELOPE SO THAT
YOUR STOCK MAY BE REPRESENTED AT THE MEETING.

<PAGE>

IKOS SYSTEMS, INC.
19050 PRUNERIDGE AVENUE
CUPERTINO, CALIFORNIA 95014
(408) 255-4567

----------------

PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS

----------------

The accompanying proxy is solicited by the Board of Directors of IKOS
Systems, Inc., a Delaware corporation (the "Company"), for use at the Annual
Meeting of Stockholders to be held Friday, January 22, 1999 (the "Annual
Meeting"), or any adjournment thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders. The date of this Proxy
Statement is December 18, 1998, the approximate date on which this Proxy
Statement and the accompanying form of proxy were first sent or given to
stockholders.

GENERAL INFORMATION

ANNUAL REPORT. An annual report for the fiscal year ended October 3, 1998 is
enclosed with this Proxy Statement.

VOTING SECURITIES. Only stockholders of record as of the close of business
on December 16, 1998 will be entitled to vote at the meeting and any
adjournment thereof. As of that date, there were 8,748,857 shares of Common
Stock of the Company, par value $0.01 per share, issued and outstanding.
Stockholders may vote in person or by proxy. Each holder of shares of Common
Stock is entitled to one (1) vote for each share of stock held on the
proposals presented in this Proxy Statement. The Company's Bylaws provide that
a majority of all of the shares of stock entitled to vote, whether present in
person or represented by proxy, shall constitute a quorum for the transaction
of business at the meeting.

SOLICITATION OF PROXIES. The cost of soliciting proxies will be borne by the
Company. In addition, the Company will solicit stockholders by mail through
its regular employees, and will request banks and brokers and other
custodians, nominees and fiduciaries to solicit their customers who have stock
of the Company registered in the names of such persons and will reimburse them
for their reasonable, out-of-pocket costs. The Company may use the services of
its officers, directors and others to solicit proxies, personally or by
telephone, without additional compensation.

VOTING OF PROXIES. All valid proxies received prior to the meeting will be
voted. All shares represented by a proxy will be voted, and where a
stockholder specifies by means of the proxy a choice with respect to any
matter to be acted upon, the shares will be voted in accordance with the
specification so made. If no choice is indicated on the proxy, the shares will
be voted in favor of the proposal. A stockholder giving a proxy has the power
to revoke his or her proxy, at any time prior to the time it is voted, by
delivery to the Secretary of the Company of a written instrument revoking the
proxy or a duly executed proxy with a later date, or by attending the meeting
and voting in person.

1
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The
following table contains information as of October 31, 1998 regarding the
ownership of the Common Stock of the Company by all persons who, to the
knowledge of the Company, were (i) the beneficial owners of 5% or more of the
outstanding shares of Common Stock of the Company, (ii) each director and
director nominee of the Company, (iii) the Chief Executive Officer and the
four other most highly compensated executive officers of the Company as of
October 3, 1998 whose salary and bonus for the fiscal year ended October 3,
1998 exceeded $100,000 and (iv) all current executive officers and directors
of the Company as a group.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED(2)
----------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE
--------------------------- ------- ----------
<S> <C> <C>
Dimensional Fund Advisors Inc. ........................ 517,500(3) 6.18%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401

Ramon A. Nunez......................................... 217,372(4) 2.54%
Gerald S. Casilli...................................... 144,383 1.73%
Joseph W. Rockom....................................... 67,357(5) *
Daniel R. Hafeman...................................... 49,129(6) *
Lawrence A. Melling.................................... 29,422(7) *
Lutz P. Henckels....................................... 21,876(8) *
Glenn E. Penisten...................................... 15,615(9) *
Nader Fathi............................................ 15,025(10) *
James R. Oyler......................................... 14,800(11) *
All Directors and Executive Officers as a Group (12
persons).............................................. 622,106(12) 7.44%
</TABLE>
- --------
* Less than 1%

(1) Except as otherwise indicated, the address of each beneficial owner is
c/o the Company, 19050 Pruneridge Avenue, Cupertino, California 95014.

(2) This table is based on information supplied by officers, directors and
principal stockholders. Except as otherwise indicated in the footnotes to
the above table, the Company believes that the persons named in the table
have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable.

(3) According to a Schedule 13f filed by the stockholder with the Securities
and Exchange Commission in June 1998, Dimensional Fund Advisors
("Dimensional"), may be deemed to beneficially own an aggregate 517,500
shares of the Company's Common Stock.

(4) Includes 186,825 shares subject to options exercisable within 60 days of
October 31, 1998.

(5) Includes 18,100 shares subject to options exercisable within 60 days of
October 31, 1998.

(6) Includes 11,750 shares subject to options exercisable within 60 days of
October 31, 1998.

(7) Includes 14,975 shares subject to options exercisable within 60 days of
October 31, 1998.

(8) Mr. Henckels resigned as a director of the Company in November 1998.
Includes 11,355 shares subject to options exercisable within 60 days of
October 31, 1998.

(9) Includes 7,500 shares subject to options exercisable within 60 days of
October 31, 1998.

(10) Includes 8,925 shares subject to options exercisable within 60 days of
October 31, 1998.

(11) Includes 7,500 shares subject to options exercisable within 60 days of
October 31, 1998.

(12) Includes 298,263 shares subject to options exercisable within 60 days of
October 31, 1998.

2
<PAGE>

PROPOSAL 1
ELECTION OF DIRECTORS

Management's nominees for election to the Board of Directors (the "Board")
at the Annual Meeting are Gerald S. Casilli, Ramon A. Nunez, James R. Oyler,
Glenn E. Penisten, William Stevens, and Jackson Hu. If elected, each nominee
will hold office until the next annual meeting of stockholders or until his
successor is elected and qualified unless he shall resign or his office
becomes vacant by death, removal, or other cause in accordance with the Bylaws
of the Company. If a quorum is present and voting, the nominees for director
receiving the highest number of votes will be elected as directors.
Abstentions and shares held by brokers that are present, but not voted because
the brokers were prohibited from exercising discretionary authority, i.e.,
"broker non-votes," will be counted as present in determining if a quorum is
present. Lutz P. Henckels resigned from the Company's Board effective November
17, 1998.

It is intended that votes pursuant to the Proxies will be cast for the named
nominees. The persons named in the accompanying form of proxy will vote the
shares represented thereby for the named nominees. Management knows of no
reason why any of the named nominees should be unable or unwilling to serve.
However, if any named nominee(s) should for any reason be unable or unwilling
to serve, the Proxies will be voted for the election of such other person(s)
for the office of director as management may recommend in the place of such
nominee(s).

At the Annual Meeting, six (6) directors of the Company are to be elected
for the ensuing year and until their successors are elected and qualified.
Proxies cannot be voted for a greater number of persons than the number of
nominees named. The nominees for election to the office of director and
certain information with respect to their age and background are set forth
below. Messrs. Casilli, Nunez, Oyler and Penisten each was elected to his
present term of office at the 1998 Annual Meeting of Stockholders of the
Company. Lutz P. Henckels resigned from the Company's Board effective November
17, 1998. In December 1998, the Company increase the size of its Board to six
members and appointed William Stevens and Jackson Hu to serve as directors
until the Annual Meeting or until their deaths, resignation, or removals in
accordance with the Company's Bylaws.

<TABLE>
<CAPTION>
POSITIONS WITH THE
NOMINEE COMPANY AGE DIRECTOR SINCE
------- ------------------ --- --------------
<C> <S> <C> <C>
Gerald S. Casilli Chairman of the Board 59 1986
Ramon A. Nunez Chief Executive Officer, 44 1994
President and Director
James R. Oyler Director 52 1991
Glenn E. Penisten Director 67 1985
William Stevens Director 57 1998
Jackson Hu Director 39 1998
</TABLE>

Mr. Casilli has served as Chairman of the Board 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 a Director for Evans & Sutherland
Computer Corporation. From January 1986 to December 1989, he was a general
partner of Trinity Ventures, Ltd., a venture capital firm and a former
investor in the Company. 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. Nunez was appointed Chief Executive Officer in August 1995. Mr. Nunez
had been President, Chief Operating Officer and Director of the Company since
October 1994. He had served as Vice President of Worldwide Sales since July
1993. Mr. Nunez joined the Company 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.

3
<PAGE>

Mr. Oyler has served as a member of the Board since October 1991. He is
presently President, Chief Executive Officer and Director of Evans &
Sutherland Computer Corporation. Evans & Sutherland develops, manufactures and
markets high performance systems for various applications with demanding
graphics requirements. Prior to his position with Evans & Sutherland, Mr.
Oyler was President of AMG, Inc., a process machine design company. From 1976
to 1990, Mr. Oyler worked at Harris Corporation, most recently as Senior Vice
President and Sector Executive, where he was responsible for nine operating
divisions. Prior to that time, he held positions as consultant and associate
with Booz, Allen & Hamilton in New York.

Mr. Penisten has been a member of the Board since September 1985. Since
September 1985, he has been a general partner of Alpha Partners, a venture
capital firm and former investor in the Company. From January 1985 to August
1985, he was a general partner of P&C Venture Partners, a venture capital
firm. From 1982 to 1985, he was a Senior Vice President at Gould/AMI. From
1976 to 1982, Mr. Penisten served as Chief Executive Officer of AMI, a
semiconductor manufacturer. Mr. Penisten is also a director of Bell
Microproducts, Inc. and Pinnacle Systems, Inc. and is Chairman of the Board of
Network Peripherals, Inc. and Superconductor Technologies.

Mr. Stevens joined the Company's Board in December 1998. He was a founder of
the Triad Systems Corporation and was President and Chairman of the Board from
1972 to 1985 and Chairman from 1985 to 1996. Prior to founding Triad, he was
employed from 1961 to 1971 by Data Disc, Inc., a manufacturer of computer
peripherals, where he served in various technical management positions,
including President. Mr. Stevens has served on numerous boards of both private
and public companies.

Mr. Hu joined the Company's Board in December 1998. He has 20 years of
experience in the semiconductor industry, including all phases of development,
marketing and management. Most recently, he was senior vice president and
general manager at S3, Inc., where he helped to grow the company from a start-
up to a company with revenues of approximately $450 million. In addition to
architecting and managing the development of S3's venerable 2D GUI accelerator
families, he established the company's analog and COT design capabilities. He
also created an operations and quality infrastructure for very high volume
production. Mr. Hu started and managed the audio and communications business
unit at S3. Before S3, he held positions at Western Digital as Director of
Graphics Engineering, Verticom as Director of Engineering, and Zilog as
project leader. Mr. Hu holds a Ph.D in computer science from the University of
Illinois, Urbana and an MBA from the University of Santa Clara.

BOARD MEETINGS. During the fiscal year ended October 3, 1998, the Board held
seven meetings and took action by unanimous written consent five times. No
director serving on the Board in fiscal year 1998 attended fewer than 75% of
such meetings of the Board and the Committees on which he serves.

COMMITTEES OF THE BOARD. The Company has an Audit Committee and a
Compensation Committee. The Audit Committee's function is to review with the
Company's independent accountants and management the annual financial
statements and independent accountants' opinion, review the scope and results
of the examination of the Company's financial statements by the independent
accountants, approve all professional services and related fees performed by
the independent accountants, recommend the retention of the independent
accountants to the Board, subject to ratification by the stockholders, and
periodically review the Company's accounting policies and internal accounting
and financial controls. The members of the Audit Committee during the fiscal
year ended October 3, 1998 were Messrs. Henckels, Oyler and Penisten. During
the fiscal year ended October 3, 1998, the Audit Committee held four meetings
and took action by unanimous written consent five times.

The Compensation Committee's function is to review and recommend salary and
bonus levels for executive officers and certain other management employees and
to recommend stock option grants. The members of the Compensation Committee
during the fiscal year ended October 3, 1998 were Messrs. Henckels, Oyler and
Penisten. During the fiscal year ended October 3, 1998, the Compensation
Committee held four meetings and took action by unanimous written consent two
times. For additional information concerning the Compensation Committee, see
"REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION."

4
<PAGE>

COMPENSATION OF DIRECTORS

The Company pays each of its outside directors $4,000 per quarter for their
services as members of the Board. The Chairman of the Board receives an
additional $90,000 per year and, as an employee of the Company, is eligible to
receive options to purchase the Company's Common Stock under the Company's
1995 Stock Option Plan. In addition, all directors who were not members of
management during the fiscal year ended October 3, 1998 received stock options
to purchase 2,500 shares of Common Stock pursuant to the 1995 Outside
Directors Stock Option Plan upon the date of the 1998 annual meeting of
stockholders. It is currently proposed under Proposal 2 that the annual
options granted on or after the date of the 1999 annual meeting of
stockholders be increased from 2,500 share to 6,000 shares and that the size
of initial options granted to newly elected or appointed outside directors on
or after the date of the 1999 annual meeting of stockholders be increased from
10,000 shares to 24,000 shares. It is also proposed under Proposal 2 that each
of the current outside directors receives a special option for 10,500 shares
on the date of the 1999 annual meeting of stockholders to vest in three annual
installments of 33 1/3% on the dates immediately preceding the date of each of
the annual meetings of stockholders in 2000, 2001 and 2002.

The following table provides the specified information concerning all
compensation paid to persons who were directors of the Company during the
fiscal year ended October 3, 1998 who are not named in the Summary
Compensation Table.

DIRECTOR COMPENSATION FOR LAST FISCAL YEAR(1)

<TABLE>
<CAPTION>
CASH COMPENSATION SECURITY GRANTS
------------------------ ---------------------
NUMBER OF SECURITIES
NAME ANNUAL RETAINER FEES (4) UNDERLYING OPTIONS (#)
---- ------------------------ ---------------------
<S> <C> <C>
Gerald S. Casilli............... $105,000(3) 25,000
Lutz P. Henckels(2)............. 15,500 2,500
James R. Oyler.................. 15,500 2,500
Glenn E. Penisten............... 15,500 2,500
</TABLE>
- --------
(1) Messrs. Stevens and Hu were each appointed as directors of the Company in
December 1998.

(2) Mr. Henckels resigned as a director of the Company in November 1998.

(3) Includes $90,000 paid to Mr. Casilli in compensation for his service to
the Company as Chairman of the Board.

(4) For the first quarter in the fiscal year ended October 3, 1998, the
outside directors received $3,500 instead of $4,000.

5
<PAGE>

EXECUTIVE COMPENSATION AND OTHER MATTERS

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth information concerning the compensation
during the fiscal years ended October 3, 1998, September 27, 1997, and
September 28, 1996 of the Chief Executive Officer and the four other most
highly compensated executive officers of the Company as of October 3, 1998
whose salary and bonus for the fiscal year ended October 3, 1998 exceeded
$100,000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- -------------
OTHER ANNUAL AWARDS OPTION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SHARES
--------------------------- ---- --------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Ramon A. Nunez............... 1998 $ 240,492 $ 32,000 (2) 30,000
Chief Executive Officer, 1997 228,418 90,400 (2) 41,700
President and Director 1996 209,228 100,000 (2) 42,300

Daniel R. Hafeman............ 1998 164,499 23,656 (2) 10,000
Chief Technical Officer 1997 154,883 53,795 (2) 0
1996 148,859 19,233 (2) 37,500

Lawrence A. Melling.......... 1998 198,463 22,982 (2) 30,000
Vice President of 1997 158,357 65,000 (2) 0
Business Development 1996 145,522 22,327 (2) 33,000

Joseph W. Rockom............. 1998 161,139 26,515 (2) 15,000
Vice President of Finance 1997 152,900 55,000 (2) 0
and Administration 1996 138,450 21,517 (2) 33,000

Nader Fathi (1).............. 1998 159,156 0 78,628(3) 41,250
Vice President of 1997 -- -- -- --
International Sales 1996 -- -- -- --
</TABLE>
- --------
(1) Mr. Fathi was appointed Vice President of International Sales June 5,
1998.

(2) Total amount of personal benefits paid to this executive officer during
the fiscal year was less than the lesser of (i) $50,000 or (ii) 10% of
such executive officer's total reported salary and bonus.

(3) Represents amount paid to Mr. Fathi as sales commissions.

6
<PAGE>

STOCK OPTIONS GRANTED DURING FISCAL 1998

The following table provides the specified information concerning grants of
options to purchase the Company's Common Stock made during the fiscal year
ended October 3, 1998 to the persons named in the Summary Compensation Table.

STOCK OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN FISCAL 1998
------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS EXERCISE STOCK PRICE APPRECIATION
UNDERLYING GRANTED OR BASE FOR OPTION TERM(4)
OPTIONS TO EMPLOYEES PRICE(3) EXPIRATION ---------------------------
NAME GRANTED(1)(2) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ------------- -------------- -------- ---------- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
Ramon A. Nunez.......... 30,000 1.6% $7.75 1/27/08 $ 146,218 $ 370,545
Joseph W. Rockom........ 15,000 0.8% 1.78 9/11/08 16,803 42,584
Daniel R. Hafeman....... 10,000 0.6% 1.78 9/11/08 11,202 28,389
Lawrence A. Melling..... 30,000 1.6% 1.78 9/11/08 33,607 85,167
Nader Fathi............. 5,000 0.3% 5.75 12/19/07 6,043 15,314
35,000 1.97% 4.43 6/22/08 97,675 241,528
1,250 0.07% 1.78 9/11/08 1,400 3,548
</TABLE>
- --------
(1) Options granted in fiscal 1998 under the Company's 1995 Stock Option Plan
(the "Option Plan") generally vest 12.5% six months after commencement of
employment or grant and continue to vest thereafter in equal monthly
increments over three and one-half years, conditioned upon continued
employment with the Company. Repriced options granted in December 1997
generally vest over four years, and optionees forfeited any accrued
vesting on their canceled options. Repriced options granted in September
1998 generally vest in total after three years; however, if there is a
change in ownership, these repriced options would vest ratably over three
years commencing on the date of repricing. Optionees who repriced in
September 1998 forfeited any accrued vesting on their canceled options.
Under the Option Plan, the Board retains discretion to modify the terms,
including the price of outstanding options. See "EXECUTIVE COMPENSATION
AND OTHER MATTERS-Employment Contracts and Termination of Employment and
Change-in-Control Arrangements." See also "REPORT OF THE COMPENSATION
COMMITTEE ON REPRICING OF OPTIONS."
(2) In December 1997 and September 1998, the Compensation Committee considered
the options held by the Company's executive officers and employees and the
fact that a broad decline in the price of the Common Stock of the Company
had resulted in a substantial number of stock options granted pursuant to
the Company's Option Plan having exercise prices well above the recent
trading prices for the Company's Common Stock. The Committee was advised
by management that management believed that employee turnover was likely
to increase in part because the Company's total compensation package for
long-term employees, which included substantial options with exercise
prices well above the current trading price, was less attractive than
compensation offered by other companies in the same geographic location,
because options granted to new hires at other companies would be granted
at current trading prices, providing more opportunity for appreciation
than the Company's options. Accordingly, in December 1997 and September
1998, the Committee approved an offer to all employees of the Company,
including executive officers, to exchange outstanding options with
exercise prices above the then current trading price for options with an
exercise price equal to the then current trading price. The Committee also
approved new vesting for exchanged options, and optionees who participated
in the exchange received a lower exercise price in exchange for their
forfeiting accrued vesting on their exchanged options. Under the Option
Plan, the Board retains discretion to modify the terms of outstanding
options. For details concerning the repricings of options see "EXECUTIVE
COMPENSATION AND OTHER MATTERS -- Repricing of Options" and "REPORT OF THE
COMPENSATION COMMITTEE ON REPRICING OF OPTIONS."

7
<PAGE>

(3) All options were granted at fair market value on the date of grant. The
repriced options granted in December 1997 have an exercise price equal to
$5.75 per share, the closing sales price of the common stock of the
Company on December 19, 1997. The repriced options granted in September
1998 have an exercise price equal to $1.78 per share, the closing sales
price of the common stock of the Company on September 11, 1998.
(4) Potential gains are net of exercise price, but before taxes associated
with exercise. These amounts represent certain assumed rates of
appreciation only, in accordance with the Securities and Exchange
Commission's rules. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock, overall market
conditions and the optionholders' continued employment through the vesting
period. The amounts reflected in this table may not necessarily be
achieved. One share of stock purchased at $7.75 in fiscal 1998 would yield
profits of approximately $4.87 per share at 5% appreciation over ten
years, or approximately $12.35 per share at 10% appreciation over the same
period. One share of stock purchased at $5.75 in fiscal 1998 would yield
profits of approximately $1.21 per share at 5% appreciation over ten
years, or approximately $3.06 per share at 10% appreciation over the same
period. One share purchased at $4.43 per share in fiscal 1998 would yield
profits of approximately $2.79 per share at 5% appreciation over ten
years, or approximately $6.90 per share at 10% appreciation over the same
period. One share purchased at $1.78 per share in fiscal 1998 would yield
profits of approximately $1.12 per share at 5% appreciation over ten
years, or approximately $2.84 per share at 10% appreciation over the same
period.

8
<PAGE>

OPTION EXERCISES AND FISCAL 1998 YEAR-END VALUES

The following table provides the specified information concerning exercises
of options to purchase the Company's Common Stock in the fiscal year ended
October 3, 1998 and unexercised options held as of October 3, 1998 by the
persons named in the Summary Compensation Table. A portion of the shares
subject to these options may not yet be vested and may be subject to
repurchase by the Company at a price equal to the option exercise price, if
the corresponding options were exercised before such shares had vested.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE IN DOLLARS OF
SHARES UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT 10/3/98 OPTIONS AT 10/3/98
ON VALUE ---------------------------------- -------------------------------
NAME EXERCISE REALIZED ($) EXERCISABLE(1)(2) UNEXERCISABLE(3) EXERCISABLE(2) UNEXERCISABLE(4)
---- -------- ------------ ----------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Ramon A. Nunez.......... 17,500 $26,250 167,012 60,187 $ 0 $ 0
Daniel R. Hafeman....... 10,000 80,625 11,750 53,800 0 18,491
Lawrence A. Melling..... 15,000 20,625 12,588 57,461 0 10,311
Joseph W. Rockom........ -- -- 18,100 53,400 0 18,353
Nader Fathi............. -- -- 3,412 51,037 0 429
</TABLE>
- --------
(1) Options granted in fiscal 1998 under the Option Plan generally vest 12.5%
six months after commencement of employment or grant and continue to vest
thereafter in equal monthly increments over three and one-half years,
conditioned upon continued employment with the Company. Repriced options
granted in December 1997 generally vest over four years, and optionees
forfeited any accrued vesting on their canceled options. Repriced options
granted in September 1998 generally vest in total after three years;
however, if there is a change in ownership, these repriced options would
vest ratably over three years commencing on the date of repricing. Under
the Option Plan, the Board retains discretion to modify the terms,
including the price of outstanding options. See also "REPORT OF THE
COMPENSATION COMMITTEE ON REPRICING OF OPTIONS."
(2) Represents shares which are immediately exercisable and/or vested. Based
on the closing price of $1.4375, as reported on the Nasdaq National Market
on October 2, 1998, less the exercise price.
(3) Represents shares which are unvested and/or not immediately exercisable.
Includes options granted in December 1997 and September 1998 as part of
the Company's repricing and replacing of options granted during previous
fiscal years. Repriced options granted in December 1997 generally vest
over four years, and optionees forfeited any accrued vesting on their
canceled options. Repriced options granted in September 1998 generally
vest in total after three years; however, if there is a change in
ownership, these repriced options would vest ratably over three years
commencing on the date of repricing. See "EXECUTIVE COMPENSATION AND OTHER
MATTERS--Repricing of Options" and "REPORT OF THE COMPENSATION COMMITTEE
ON REPRICING OF OPTIONS."
(4) Based on the closing price of $1.4375, as reported on the Nasdaq National
Market on October 2, 1998, less the exercise price.

9
<PAGE>

REPRICING OF OPTIONS. The following table provides information concerning
all repricings of options to purchase the Company's Common Stock held by any
executive officer of the Company from September 1988 through October 3, 1998:

TEN-YEAR OPTION REPRICINGS

<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES MARKET PRICE ORIGINAL OPTION
UNDERLYING OF STOCK AT EXERCISE PRICE TERM REMAINING
OPTIONS TIME OF AT TIME OF NEW AT DATE OF
DATE OF REPRICED REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME AND POSITION REPRICING OR AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT(1)
----------------- --------- ---------- ------------ -------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Casilli.......... 12/19/97 13,000 $ 5.75 $ 9.13 $ 5.75 8 years 16 days
12/19/97 12,200 5.75 16.00 5.75 8 years 274 days
12/19/97 1,800 5.75 16.00 5.75 8 years 274 days
9/11/98 6,700 1.78 5.75 1.78 6 years 177 days
9/11/98 13,000 1.78 5.75 1.78 9 years 99 days
9/11/98 12,200 1.78 5.75 1.78 9 years 99 days
9/11/98 1,800 1.78 5.75 1.78 9 years 99 days
9/11/98 25,000 1.78 7.75 1.78 9 years 99 days
Nader Fathi............. 8/1/97 3,200 15.25 25.00 15.25 9 years 180 days
12/19/97 10,000 5.75 17.13 5.75 8 years 258 days
12/19/97 3,200 5.75 15.25 5.75 9 years 225 days
12/19/97 5,000 5.75 7.50 5.75 9 years 354 days
9/11/98 1,250 1.78 7.69 1.78 9 years 153 days
Thomas Gardner.......... 8/1/97 1,000 15.25 25.00 15.25 9 years 180 days
12/19/97 5,000 5.75 11.75 5.75 8 years 48 days
12/19/97 2,000 5.75 18.88 5.75 8 years 334 days
12/19/97 1,000 5.75 15.25 5.75 9 years 225 days
9/11/98 5,000 1.78 5.75 1.78 9 years 99 days
9/11/98 2,000 1.78 5.75 1.78 9 years 99 days
9/11/98 2,000 1.78 7.69 1.78 9 years 153 days
9/11/98 25,000 1.78 4.44 1.78 9 years 285 days
Daniel Hafeman.......... 12/19/97 10,200 5.75 16.00 5.75 8 years 274 days
12/19/97 9,800 5.75 16.00 5.75 8 years 274 days
9/11/98 6,300 1.78 5.50 1.78 6 years 177 days
9/11/98 17,500 1.78 9.13 1.78 7 years 115 days
9/11/98 10,200 1.78 5.75 1.78 9 years 99 days
9/11/98 9,800 1.78 5.75 1.78 9 years 99 days
9/11/98 10,000 1.78 7.75 1.78 9 years 138 days
Robert Hum.............. 12/19/97 10,000 5.75 15.00 5.75 9 years 210 days
12/19/97 19,500 5.75 15.25 5.75 9 years 225 days
12/19/97 20,500 5.75 15.25 5.75 9 years 225 days
Stephen McLaughlin...... 12/19/97 13,000 5.75 16.00 5.75 8 years 274 days
12/19/97 5,000 5.75 16.00 5.75 8 years 274 days
9/11/98 12,000 1.78 9.13 1.78 7 years 115 days
Larry Melling........... 12/19/97 13,000 5.75 9.13 5.75 8 years 16 days
12/19/97 12,500 5.75 16.00 5.75 8 years 274 days
12/19/97 7,500 5.75 16.00 5.75 8 years 274 days
9/11/98 5,000 1.78 8.00 1.78 9 years 62 days
9/11/98 25,000 1.78 8.00 1.78 9 years 62 days
</TABLE>

10
<PAGE>

TEN-YEAR OPTION REPRICINGS (CONT.)

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

The Company has entered into an employment agreement with Ramon A. Nunez,
the Company's Chief Executive Officer, President and Director. Mr. Nunez's
employment agreement provides that Mr. Nunez shall receive an annual salary of
$240,492, subject to annual review. In connection with Mr. Nunez's employment
agreement, the Company granted Mr. Nunez an option to purchase 150,000 shares
of the Company's Common Stock pursuant to the Company's Option Plan. Pursuant
to Mr. Nunez's employment agreement, Mr. Nunez is granted additional options
if the Company achieves or exceeds certain earnings per share objectives. Mr.
Nunez's employment agreement further provides that Mr. Nunez will be entitled
to a performance bonus of up to $100,000 per year, of which 80% will be earned
upon meeting certain revenue and earnings per share targets and 20% will be
discretionary and will be granted based upon his job performance and other
factors as determined by the Board. Mr. Nunez's employment pursuant to his
employment agreement may be terminated by the Company at any time, with or
without cause; provided, however, if Mr. Nunez's employment is terminated by
the Company for any reason other than cause (as defined in the employment
agreement) he shall be entitled to the following severance benefits: (i)
payment over a nine (9) month period of a monthly amount equal to his average
monthly salary for the twelve (12) months prior to his termination; (ii)
continued vesting of stock options granted pursuant to his employment
agreement; and (iii) continued provision of employee benefits for the nine (9)
month period following termination.

The Company has entered into severance agreements with each of its current
executive officers. In general, such agreements provide that if within one
year of a transfer of control of the Company, as defined in the agreement, an
executive officer's employment is terminated by the Company without cause, the
executive officer

11
<PAGE>

terminates his employment with the Company as a result of being required to
relocate, as defined in the agreement, or the executive officer's base salary
immediately prior to the transfer of control is reduced, he shall continue to
receive his base salary and benefits for a period of one (1) year after his
date of termination. In addition, such agreements provide that any unvested
stock options held by an executive officer on his date of termination shall
become fully vested.

Options granted under the Company's Option Plan contain provisions pursuant
to which, under certain circumstances, all outstanding options and shares
granted under such plan will become fully vested and immediately exercisable
upon a "transfer of control" as defined in such plan.

CHANGES TO BENEFIT PLANS

1995 Outside Directors Stock Option Plan. The Company has proposed the
approval of an amendment to the Company's 1995 Outside Directors Stock Option
Plan (the "Directors Plan") to (i) increase the maximum aggregate number of
shares of the Company's Common Stock issuable under the plan by 100,000 shares
from 100,000 shares to 200,000 shares; (ii) increase the size of initial
options granted to newly elected or appointed outside directors on or after
the date of the 1999 annual meeting of stockholders from 10,000 shares to
24,000 shares; (iii) increase the size of annual options granted on or after
the date of the 1999 annual meeting of stockholders from 2,500 shares to 6,000
shares; and (iv) provide for the grant of a special option on the date of the
1999 annual meeting of stockholders for 10,500 shares to vest in three annual
installments of 33-1/3% on the date immediately preceding the dates of each of
the annual meetings of stockholders in 2000, 2001 and 2002, as described below
under the caption, "APPROVAL OF AMENDMENTS TO 1995 OUTSIDE DIRECTORS STOCK
OPTION PLAN." If the proposed amendment to the Directors Plan is approved,
each of Messrs. Oyler and Penisten will receive on the date of the 1999 Annual
Meeting of stockholders an annual option to purchase 6,000 shares and a
special option to purchase 10,500 shares. If approved, each of Messrs. Stevens
and Hu will receive on the date of the 1999 Annual Meeting of stockholders an
initial option to purchase 24,000 shares.

1996 Employee Stock Purchase Plan. The Company also has proposed the
approval of an amendment to the Company's 1996 Employee Stock Purchase Plan
(the "Purchase Plan") to increase the maximum aggregate number of shares of
the Company's Common Stock issuable under the Purchase Plan by 400,000 shares
from 250,000 shares to 650,000 shares, as described below under the caption,
"APPROVAL OF AMENDMENT TO 1996 EMPLOYEE STOCK PURCHASE PLAN." Purchases of
stock under the Purchase Plan are made at the discretion of participants.
Accordingly, future purchases under the Purchase Plan are not determinable.
Non-employee directors are not eligible to participate in the Purchase Plan.

12
<PAGE>

COMPARISON OF STOCKHOLDER RETURN(1)

Set forth below is a line graph comparing the annual percentage change in
the cumulative total return on the Company's Common Stock with the CRSP Total
Return Index for the Nasdaq Stock Market (U.S. Companies) and the Nasdaq
Computer and Data Processing Stocks (SIC 7370-7379 US & Foreign) for the
period commencing October 1, 1993 and ending October 3, 1998.

[PERFORMANCE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
10/01/93 9/30/94 9/29/95 9/27/96 9/26/97 10/03/98
-------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
n IKOS Systems, Inc......... 100.0 141.7 395.8 662.5 416.7 47.9
H Nasdaq Stock Market (US
Companies)................ 100.0 100.9 139.3 165.8 226.4 221.1
s Nasdaq Computer and Data
Processing Stocks
(SIC 7370-7379 US &
Foreign).................. 100.0 111.6 178.8 223.8 302.4 363.0
</TABLE>
- --------
(1) Assumes that $100.00 was invested October 1, 1993 in the Company's Common
Stock and in each index, and that all dividends were reinvested.
Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.

13
<PAGE>

REPORT OF THE COMPENSATION COMMITTEE ON REPRICING OF OPTIONS

In December 1997 and September 1998, the Compensation Committee considered
the options held by the Company's employees, including executive officers, and
the fact that a broad decline in the price of the Common Stock of the Company
had resulted in a substantial number of stock options granted pursuant to the
Option Plan having exercise prices above the recent trading prices for the
Company's Common Stock. The Committee was advised by management that
management believed that employee turnover was likely to increase in part
because the Company's total compensation package for long-term employees,
which included substantial options with exercise prices above the current
trading price, was less attractive than compensation offered by other
companies in the same geographic location, because options granted to new
hires at other companies would be granted at current trading prices, providing
more opportunity for appreciation than the Company's options.

The Committee believed that the Company's success in the future would depend
in large part on its ability to retain a number of its highly skilled
technical, managerial and marketing personnel and the loss of key employees
could have a significant adverse impact on the Company's business. The
Committee also believed that unless an adjustment was made in option prices,
longer term employees holding options would perceive a substantial inequity in
comparison to newer employees granted stock options with exercise prices set
at the current, lower fair market value of the Company's Common Stock and that
employee morale would suffer as a consequence. The Committee concluded that it
was important and cost-effective to provide equity incentives to employees and
executive officers of the Company to improve the Company's performance and the
value of the Company for its stockholders. The Committee considered granting
new options selectively to current key employees at fair market value, but
recognized that the size of the option grants required to offset the decline
in market price would result in significant additional dilution to
stockholders. The Committee recognized that an exchange of existing options
with exercise prices higher than fair market value for options at fair market
value would provide additional incentives to employees because of the
increased potential for appreciation. The Committee also recognized that it
could require restarted vesting in the exchange options so that optionees
participating in the exchange would have incentives to remain with the
Company. Considering these factors, the Committee determined that it was in
the best interests of the Company and its stockholders to restore the
incentives for employees and executive officers to remain as employees of the
Company and to exert their maximum efforts on behalf of the Company by
granting replacement stock options under the Option Plan at the optionee's
request for those options with exercise prices above recent trading prices,
with restarted vesting and exercise prices equal to the closing sales price of
the Company's Common Stock on the date of the Committee's approval of the
repricing.

Accordingly, in December 1997, the Committee approved an offer to all
employees of the Company, including executive officers, to exchange
outstanding options with exercise prices above the then current trading price
for options with an exercise price equal to $5.75, the closing sales price of
the Company's Common Stock on December 19, 1997, with vesting commencing on
the date of the exchange. All exchanged options will terminate no later than
ten (10) years from the date of the exchange. Accordingly, optionees who
participated in the exchange received a lower exercise price in exchange for
their forfeiting accrued vesting on their exchanged options. The first offer
to exchange options was completed in December 1997; options for a total of
891,035 shares with exercise prices ranging from $7.50 per share to $28.375
per share were exchanged for options for an equal number of shares at an
exercise price of $5.75 per share, the closing price of the Company's Common
Stock on December 19, 1997.

Due to the continued decline in the Company's stock price, in September
1998, the Committee approved another offer to all employees of the Company,
including executive officers, to exchange outstanding options with exercise
prices above the then current trading price for options with an exercise price
equal to $1.78, the closing sales price of the Company's Common Stock on
September 11, 1998, with the options vesting in total after three years.
However, upon a change in ownership, the repriced options would vest ratably
over three years commencing on the date of the repricing. All exchanged
options will terminate no later than ten (10) years from the date of the
exchange. Accordingly, optionees who participated in the exchange received a
lower exercise price in exchange for their forfeiting accrued vesting on their
exchanged options. The offer to exchange options

14
<PAGE>

was completed in September 1998; options for a total of 531,022 shares with
exercise prices ranging from $2.8125 per share to $15.25 per share were
exchanged for options for an equal number of shares at an exercise price of
$1.78 per share, the closing price of the Company's Common Stock on September
11, 1998.

COMPENSATION COMMITTEE

Lutz P. Henckels
James R. Oyler
Glenn E. Penisten

15
<PAGE>

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

The Compensation Committee is comprised of three outside directors of the
Board and is responsible for setting and monitoring policies governing
compensation of executive officers. The Compensation Committee reviews the
performance and compensation levels for executive officers and sets salary and
bonus levels and option grants under the Option Plan. The objectives of the
Committee are to correlate executive compensation with the Company's business
objectives and performance, and to enable the Company to attract, retain and
reward executive officers who contribute to the long-term success of the
Company.

SALARY

The Compensation Committee annually assesses the performance and sets the
salary of the Company's President and Chief Executive Officer, Ramon A. Nunez.
In turn, Mr. Nunez annually assesses the performance of all other executive
officers and recommends salary increases which are reviewed and approved by
the Compensation Committee.

In particular, Mr. Nunez's compensation as the Company's President and Chief
Executive Officer is based on compensation levels of President/Chief Executive
Officers of comparable size companies. In addition, the Compensation Committee
considers certain incentive objectives based on the Company's performance as
it relates to revenue levels and earnings per share levels.

In determining executive officer salaries, the Compensation Committee
reviews recommendations from Mr. Nunez which include information from salary
surveys, performance evaluations and the financial condition of the Company.
The Compensation Committee also establishes both financial and operational
based objectives and goals in determining executive officer salaries. These
goals and objectives include sales and spending forecasts for the upcoming
year and published executive compensation literature for comparable sized
companies.

For more information regarding the compensation and employment arrangements
of Mr. Nunez and other executive officers of the Company, see "EXECUTIVE
COMPENSATION AND OTHER MATTERS--Compensation of Executive Officers and
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements."

BONUSES

The Compensation Committee administers a bonus plan to provide additional
incentives to executives who meet established performance goals for the
Company. In consultation with the Chief Executive Officer, the Compensation
Committee annually determines the total amount of cash bonuses available for
executive officers and certain other management employees. In fiscal 1998,
awards under this bonus plan were contingent upon the Company's attainment of
revenue and operating profit targets, set by the Compensation Committee in
consultation with the Chief Executive Officer. The target amount of the bonus
for the Chief Executive Officer and more senior executive officers was set by
the Compensation Committee; the amounts of individual bonuses for the
remaining executive officers and other management were proposed by the Chief
Executive Officer, subject to approval by the Compensation Committee. Awards
are weighted so that proportionately higher awards are received when the
Company's performance reaches maximum targets, proportionately smaller awards
are received when the Company's performance reaches minimum targets and no
awards are received when the Company does not meet minimum performance
targets.

STOCK OPTIONS

The Compensation Committee believes that employee equity ownership provides
significant motivation to executive officers to maximize value for the
Company's stockholders and, therefore, periodically grants stock options under
the Option Plan. Stock options are granted at the current market price and
will only have value if the Company's stock price increases over the exercise
price.

16
<PAGE>

The Compensation Committee determines the size and frequency of option
grants for executive officers, after consideration of recommendations from the
Chief Executive Officer. Recommendations for options are based upon the
relative position and responsibilities of each executive officer, previous and
expected contributions of each officer to the Company and previous option
grants to such executive officers. Generally, option grants vest 12.5% six
months after commencement of employment or six months after the date of grant
and continue to vest thereafter in equal monthly installments over three and
one-half years, conditioned upon continued employment with the Company.

COMPENSATION COMMITTEE

Lutz P. Henckels
James R. Oyler
Glenn E. Penisten

17
<PAGE>

PROPOSAL 2
APPROVAL OF AMENDMENTS TO 1995 OUTSIDE DIRECTORS STOCK OPTION PLAN

GENERAL

The Company's 1995 Outside Directors Stock Option Plan (the "Directors
Plan") was adopted by the Board in 1995 with an initial reserve of 100,000
shares of Common Stock. Excluding the proposed increase in the share reserve
and the new grants of options to purchase shares of Common Stock under the
Directors Plan as described below and in "EXECUTIVE COMPENSATION AND OTHER
MATTERS--Changes to Benefit Plans: 1995 Outside Directors Stock Option Plan,"
as of December 16, 1998, approximately 65,000 shares remained available for
future option grants under the Directors Plan. See also "EXECUTIVE
COMPENSATION AND OTHER MATTERS--Changes to Benefit Plans: 1995 Outside
Directors Stock Option Plan." In October 1998, the Board amended the Directors
Plan, subject to stockholder approval, to (i) increase by 100,000 shares from
100,000 shares to 200,000 shares the maximum aggregate number of shares of
Common Stock issuable under the plan; (ii) increase the size of Initial
Options granted to newly elected or appointed outside directors on or after
the date of the 1999 annual meeting of stockholders from 10,000 shares to
24,000 shares; (iii) increase the size of Annual Options granted on or after
the date of the 1999 annual meeting of stockholders from 2,500 shares to 6,000
shares; and (iv) provide for the grant of a special option on the date of 1999
annual meeting of stockholders for 10,500 shares to each Outside Director in
office as an Outside Director immediately following such meeting who has,
prior to such date, received an option under the Directors Plan (a "Special
Option"). The Special Option will vest in three annual installments of 33-1/3%
on the dates immediately preceding the date of each of the annual meetings of
stockholders in 2000, 2001 and 2002.

The stockholders are now being asked to approve the amendment to (i)
increase the maximum aggregate number of shares of Common Stock issuable under
the Directors Plan; (ii) increase the size of Initial Options granted to newly
elected or appointed outside directors on or after the date of the 1999 annual
meeting of stockholders; (iii) increase the size of Annual Options granted on
or after the date of the 1999 annual meeting of stockholders; and (iv) provide
for the grant of a special option on the date of 1999 annual meeting of
stockholders to each Outside Director who has previously received an option
under the Directors Plan (a "Special Option"). The Board believes that the
availability of an adequate Directors Plan reserve is an important factor in
attracting, motivating and retaining qualified outside directors essential to
the success of the Company and in aligning their long-term interests with
those of the stockholders. Because competition for highly qualified
individuals in the Company's industry is intense, management believes that to
successfully attract the best candidates, the Company must offer a competitive
stock option program as an essential component of its compensation packages.
The Board of Directors further believes that stock options serve an important
role in motivating their holders to contribute to the Company's continued
growth and profitability. The proposed amendment is intended to ensure that
the Directors Plan will continue to have attract and retain well-qualified
directors.

DESCRIPTION OF PLAN

The following summary of the Directors Plan is qualified in its entirety by
the specific language of the Directors Plan, a copy of which is available to
any stockholder upon request.

General. The Directors Plan provides for the automatic grant of nonstatutory
stock options to nonemployee directors of the Company and is intended to
qualify as a "formula plan" within the meaning of Rule 16b-3 under the
Exchange Act.

Shares Subject to Plan. Currently, a maximum of 100,000 shares of the
authorized but unissued or reacquired shares of the Common Stock of the
Company may be issued upon the exercise of options granted under the Directors
Plan. Upon any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments will be made to the
shares subject to the Directors Plan, to the terms of the automatic option
grants described below, and to

18
<PAGE>

outstanding options. In October 1998, the Board, subject to stockholder
approval, amended the Directors Plan to increase its share reserve by 100,000
shares to an aggregate of 200,000 shares. The stockholders are now being
requested to approve the increase in the Directors Plan reserve at the Annual
Meeting. To the extent that any outstanding option under the Directors Plan
expires or terminates prior to exercise in full or if shares issued upon the
exercise of an option are repurchased by the Company, the shares of Common
Stock for which such option is not exercised or the repurchased shares are
returned to the plan and become available for future grants.

Administration. The Directors Plan is intended to operate automatically
without discretionary administration. To the extent administration is
necessary, it will be performed by the Board of Directors or a duly appointed
committee of the Board (hereinafter referred to as the "Board"). However, the
Board has no discretion to select the nonemployee directors of the Company who
are granted options under the Directors Plan, to set the exercise price of
such options, to determine the number of shares for which or the time at which
particular options are granted or to establish the duration of such options.
The Directors Plan provides, subject to certain limitations, for
indemnification by the Company of any director, officer or employee against
all reasonable expenses, including attorneys' fees, incurred in connection
with any legal action arising from such person's action or failure to act in
administering the Directors Plan. The Board is authorized to interpret the
Directors Plan and options granted thereunder, and all determinations of the
Board will be final and binding on all persons having an interest in the
Directors Plan or any option.

Eligibility. Only directors of the Company who are not at the time of option
grant employees of the Company or of any parent or subsidiary corporation of
the Company (the "Outside Directors") are eligible to participate in the
Directors Plan. Currently, the Company has three Outside Directors.

Automatic Grant of Options. Currently, the Directors Plan provides that each
Outside Director first elected or appointed to the Board after the Effective
Date of the plan will be granted automatically, on the date of such initial
election or appointment, an option to purchase 10,000 shares of Common Stock.
An option granted on the Effective Date of the plan or on the date of initial
appointment or election as an Outside Director is referred to herein as an
"Initial Option". The Directors Plan also currently provides for the automatic
annual grant, on the day of each annual meeting of the stockholders of the
Company, of an additional option to purchase 2,500 shares (authorized to
increase to 6,000 shares subject to shareholder approval) of Common Stock (an
"Annual Option") to each Outside Director remaining a member of the Board
(including a director who previously did not qualify as an Outside Director
but who subsequently qualifies) other than an Outside Director receiving an
Initial Option on the day of the annual meeting. The size of the first Annual
Option granted to an Outside Director initially elected or appointed to the
Board of Directors following the preceding annual meeting of the stockholders
is prorated. It is proposed that (i) the size of Initial Options granted to
newly elected or appointed outside directors on or after the date of the 1999
annual meeting of stockholders be increased from 10,000 shares to 24,000
shares; (ii) the size of Annual Options granted on or after the date of the
1999 annual meeting of stockholders be increased from 2,500 shares to 6,000
shares; and (iii) the Company provide for the grant of a special option on the
date of 1999 annual meeting of stockholders for 10,500 shares to each Outside
Director in office as an Outside Director immediately following such meeting
who has, prior to such date, received an option under the Directors Plan (a
"Special Option").

Terms and Conditions of Options. Each option granted under the Directors
Plan is evidenced by a written agreement between the Company and the Outside
Director specifying the number of shares subject to the option and the other
terms and conditions of the option, consistent with the requirements of the
Directors Plan. The exercise price of any option granted under the Directors
Plan must equal the fair market value, as determined pursuant to the plan, of
a share of the Company's Common Stock on the date of grant. Generally, the
fair market value of the Common Stock will be the closing price per share on
the date of grant as reported on the Nasdaq National Market. No option granted
under the Directors Plan is exercisable after the expiration of 10 years after
the date such option is granted, subject to earlier termination in the event
the optionee's service with the Company ceases or in the event of a Transfer
of Control of the Company, as discussed below. Initial Options granted under
the Directors Plan will become exercisable cumulatively in installments of 25%
of the shares subject to the option on the day preceding each of the first
four annual meetings of the stockholders occurring

19
<PAGE>

after the date of grant. Annual Options will become exercisable in full on the
day preceding the fourth annual meeting of the stockholders occurring after
the date of grant.

Generally, the exercise price may be paid in cash, by check, or in cash
equivalent, by tender of shares of the Company's Common Stock owned by the
optionee having a fair market value not less than the exercise price, by the
assignment of the proceeds of a sale or loan with respect to some or all of
the shares of Common Stock being acquired upon the exercise of the option, or
by any combination of these. During the lifetime of the optionee, the option
may be exercised only by the optionee. An option may not be transferred or
assigned, except by will or the laws of descent and distribution.

Transfer of Control. The Directors Plan provides that, in the event of (i) a
sale or exchange by the stockholders in a single or series of related
transactions of more than 50% of the Company's voting stock, (ii) a merger or
consolidation in which the Company is a party, (iii) the sale, exchange or
transfer of all or substantially all of the assets of the Company, or (iv) a
liquidation or dissolution of the Company wherein, upon any such event, the
stockholders of the Company immediately before such event do not retain direct
or indirect beneficial ownership of more than 50% of the total combined voting
power of the voting stock of the Company, its successor, or the corporation to
which the assets of the Company were transferred (a "Transfer of Control"),
all options outstanding under the Directors Plan will become immediately
exercisable and vested in full prior to the Transfer of Control. In addition,
the acquiring or successor corporation may assume or substitute substantially
equivalent options for the options outstanding under the Directors Plan. To
the extent that the options outstanding under the Directors Plan are not
assumed, substituted for, or exercised prior to the Transfer of Control, they
will terminate.

Termination or Amendment. The Directors Plan continues until terminated by
the Board or until all of the shares reserved for issuance under the plan have
been issued. The Board may terminate or amend the Directors Plan at any time.
However, subject to changes in the law that would permit otherwise, without
stockholder approval, the Board may not amend the Directors Plan to increase
the total number of shares of Common Stock reserved for issuance thereunder or
expand the class of persons eligible to receive options. The provisions of the
Directors Plan addressing eligibility to participate in the plan and the
amount, price and time of the grant of options may not be amended more than
once every six months, other than to comport to changes in the Code, the
Employee Retirement Income Security Act of 1974, or the rules thereunder. No
termination or amendment of the Directors Plan may adversely affect an
outstanding option without the consent of the optionee, unless such
termination or amendment is necessary to comply with any applicable law.

SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in
the Directors Plan and does not attempt to describe all possible federal or
other tax consequences of such participation or tax consequences based on
particular circumstances.

Options granted under the Directors Plan are nonstatutory stock options,
which have no special tax status. An optionee generally recognizes no taxable
income as the result of the grant of such an option. Upon exercise of a
nonstatutory stock option, the optionee normally recognizes ordinary income in
the amount of the difference between the option exercise price and the fair
market value of the shares on the exercise date. Upon the sale of stock
acquired by the exercise of a nonstatutory stock option, any gain or loss,
based on the difference between the sale price and the fair market value on
the exercise date, will be taxed as capital gain or loss. A capital gain or
loss will be long-term if the optionee's holding period of the shares is more
12 months. No tax deduction is available to the Company with respect to the
grant of a nonstatutory stock option or the sale of the stock acquired
pursuant to such grant. The Company generally should be entitled to a
deduction equal to the amount of ordinary income recognized by the optionee as
a result of the exercise of a nonstatutory stock option, except to the extent
such deduction is limited by applicable provisions of the Code or the
regulations thereunder.

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VOTE REQUIRED AND BOARD'S RECOMMENDATION

The affirmative vote of a majority of the shares present or represented by
proxy and entitled to vote at the Annual Meeting, at which a quorum
representing a majority of all outstanding shares of Common Stock of the
Company is present and voting, either in person or by proxy, is required for
approval of this proposal. Abstentions and broker non-votes each will be
counted as present for purposes of determining the presence of a quorum.
Abstentions will have the same effect as a negative vote on this proposal.
Broker non-votes will have no effect on the outcome of this vote.

The Board believes that the proposed amendments to the Directors Plan (i) to
increase to 200,000 the maximum aggregate number of shares of Common Stock
issuable under the plan, (ii) to increase the size of initial options granted
to newly elected or appointed outside directors on or after the date of the
1999 annual stockholders meeting from 10,000 shares to 24,000 shares, (iii) to
increase the size of annual options granted on or after the date of the 1999
annual stockholders meeting from 2,500 shares to 6,000 shares, and (iv) to
provide for the grant of a special option on the date of 1999 annual
stockholders meeting for 10,500 shares to vest, as described above, is in the
best interests of the Company and the stockholders for the reasons stated
above. THEREFORE, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL
TO AMEND THE DIRECTORS PLAN TO INCREASE THE MAXIMUM AGGREGATE NUMBER OF SHARES
OF COMMON STOCK ISSUABLE UNDER THE PLAN TO 200,000 SHARES, TO INCREASE THE
SIZE OF THE INITIAL STOCK OPTION GRANT, TO INCREASE THE SIZE OF THE AUTOMATIC
STOCK OPTION GRANT, AND TO PROVIDE FOR THE GRANT OF A SPECIAL OPTION FOR
10,500 SHARES WITH THREE YEAR ANNUAL VESTING.

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PROPOSAL 3
APPROVAL OF AMENDMENT TO 1996 EMPLOYEE STOCK PURCHASE PLAN

GENERAL

In October 1995, the Board adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan"). The Purchase Plan provides a means by which employees
may purchase Common Stock of the Company through payroll deductions. As of
December 16, 1998, approximately 69,000 shares remained available for future
issuance under the Purchase Plan. In October 1998, subject to stockholder
approval, the Board increased the number of shares authorized for issuance
under the Purchase Plan by 400,000 to 650,000 shares.

DESCRIPTION OF PLAN

The following summary of the Purchase Plan is qualified in its entirety by
the specific language of the Purchase Plan, a copy of which is available to
any stockholder upon request.

General. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" under section 423 of the Code. Each participant in the Purchase
Plan is granted at the beginning of each offering under the plan (an
"Offering") the right to purchase through accumulated payroll deductions up to
a number of shares of the Common Stock of the Company (a "Purchase Right")
determined on the first day of the Offering. The Purchase Right is
automatically exercised on the last day of the Offering unless the participant
has withdrawn from participation in the Offering or in the Purchase Plan prior
to such date.

Shares Subject to Plan. Currently, a maximum of 250,000 of the Company's
authorized but unissued or reacquired shares of Common Stock may be issued
under the Purchase Plan, subject to appropriate adjustment in the event of a
stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the Company's capital
structure or in the event of any merger, sale of assets or other
reorganization of the Company. In October 1998, the Board, subject to
stockholder approval, amended the Purchase Plan to increase its share reserve
by 400,000 shares to an aggregate of 650,000 shares. The stockholders are now
being requested to approve the increase in the Purchase Plan reserve at the
Annual Meeting. If any Purchase Right expires or terminates, the shares
subject to the unexercised portion of such Purchase Right will again be
available for issuance under the Purchase Plan.

Administration. The Purchase Plan is administered by the Board or a duly
appointed committee of the Board. Subject to the provisions of the Purchase
Plan, the Board determines the terms and conditions of Purchase Rights granted
under the plan. The Board will interpret the Purchase Plan and Purchase Rights
granted thereunder, and all determinations of the Board will be final and
binding on all persons having an interest in the Purchase Plan or any Purchase
Rights.

Eligibility. Any employee of the Company or of any present or future parent
or subsidiary corporation of the Company designated by the Board for inclusion
in the Purchase Plan is eligible to participate in an Offering under the Plan
so long as the employee has completed at least six months of continuous
employment prior to the start of the Offering (the "Eligibility Service
Requirement") and is customarily employed for more than 20 hours per week;
provided, however, that the Eligibility Service Requirement will not apply to
Offerings commencing on or after August 1, 1996, except for employees who are
executive officers. However, no employee who owns or holds options to
purchase, or as a result of participation in the Purchase Plan would own or
hold options to purchase, five percent or more of the total combined voting
power or value of all classes of stock of the Company or of any parent or
subsidiary corporation of the Company is entitled to participate in the
Purchase Plan.

Offerings. Generally, each Offering of Common Stock under the Purchase Plan
is for a period of six months (an "Offering Period") commencing on or about
February 1 and August 1 of each year (an "Offering Date"). The Board may
establish a different term for one or more Offerings, not to exceed 27 months,
or different commencement or ending dates for any Offering Period. Generally,
shares are purchased on the last day of the Offering Period (a "Purchase
Date"). The Purchase Plan also authorizes the Board to establish one or more
additional Purchase Dates during an Offering Period.

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<PAGE>

Participation and Purchase of Shares. Participation in an Offering under the
Purchase Plan is limited to eligible employees who authorize payroll
deductions prior to the Offering Date. Payroll deductions may not exceed 10%
(or such other rate as the Board determines) of an employee's compensation on
any payday during the Offering Period. Once an employee becomes a participant
in the Purchase Plan, that employee will automatically participate in each
successive Offering Period until such time as the employee withdraws from the
Purchase Plan, becomes ineligible to participate, or terminates employment.

Subject to certain limitations, each participant in an Offering has a
Purchase Right equal to the lesser of (i) a number of whole shares determined
by dividing $12,500 by the fair market value of a share of Common Stock on the
Offering Date, or (ii) 1,000 shares. These dollar and share amounts will be
prorated for any Offering Period that is less than 5 1/2 months or more than 6
1/2 months in duration. However, no participant may purchase under the
Purchase Plan shares of Common Stock having a fair market value exceeding
$25,000 in any calendar year (measured by the fair market value of the
Company's Common Stock on the first day of the Offering Period in which the
shares are purchased).

On each Purchase Date, the Company issues to each participant in the
Offering the number of shares of the Company's Common Stock determined by
dividing the amount of payroll deductions accumulated for the participant
during the Offering Period by the purchase price, limited in any case by the
number of shares subject to the participant's Purchase Right for that
Offering. The price at which shares are sold under the Purchase Plan is
established by the Board but may not be less than 85% of the lesser of the
fair market value per share of the Company's Common Stock on the Offering Date
or on the Purchase Date. The fair market value of the Common Stock on any
relevant date generally will be the closing price per share on such date as
reported on the Nasdaq National Market. Any payroll deductions under the
Purchase Plan not applied to the purchase of shares will be returned to the
participant, unless the amount remaining is less than the amount necessary to
purchase a whole share of Common Stock, in which case the remaining amount may
be applied to the next Offering Period.

A participant may withdraw from an Offering at any time without affecting
his or her eligibility to participate in future Offerings. However, once a
participant withdraws from an Offering, that participant may not again
participate in the same Offering.

Transfer of Control. The Purchase Plan provides that, in the event of (i) a
sale or exchange by the stockholders in a single or series of related
transactions of more than 50% of the Company's voting stock, (ii) a merger or
consolidation in which the Company is a party, (iii) the sale, exchange or
transfer of all or substantially all of the assets of the Company, or (iv) a
liquidation or dissolution of the Company wherein, upon any such event, the
stockholders of the Company immediately before such event do not retain direct
or indirect beneficial ownership of more than 50% of the total combined voting
power of the voting stock of the Company, its successor, or the corporation to
which the assets of the Company were transferred (a "Transfer of Control"),
the acquiring or successor corporation may assume the Company's rights and
obligations under the Purchase Plan or substitute substantially equivalent
Purchase Rights for such corporation's stock. If the acquiring or successor
corporation elects not to assume or substitute for the outstanding Purchase
Rights, the Board may adjust the next Purchase Date to a date on or before the
date of the Transfer of Control. Any Purchase Rights that are not assumed,
substituted for, or exercised prior to the Transfer of Control will terminate.

Termination or Amendment. The Purchase Plan will continue until terminated
by the Board or until all of the shares reserved for issuance under the plan
have been issued. The Board may at any time amend or terminate the Purchase
Plan, except that the approval of the Company's stockholders is required
within twelve months of the adoption of any amendment increasing the number of
shares authorized for issuance under the Purchase Plan, or changing the
definition of the corporations which may be designated by the Board as
corporations the employees of which may participate in the Purchase Plan.

SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in
the Purchase Plan and does not attempt to describe all possible federal or
other tax consequences of such participation or tax consequences based on
particular circumstances.

23
<PAGE>

Generally, there are no tax consequences to an employee of either becoming a
participant in the Purchase Plan or purchasing shares under the Purchase Plan.
The tax consequences of a disposition of shares vary depending on the period
such stock is held before its disposition. If a participant disposes of shares
within two years after the Offering Date or within one year after the Purchase
Date on which the shares are acquired (a "disqualifying disposition"), the
participant recognizes ordinary income in the year of disposition in an amount
equal to the difference between the fair market value of the shares on the
Purchase Date and the purchase price. Such income may be subject to
withholding of tax. Any additional gain or resulting loss recognized by the
participant from the disposition of the shares is a capital gain or loss. If
the participant disposes of shares at least two years after the Offering Date
and at least one year after the Purchase Date on which the shares are
acquired, the participant recognizes ordinary income in the year of
disposition in an amount equal to the lesser of (i) the difference between the
fair market value of the shares on the date of disposition and the purchase
price or (ii) 15% of the fair market value of the shares on the Offering Date.
Any additional gain recognized by the participant on the disposition of the
shares is a capital gain. If the fair market value of the shares on the date
of disposition is less than the purchase price, there is no ordinary income,
and the loss recognized is a capital loss. If the participant owns the shares
at the time of the participant's death, the lesser of (i) the difference
between the fair market value of the shares on the date of death and the
purchase price or (ii) 15% of the fair market value of the shares on the
Offering Date is recognized as ordinary income in the year of the
participant's death.

If the exercise of a Purchase Right does not constitute an exercise pursuant
to an "employee stock purchase plan" under section 423 of the Code, the
exercise of the Purchase Right will be treated as the exercise of a
nonstatutory stock option. The participant would therefore recognize ordinary
income on the Purchase Date equal to the excess of the fair market value of
the shares acquired over the purchase price. Such income is subject to
withholding of income and employment taxes. Any gain or loss recognized on a
subsequent sale of the shares, as measured by the difference between the sale
proceeds and the sum of (i) the purchase price for such shares and (ii) the
amount of ordinary income recognized on the exercise of the Purchase Right,
will be treated as a capital gain or loss, as the case may be.

A capital gain or loss will be long-term if the participant holds the shares
for more than 12 months and short-term if the participant holds the shares for
12 months or less. Long-term capital gains are currently subject to a maximum
tax rate of 20%. Short-term capital gains are generally subject to the same
tax rates as ordinary income.

If the participant disposes of the shares in a disqualifying disposition the
Company should be entitled to a deduction equal to the amount of ordinary
income recognized by the participant as a result of the disposition, except to
the extent such deduction is limited by applicable provisions of the Code or
the regulations thereunder. In all other cases, no deduction is allowed the
Company.

VOTE REQUIRED AND BOARD'S RECOMMENDATION

The affirmative vote of a majority of the votes present or represented by
proxy and entitled to a vote at the Annual Meeting, at which a quorum
representing a majority of all outstanding shares of Common Stock of the
Company is present and voting, is required for approval of this proposal.
Abstentions and broker non-votes will each be counted present for purposes of
determining the presence of a quorum. However, abstention and broker non-votes
will have no effect on the outcome of the vote.

The Board believes that the availability of an opportunity to purchase
shares under the Purchase Plan at a discount from market price is important to
attracting and retaining qualified officers and employees essential to the
success of the Company, and that stock ownership is important to providing
such persons with incentive to perform in the best interest of the Company.
THEREFORE, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL TO
APPROVE THE INCREASE IN THE NUMBER OF SHARES RESERVED FOR ISSUANCE UNDER THE
1996 EMPLOYEE STOCK PURCHASE PLAN TO 650,000 SHARES.

24
<PAGE>

PROPOSAL 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Board of the Company has appointed Ernst & Young LLP to serve as
independent auditors to audit the financial statements of the Company for the
fiscal year ending October 2, 1999. Ernst & Young LLP has acted in such
capacity since its appointment for fiscal 1986. A representative of Ernst &
Young LLP will be present at the Annual Meeting, will be given the opportunity
to make a statement if the representative desires and will be available to
respond to appropriate questions.

In the event that ratification by the stockholders of the appointment of
Ernst & Young LLP as the Company's independent auditors is not obtained, the
Board will reconsider said appointment.

The affirmative vote of a majority of the shares present or represented by
proxy and entitled to vote at the Annual Meeting, at which a quorum
representing a majority of all outstanding shares of Common Stock of the
Company is present and voting, either in person or by proxy, is required for
approval of this proposal. Abstentions and broker non-votes will each be
counted as present for purposes of determining the presence of a quorum.
Abstentions will have the same effect as a negative vote on this proposal.
Broker non-votes will have no effect on the outcome of the vote on this
proposal.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" RATIFICATION OF ERNST & YOUNG
LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS FOR THE FISCAL YEAR ENDING
October 2, 1999.

STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING

The Company has an advance notice provision under its bylaws for stockholder
business to be presented at meetings of stockholders. Such provision states
that in order for stockholder business to be properly brought before a meeting
by a stockholder, such stockholder must have given timely notice thereof in
writing to the Secretary of the Company. A stockholder proposal, to be timely,
must be received at the Company's principal executive offices not less than
120 calendar days in advance of the one year anniversary of the date the
Company's proxy statement was released to stockholders in connection with the
previous year's annual meeting of stockholders; except that (i) if no annual
meeting was held in the previous year, (ii) if the date of the annual meeting
has been changed by more than thirty calendar days from the date contemplated
at the time of the previous year's proxy statement, or (iii) in the event of a
special meeting, then notice must be received not later than the close of
business on the tenth day following the day on which notice of the date of the
meeting was mailed or public disclosure of the meeting date was made.

Proposals of stockholders intended to be presented at the next annual
meeting of stockholders of the Company (i) must be received by the Company at
its offices at 19050 Pruneridge Avenue, Cupertino, California 95014 no later
than August 20, 1999 and (ii) must satisfy the conditions established by the
Securities and Exchange Commission for stockholder proposals to be included in
the Company's proxy statement for that meeting.

TRANSACTION OF OTHER BUSINESS

At the date of this Proxy Statement, the Board knows of no other business
that will be conducted at the 1999 Annual Meeting, other than as described in
this Proxy Statement. If any other matter or matters are properly brought
before the meeting, or any adjournment thereof, it is the intention of the
persons named in the accompanying form of Proxy to vote the Proxy on such
matters in accordance with their best judgment.

By Order of the Board of Directors,

/s/ Joseph W. Rockom, Secretary

Joseph W. Rockom, Secretary
December 18, 1998

25
<PAGE>

3920-PS-98
<PAGE>

IKOS SYSTEMS, INC.
Proxy for Annual Meeting of Stockholders
Solicited by the Board of Directors

The undersigned hereby appoints Ramon A. Nunez and Joseph W. Rockom, and
each of them, with full power of substitution to represent the undersigned and
to vote all of the shares of stock in IKOS Systems, Inc. (the "Company") which
the undersigned is entitled to vote at the Annual Meeting of Stockholders of
said Company to be held at the Hilton Inn, Cupertino, California on Friday,
January 22, 1999 at 10:00 a.m. Pacific Standard Time, and at any adjournment
thereof (1) as hereinafter specified upon the proposals listed below and as
more particularly described in the Company's Proxy Statement, receipt of which
is hereby acknowledged and (2) in their discretion upon such other matters as
may properly come before the meeting.

A vote FOR the following proposals is recommended by the Board of
Directors:

1. Election of directors listed below.

Nominees: Gerald S. Casilli, Ramon A. Nunez, James R. Oyler, Glenn E.
Penisten, William Stevens, and Jackson Hu.

[_] FOR [_] WITHHELD

[_]___________________________________________________________________

INSTRUCTION: To withhold authority to vote for any nominee, mark
the above box and list the name(s) of the nominee(s) in the space
provided.

2. To approve amendments to the Company's 1995 Outside Directors Stock
Option Plan to (i) increase by 100,000 the maximum number of shares
of the Company's Common Stock that may be issued thereunder; (ii)
increase the size of initial options granted to newly elected or
appointed outside directors on or after the date of the 1999 annual
meeting of stockholders from 10,000 shares to 24,000 shares; (iii)
increase the size of annual options granted on or after the date of
the 1999 annual meeting of stockholders from 2,500 shares to 6,000
shares; and (iv) provide for the grant of a special option on the
date of the 1999 annual meeting of stockholders for 10,500 shares to
vest in three annual installments of 33-1/3% on the dates
immediately preceding the date of each of the annual meetings of
stockholders in 2000, 2001 and 2002.

[_] FOR [_] WITHHELD [_] ABSTAIN

1
<PAGE>

3. To approve an increase in the number of shares of the Company's
Common Stock reserved for issuance under its 1996 Employee Stock
Purchase Plan by 400,000 shares.

[_] FOR [_] WITHHELD [_] ABSTAIN

4. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending October 2, 1999.

[_] FOR [_] WITHHELD [_] ABSTAIN

5. To transact such other business as may properly come before the
meeting or any adjournment thereof.

The shares represented hereby shall be voted as specified. If no
specification is made, such shares shall be voted FOR proposals 1, 2, 3, and 4.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.

Dated ___________________, 199___
(Be sure to date Proxy)

_______________________________________
Signatures(s)

_______________________________________
Print Name(s)

Sign exactly as your name(s) appears on your stock certificate. If shares
of stock stand on record in the names of two or more persons or in the name of
husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign the above Proxy. If shares of stock are held of record by
a corporation, the Proxy should be executed by the President or Vice President
and the Secretary or Assistant Secretary, and the corporate seal should be
affixed thereto. Executors or administrators or other fiduciaries who execute
the above Proxy for a deceased stockholder should give their full title.
PLEASE DATE THE PROXY.

Even if you are planning to attend the meeting in person, you are urged
to sign and mail the Proxy in the return envelope so that your stock may be
represented at the meeting.