AVANT CORP, 10-K, 1998-03-31

AVANT CORP
10-K, 1998-03-31
PREPACKAGED SOFTWARE

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

FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

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

Commission File Number 0-25864

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

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

46871 BAYSIDE PARKWAY
FREMONT, CALIFORNIA 94538
(Address of principal executive offices, including Zip Code)

(510) 413-8000
(Registrant's telephone number, including area code)

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

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

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject
to such filing requirements for the past 90 days. [ x ] Yes [ ] No

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of February 27, 1998 was approximately $454,236,000 (based on the
last sale price of such stock as reported by the Nasdaq National Market).

The number of shares of the registrant's Common Stock outstanding as of February
27, 1998 was 32,445,460.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of: (1) the Proxy Statement to be filed by the Company with the
Securities and Exchange Commission within 120 days of the Company's fiscal year
ended December 31, 1997, are incorporated by reference in Part III of this Form
10-K; and (2) the Annual Report to Stockholders for the fiscal year ended
December 31, 1997 are incorporated by reference in Part II of this Form 10-K.

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AVANT! CORPORATION

FORM 10-K ANNUAL REPORT

FOR THE YEAR ENDED DECEMBER 31, 1997

Table of Contents

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Page
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PART I.

Item 1. Business 1

Item 2. Properties 19

Item 3. Legal Proceedings 19

Item 4. Submission of Matters to a Vote of Security Holders 22

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 23

Item 6. Selected Consolidated Financial Data 23

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation 23

Item 8. Consolidated Financial Statements and Supplementary Data 23

Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 23

PART III.

Item 10. Directors and Executive Officers of the Registrant 24

Item 11. Executive Compensation 25

Item 12. Security Ownership of Certain Beneficial Owners and Management 25

Item 13. Certain Relationships and Related Transactions 25

PART IV.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25

SIGNATURE PAGE

</TABLE>

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PART I.

This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in Item
1 under the heading "Business-Risk Factors that May Affect Future Results."

ITEM 1. BUSINESS

GENERAL

Avant! Corporation (the "Company" or "Avant!") resulted from the merger of
ArcSys, Inc. ("ArcSys") and Integrated Silicon Systems, Inc. ("ISS") on November
27, 1995. Avant! merged with Anagram, Inc. ("Anagram") on September 27, 1996,
Meta-Software, Inc. ("Meta") on October 29, 1996, FrontLine Design Automation,
Inc. ("FrontLine") on November 27, 1996, acquired Nexsyn Design Technology Inc.
("Nexsyn") on December 31, 1996, Compass Design Automation, Inc. ("Compass") on
September 12, 1997 and Datalink Far East Ltd, ("Datalink") on September 30,
1997. On January 16, 1998, the Company merged with Technology Modeling
Associates, Inc. ("TMA"). Avant! is a Delaware corporation that develops,
markets and supports software products that assist design engineers in the
physical layout, design, verification, simulation, timing and analysis of
advanced integrated circuits ("ICs").

The Company's objective is to establish a significant market position as a
supplier of design software for the integrated circuit design automation
("ICDA") market. To achieve this objective, Avant! has adopted its mission,
which is to provide innovative technology, products and business models that
enable customers to solve the toughest problems in deep submicron (less than
0.5-micron feature size) and very deep-submicron (less than 0.18-micron) feature
size IC design, improve their productivity and achieve a high return on their
investment. To effect its mission, Avant! has adopted the strategies of
maintaining focus on technological innovation and creating strategic
relationships with customers.

As the 21st century approaches, reusable silicon libraries, silicon intellectual
property ("SIP"), design blocks, and optimized design-flow management are
becoming critical to creating complex new "systems-on-a-chip." During 1997,
Avant! formed a new wholly owned subsidiary Galax!, Inc. ("Galax!") to help IC
manufacturers to develop and implement innovative design methodologies aimed at
providing faster turnaround on complex new designs.

PRODUCTS

Avant! products are based on the Company's proprietary architecture and
technology, which provide a breadth of automated IC physical design
capabilities. Avant!'s product architecture is designed to solve the
problems inherent in deep-submicron (less than 0.5-micron feature size) and
very deep-submicron (less than 0.18-micron) IC design and to offer improved
time-to-market, reduced development and manufacturing costs and enhanced IC
performance when compared to previous generations of ICDA software.

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

The Company's Milkyway system is the first common database for handling complex,
very deep-submicron designs. This database, along with a graphical user
interface, creates a foundation for efficient interoperability of next
generation design tools. Milkyway is designed to dynamically create database
objects for each application, and its patent-pending turbo-compression technique
reduces design database size and provides the best-in-class tool performance.

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The Company's Apollo family of cell-based place and route products, which
replaced the Company's Aquarius line of products, are the industry's leading
place and route software for very deep-submicron IC design. Apollo uses
fourth-generation place and route algorithms developed at Avant! and
addresses difficult design issues such as optimization for area, timing,
noise, and power. For placement algorithms, Apollo contains the
next-generation HotPlace hierarchical placement optimization technology,
improved timing optimization, power and rail-driven placement. For very
deep-submicron routing, it includes timing-driven routing, innovative coupled
noise-driven routing, automatic wiring sizing, multiple clock tree
construction methods and clock tree synthesis with gated clocks.

Avant!'s Planet product is a physical and logical floorplanning and analysis
solution for accurate prediction of the impact of physical effects on design
performance and routability early in the design process. It provides tight
linkage between synthesis-based design entry and physical layout. It
dramatically improves designer's productivity by increasing the probability of
first-time design success with early access to physical behavior during logic
synthesis.

The Company's Saturn product is the all-path, all-cell physical design
optimization solution that addresses very deep-submicron design needs by
creating the most efficient area and timing performance designs using actual
place and route information.

The Company believes its Hercules family of design verification software is the
industry's most advanced suite of IC physical verification products. The
Hercules family of products provide geometric and electrical verification
physical design layouts, and handles designs containing hundreds of millions of
transistors with breakthrough speed and enhanced ease of use.

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

Avant!'s Star-Sim family of products are high-capacity circuit simulators for
deep submicron process applications such as graphics, memory, communications
and mixed-signal IC designs. The Star-Sim family of products help increase
IC performance and reliability and increase designer productivity by enabling
designers to characterize large blocks; to accurately simulate mixed-signal,
dynamic logic and memory circuits where performance, signal integrity and
power analyses are essential; and to reuse high-performance intellectual
property without changing the design process. Star-RC is a full-chip
hierarchical capacitance extractor and a critical net resistance and
capacitance extractor. It is the first extraction tool capable of identifying
nets with cross-talk problems. Star-Power is a full-chip power
analysis/verification tool that enables designers to perform oversight
analysis. It provides accurate parasitic extraction of power and ground
rails, statis and dynamic power analysis, voltage drop and electromigration
analysis. Star-Time is a high-performance, full-chip circuit simulator that
provides transistor-level dynamic analysis for post-layout verification of
timing, signal integrity and reliability for complex designs of up to 50
million components. All of Avant!'s Star products are tightly integrated
with Avant!'s hierarchical layout and verification tools, Aquarius and
Hercules, to provide efficient, accurate and predictable IC performance.

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

The Company's Libra family of design library products were developed through
close relationships with IC foundries around the world, and utilizes advanced
silicon process technology. These products have received strong market
acceptance worldwide.

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During each of 1997, 1996 and 1995, the Company derived substantially all of
its total revenue from the licensing and support of Aquarius, its cell-based
place and route software product, Hercules, its hierarchical physical
verification software product, Star-Hspice, its circuit simulator, the
Star-Sim products, its high-capacity circuit simulation and high-accuracy
timing analysis software, the Polaris products, its Verilog simulation
product, and Libra, its design library product. Absent any unfavorable
results from existing litigation, the Company currently expects that these
products will continue to account for a significant portion of the Company's
revenue for the foreseeable future. As a result, the Company's future
operating results are significantly dependent upon continued market
acceptance of these products. The Company believes that a number of factors
will be necessary for its products to achieve continued market acceptance.
These factors include performance of the Company's existing products,
successful development of advanced features, adaptability into the user's
design environment, the Company's technical, managerial, service and support
expertise and the customer's assessment of the Company's financial resources.
A decline in demand for these products as a result of competition,
technological change or other factors would have a material adverse effect on
the business, operating results and financial condition of the Company.
There can be no assurance that these products will achieve continued market
acceptance or that the Company will be successful in marketing any new or
enhanced products.

During 1997, 1996 and 1995, the Company derived 41%, 34%, and 32%,
respectively, of its total revenue from the licensing and support of its
software products internationally. In 1997, Asian and European sales
represented 31% and 10% of the Company's total revenue, respectively. In
1996 and 1995, international sales were primarily in Asia. The Company
currently expects continued growth in both the Asian and European
countries. Many Asian countries are currently experiencing banking and
currency difficulties that could lead to economic recession in those
countries which could result in a decline in the purchasing power of the
Company's Asian customers. This in turn could result in the cancellation or
delay of orders for the Company's products from Asian customers, thus
adversely affecting the Company's results of operations. In addition, the
Company's international revenue involves a number of other risks, including
the impact of possible recessionary environments in economies outside the
United States, longer receivables collection periods and greater difficulty
in accounts receivable collection, difficulties in staffing and managing
foreign operations, political and economic instability, unexpected changes in
regulatory requirements, reduced protection for intellectual property rights
in some countries and tariffs and other trade barriers. There can be no
assurance that the Company will be able to sustain or increase revenue
derived from international licensing and service or that the forgoing factors
will not have a material adverse effect on the Company's future international
license and service revenue, and, consequently, on the Company's business,
operating results and financial condition. Failure to sustain or increase
such revenue would materially and adversely affect the Company's business,
operating results and financial condition. Although the Company has
attempted to reduce the risk of fluctuations in exchange rates associated
with international revenue by pricing its products and services in United
States dollars, the Company pays the expenses of its international operations
in local currencies and does not currently engage in hedging transactions
with respect to such obligations. Currency exchange fluctuations in countries
in which the Company licenses its products could have a material adverse
effect on the Company's business, operating results or financial condition by
resulting in prices that are not competitive with products priced in local
currencies. Furthermore, there can be no assurance that in the future the
Company will be able to continue to price its products and services
internationally in United States dollars. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

The ICDA industry is characterized by extremely rapid technological change,
frequent new product introductions and enhancements, evolving industry
standards and rapidly changing customer requirements. The development of
more complex ICs embodying new technologies will require increasingly
sophisticated design tools. The Company's future results of operations will
depend in part upon its ability to enhance its current products and to
develop and introduce new products on a timely and cost-effective basis that
will keep pace with technological developments and evolving industry
standards and methodologies, as well as address the increasingly
sophisticated needs of the Company's customers. For example, all of the
Company's current products operate in, and planned future products will
operate in, the Unix operating system. In the event that another operating
system, such as Windows NT, were to achieve broad acceptance in the ICDA
industry, the Company would be required to port its products to such an
operating system, which would be costly, time consuming and could have a
material adverse effect on the Company's business, operating results or
financial condition. The Company has in the past and may in the future
experience delays in new product development. The introduction of certain
products in the past have

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been delayed by as much as 12 months beyond their original scheduled release
dates. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
technological change, evolving industry standards and changing customer
requirements, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of
these products or product enhancements, or that its new products and product
enhancements will adequately meet the requirements of the marketplace and
achieve any significant degree of market acceptance. Failure of the Company,
for technological or other reasons, to develop and introduce new products and
product enhancements in a timely and cost-effective manner would have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the introduction or even announcement of
products by the Company or one or more of its competitors embodying new
technologies or changes in industry standards or customer requirements could
render the Company's existing products obsolete or unmarketable. There can
be no assurance that the introduction or announcement of new product
offerings by the Company or one or more of its competitors will not cause
customers to defer purchases of existing Company products. Such deferment of
purchases could have a material adverse effect on the Company's business,
operating results or financial condition.

CUSTOMERS

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

The market for the Company's physical layout, design, verification,
simulation, timing and analysis products, and design libraries encompasses a
wide range of industries, including semiconductor, computer, consumer
electronics, multimedia and telecommunications IC companies worldwide.
End-users of the Company's products range from small companies to a number of
the world's largest manufacturing organizations.

No one customer accounted for greater than 10% of the Company's revenue in
1997, 1996 or 1995. The Company does not believe that seasonality is a
significant factor in sales.

SALES AND MARKETING

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

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

In 1997 and 1996, the Company consolidated its Japanese and Korean sales
channel by forming two joint ventures, MainGate Electronics, KK ("MainGate")
and DavanTech Co., Ltd. ("DavanTech"), respectively. The joint ventures were
formed for the purpose of consolidating distribution in Japan and Korea. The
Company has ownership of 35% and 39.6% of MainGate and DavanTech,
respectively, and accounts for the joint ventures by the equity method.
Gerry C. Hsu, the Company's Chairman of the Board, President and Chief
Executive Officer owns

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40% and 2.6%, of MainGate and DavanTech, respectively. The Company believes
that this arrangement optimizes its competitive advantage in the Asian
markets to an extent that could not be achieved by using another distributor
or by directly selling into these markets. Distribution and marketing in
these markets are dominated by local companies, making it difficult for
non-local manufacturers to distribute their products directly. Thus, the
Company created MainGate and DavanTech, which are locally managed and
operated and have significant local ownership. By providing local ownership
of MainGate and DavanTech through equity incentives, the Company believes
that it is best able to attract and retain top local talent. However, there
can be no assurance that MainGate or DavanTech will be successful. If they
are not successful, the Company's, business, operating results or financial
condition would be materially adversely affected.

In 1997, the Company acquired the assets of Datalink Far East Ltd., a Taiwan
EDA distribution corporation ("Datalink"), pursuant to an asset purchase
agreement. The acquisition of Datalink helped the Company consolidate
Avant!'s distribution channels in Taiwan, Hong Kong, Singapore and Mainland
China.

The Company has relied on Third Party Sellers and joint ventures for
licensing and support of its products in Japan, Korea and Singapore. A
substantial portion of the Company's international license and service
revenue has resulted from a limited number of these Third Party Sellers and
joint ventures. During 1997, 1996, and 1995, revenue from these channels
accounted for an aggregate of approximately 31%, 27% and 28%, respectively,
of the Company's total revenue.

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

The license of the Company's software products generally involves a
significant commitment of capital by prospective customers, with the
attendant delays frequently associated with large capital expenditures and
lengthy acceptance procedures. For these and other reasons, the sales cycle
associated with the license of the Company's products is typically lengthy
and subject to a number of significant risks over which the Company has
little or no control and, as a result, the Company believes that its
quarterly operating results are likely to vary significantly in the future.
Due to the nature of the Company's business, the Company does not believe any
of its backlog orders to be firm.

CUSTOMER SERVICE AND SUPPORT

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

To address technical issues, Avant! has established both field and corporate
technical application engineering groups that understand the design
methodologies of Avant!'s customers and generally have IC design backgrounds.
Most of Avant!'s customers currently have maintenance agreements that entitle
them to receive software updates, documentation updates and a formal problem
identification and resolution process through a support hotline. Questions
or suggestions may be submitted by facsimile or through the Internet network
mail

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system. Avant! also offers additional training and consulting services for a
fee. The Company provides on-site and in-house training on all products.

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

RESEARCH AND DEVELOPMENT

The ICDA industry is characterized by extremely rapid technological change,
frequent product introductions and enhancements, evolving industry standards
and rapidly changing customer requirements. The development of more complex
ICs embodying new technologies will require increasingly sophisticated design
tools. Avant! believes that its future competitive position and future
results of operations will depend in large part on its ability to quickly and
cost-effectively develop new products, maintain and enhance its current
product line, maintain technological competitiveness and meet an expanding
range of customer requirements. In addition to supporting and enhancing its
existing physical layout, design, verification, simulation, timing and
analysis products, Avant! maintains an advanced research group that is
responsible for exploring new directions and applications of Avant!'s
proprietary technologies, migrating new technologies into the existing
product lines and maintaining strong research relationships outside Avant!
with industry and academia.

During 1997, 1996, and 1995 the Company's research and development
expenditures were approximately $29,573,000, $20,696,000, and $15,318,000
respectively (including capitalized software development costs of $63,000 in
1995, and no amounts were capitalized in 1997 or 1996, as achievement of
technological feasibility was typically concurrent with availability for
general release). The amount of capitalized software development costs
amortized was $62,000, $88,000 and $228,000 for 1997, 1996, and 1995,
respectively.

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

COMPETITION AND RELATED LITIGATION

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

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

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

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

PROPRIETARY RIGHTS

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

The Company is heavily dependent upon its proprietary software technology.
The Company currently holds several patents and also relies on a combination
of trade secret, copyright and trademark laws, nondisclosure and other
contractual agreements and technical measures to protect its proprietary
rights in its products. Although the Company holds several patents, there
can be no assurance that the Company will develop additional proprietary
products or technologies that are patentable, that any issued patent will
provide the Company with any competitive

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

EMPLOYEES

As of March 12, 1998, the Company had 701 employees, including, 406 in
research and development, 196 in sales, marketing and related customer
support services, and 99 in finance and administration. Of these employees,
644 were located in the United States, 32 in Europe, 8 in Japan, 3 in Korea
and 14 in Taiwan. None of the Company's employees is represented by a labor
union or is subject to a collective bargaining agreement, nor has Avant!
experienced any work stoppage. Avant! considers its relations with its
employees to be good.

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

The Company's future operating results depend in significant part upon the
continued service of its key technical and senior management personnel,
including in particular, Gerald C. Hsu, the Company's President and Chief
Executive Officer. None of the Company's employees is bound by an employment
agreement with the Company, and their employment may be terminated at any
time at the discretion of management or the Board of Directors, with the
exception of Gerald C. Hsu, who has entered into an employment agreement
under which he may only be terminated upon at least 30 days' notice. The
Company's business, operating results and financial condition also depend on
its continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will retain its key technical and
managerial personnel or attract such personnel in the future. Uncertainty
during the existing litigation may adversely affect the Company's ability to
attract and retain such personnel. In particular, there are only a limited
number of qualified ICDA engineers, and competition for such individuals is
especially intense. The Company has at times experienced and continues to
experience difficulty in recruiting qualified personnel, and

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there can be no assurance that the Company will not experience such
difficulties in the future. The Company, either directly or through
personnel search firms, actively recruits qualified research and development,
financial and sales personnel. If the Company is unable to hire and retain
qualified personnel in the future, such inability could have a material
adverse effect on the Company's business, operating results or financial
condition.

ENVIRONMENTAL AFFAIRS

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

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

Litigation Risk

The Company is subject to a number of litigation matters that, if decided
adversely to the Company, could affect the Company's future results.

CADENCE LITIGATION.

On December 6, 1995, Cadence Design Systems, Inc. ("Cadence") filed an action
against the Company and certain of its officers in the United States District
Court for the Northern District of California alleging copyright
infringement, unfair competition, misappropriation of trade secrets,
conspiracy, breach of contract, inducing breach of contract and false
advertising. The essence of the complaint is that certain of the Company's
employees who were formerly Cadence employees allegedly misappropriated and
improperly copied source code for certain important functions of the
Company's place and route products from Cadence, and that the Company has
allegedly competed unfairly by making false statements concerning Cadence and
its products. The action also alleges that the Company induced certain
individual defendants to breach their agreements of employment and
confidentiality with Cadence. The matter is currently awaiting trial,
pending further pretrial matters. A trial date has not been set. On July
25, 1997, a federal judge stayed the Cadence civil action pending completion
of the criminal proceedings described below, except for limited discovery on
certain matters approved by the District Court. Avant! posted a $5.0 million
bond pending the resumption of the civil action.

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customers are authorized by the preliminary injunction to continue to use the
enjoined products without exposure to claims of copyright violation." A copy
of the modified injunction is attached hereto as Exhibit 99.2. Cadence
continues to allege that the Company's Aquarius products infringe Cadence's
Design Framework II and the District Court is allowing Cadence to take
discovery concerning the Company's Aquarius and Apollo products to determine
whether those products infringe. At the December 19, 1997 hearing, the
District Court did not rule on Cadence's request to enjoin the sale, license
or support of the Company's Aquarius place and route products from which the
Company derives a significant portion of its total revenue. On February 28,
1998, the District Court requested an additional briefing regarding whether
Aquarius should be enjoined. The District Court will hold future hearings
regarding the Aquarius products. There can be no assurance that the District
Court will not, upon further consideration, grant a preliminary injunction
with respect to the sale of the Aquarius products, which could have a
material adverse effect on the Company's business, financial position and
results of operations.

On January 16, 1996, the Company filed a counterclaim against Cadence
alleging antitrust violations, racketeering, false advertising, defamation,
trade libel, unfair competition, unfair trade practices, negligent and
intentional interference with prospective economic advantage and intentional
interference with contractual relations. On December 19, 1997, the Company
stipulated to temporarily dismissing its counterclaim in order to file more
detailed allegations. The Company refiled its counterclaim on January 29,
1998.

The Company believes it has defenses to all of Cadence's claims and intends
to defend itself vigorously. If, however, the Company's defenses are
unsuccessful, the Company may ultimately be permanently enjoined from selling
certain place and route products and may be required to pay damages to
Cadence. In addition, upon further consideration by the District Court, the
Company could be preliminarily enjoined from selling its Aquarius place and
route products. In such event, the Company's business, financial condition
and results of operations would be materially adversely affected. In
addition, it is likely that an adverse judgment against the Company would
result in a steep decline in the market price of the Company's Common Stock.
Although it is reasonably possible the Company may incur a loss upon
conclusion of these claims, an estimate of any loss or range of loss cannot
be made, based on information the Company presently possesses. There can be
no assurance that an adverse judgement, if granted on any claim would not
have a material adverse effect on the Company's business, financial position
or results of operations. Furthermore, there can be no assurance that the
Company's relationships with its customers and/or partners will not be
adversely affected in the future as a result of the Cadence litigation.

CRIMINAL COMPLAINT.

The Santa Clara County District Attorney's office is also investigating the
allegations of misappropriation of trade secrets set forth in Cadence's
lawsuit, described above. On April 11, 1997, the Santa Clara County
District Attorney filed a criminal complaint alleging felony level offenses
against, among others, the Company and the following employees and/or
directors of the Company, Gerald C. Hsu, President, Chief Executive Officer
and Chairman of the Board of Directors, Y. Eric Cho, a former officer and
current member of the Board of Directors, Y. Z. Liao, Corporate Fellow,
Stephen Wuu, CEO Staff Operations, Leigh Huang, Marketing Manager and Eric
Cheng, Research and Development Manager, for allegedly violating various
California Penal Code Sections relating to the theft of trade secrets. The
Company and the individuals above have pleaded not guilty and are awaiting
further proceedings. The criminal complaint could result in criminal fines
against the Company, as well as the potential incarceration of certain
members of its management team. Such outcomes could result in canceled or
postponed orders, increased future expenditures, the loss of management and
other key personnel, additional shareholder litigation, loss of goodwill and
would have other material adverse effects on the Company's business,
financial position and results of operations.

SILVACO LITIGATION.

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failing to pay royalties on software that Silvaco sold to others. In August
1995, Meta was awarded $529,828 under the Superior Court's judicial
arbitration program. Both parties rejected the award and requested a trial de
novo on the issues involved. In August 1995, Silvaco filed a cross-complaint
against Meta alleging, among other things, that Meta owes Silvaco royalties
and license fees pursuant to a product development and marketing program and
unpaid commissions related to Silvaco's sale of Meta's products and services
under such program. Meta filed an answer to the cross-complaint denying the
allegations contained therein. In July 1996, Silvaco filed a first amended
cross-complaint, adding Shawn Hailey, then the President, Chief Executive
Officer and a major shareholder of Meta, and, until July 1997, the Senior
Vice President of the Company's Silicon Division, as a personal defendant,
and further alleging defamation, interference with economic advantage, unfair
competition and abuse of process by acts or statements made by Meta or its
agents.

In August 1997, the Superior Court entered a default judgment against Mr.
Hailey for failure to timely answer the complaint. In October 1997, Mr.
Hailey's application for relief from the default judgment was denied. In
August 1997, the Superior Court entered a default judgment against Meta as to
the defamation and interference with economic advantage claims. On October
31, 1997, Meta's application for relief from the default judgment was denied.
On October 28, 1997, Silvaco first presented its theory of damages and a
trial began on November 3, 1997. On November 4, 1997, the Superior Court
dismissed Meta's remaining affirmative claims. On November 5, 1997, the
Superior Court awarded Silvaco $20 million in damages against Mr. Hailey and
Meta related to the defamation and interference with economic advantage
claims, and on November 6, 1997, the Superior Court awarded Silvaco $11.4
million in damages related to the unfair competition claim. On November 12,
1997, the Superior Court awarded nominal damages to Silvaco related to the
product development claim. Silvaco's claims based on the marketing program
and abuse of process were dismissed. The Company filed an appeal on behalf
Shawn Hailey, and, if necessary, intends to file an appeal on its own behalf.
A default judgment in the aggregate amount of $31.4 million was entered
against the Company. As required, the Company posted a bond on behalf of
itself and Shawn Hailey in excess of the amount necessary to satisfy the
judgment. The bond is collateralized by a $23,583,000 letter of credit.

Meta intends to pursue all remedies available to it in connection with the
litigation with Silvaco. Meta believes it has substantial appellate issues
which could cause the judgment to be remanded to the trial court for further
proceedings. Should Meta be permitted to participate fully in further trial
court proceedings, Meta believes it would have substantial defenses to
Silvaco's claims. However, there can be no assurance that any such remedies
will be successful. Although it is reasonably possible Meta will incur a
loss in relation to this claim, it is currently unable to estimate the actual
loss or range of loss. Payment of the damages previously awarded, and damages
which may be awarded in the future, would have a material adverse effect on
the Company's business, financial condition and results of operations.

PESIC LITIGATION.

In September 1996, Katherine Ngai Pesic and Ivan Pesic commenced an action
entitled PESIC, ET AL. V. WHITE, EL AL., No.760469 in the Superior Court of
California for Santa Clara County naming as defendants the Company (as
successor in interest to Meta), Shawn Hailey, Meta's former Chief Executive
Officer, and Thomas N. White, Jr. and George S. Cole, both of whom were
Meta's former counsel in the Silvaco matter, described above. The action
asserts claims for invasion of privacy under California common law and the
California Constitution and seeks compensatory and punitive damages. Avant!
has answered the complaint, but no trial date has been set. The Company
believes it has defenses to these claims and intends to defend itself
vigorously. Although it is reasonably possible the Company will incur a loss
in relation to these claims, it is currently unable to estimate the actual
loss or range of loss. In the event the Company's defenses are unsuccessful,
the Company may be required to pay damages to the plaintiffs, and such a
judgment could have a material adverse effect on the Company's business,
financial condition and results of operations.

MICROUNITY LITIGATION.

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Technology Modeling Associates, Inc., which was acquired by the Company in
January, 1998. This lawsuit alleges liability for patent infringement, unfair
competition, and tortious interference with prospective economic advantage.
The action requests unspecified damages and an injunction against Precim.
Precim has accepted service of the complaint but has not yet responded.
Precim believes it has defenses to these claims and intends to defend itself
vigorously. Although it is reasonably possible the Company will incur a loss
in relation to these claims, it is currently unable to estimate the actual
loss or range of loss. In the event Precim's defenses are unsuccessful,
Precim may be required to pay damages to the plaintiffs, and such a judgment
could have a material adverse effect on the Company's business, financial
condition and results of operations.

SECURITIES CLASS ACTION CLAIMS.

On December 15, 1995, Paul Margetis and Helen Margetis filed in the United
States District Court for the Northern District of California a securities
fraud class action complaint against the Company. In addition, on December
19, 1995, Fred Tarca filed in the United States District Court for the
Northern District of California a class action complaint against the Company
for violations of the federal securities laws. These class action lawsuits
allege certain securities law violations, including omissions and/or
misrepresentation of material facts. The alleged omissions and/or
misrepresentations are largely consistent with those outlined in the Cadence
claim, described above. In February 1997, plaintiff Tarca voluntarily
dismissed his action and the Margetis plaintiffs were certified as class
representatives in their action. On July 25, 1997, a federal judge stayed
the Margetis action, except for certain documentary and third-party
discovery, pending resolution of the Cadence suit.

On May 30, 1997, Joanne Hoffman filed in the United States District Court for
the Northern District of California a purported class action alleging
securities claims on behalf of purchasers of the Company's stock between
March 29, 1996 and April 11, 1997, the date of the filing of the criminal
complaints against the Company and six of its employees and/or officers.
Plaintiff alleges that the Company and various of its officers misled the
market as to the likelihood of criminal charges being filed and as to the
validity of the Cadence allegations. The Company moved to dismiss the
Hoffman complaint for failure to state a claim, but the District Court in
December 1997 denied the motion. The court also denied without prejudice
plaintiff Hoffman's motion for appointment as lead plaintiff. Counsel for
plaintiff has indicated that the stay of the Margetis securities class action
pending resolution of the Cadence suit will likely apply to this securities
action as well.

The Company believes it has defenses to all of the securities class action
claims, described above, and intends to defend itself vigorously. There can
be no assurance, however, that the Company's defenses will be successful.
Although it is reasonably possible the Company will incur a loss in relation
to these claims, it is currently unable to estimate the actual loss or range
of loss, either individually or in aggregate. In the event the Company's
defenses are unsuccessful, the Company may be required to pay damages to the
securities class action plaintiffs, and such a judgment would likely have a
material adverse effect on the Company's business, financial condition and
results of operations.

Litigation Costs

The pending litigation and any future litigation against the Company and the
Company's employees, regardless of the outcome, is expected to result in
substantial costs and expenses to the Company. The Company charged to
expenses approximately $8,720,000 and $6,850,000 for the years 1997 and 1996,
respectively, related to the various litigation issues. The Company
currently expects legal costs to continue in the future as a result of its
current litigation issues. Accordingly, any such litigation could have a
material adverse effect on the Company's business, financial position and
results of operations. Furthermore, if Avant! is required to satisfy the
default judgments in full in the Silvaco litigation, Avant! could be required
to pay up to $31.4 million in damages, which would have a material adverse
effect on Avant!'s business, financial condition and results of operations.

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Uncertainty Relating to Integration of Multiple Operations and Product Lines;
Management of Growth

In the third quarter of 1997 and first quarter of 1998, the Company acquired
Compass and TMA, respectively. The integration of Compass' and TMA's
business and personnel following the Compass and TMA acquisitions present
difficult challenges for the Company's management, particularly in light of
the increased time and resources required to effect the combination with
these parties. Further, the Company will be more complex and diverse than
Avant! individually, and the combination and continued operation of their
distinct business operations will be difficult. While the Company's
management believes that the combination of Avant!, Compass and TMA can be
effected in a manner that will realize the value of the Company, the
management group has limited experience in combinations of this complexity or
size. Accordingly, there can be no assurance that the process of effecting
these business combinations can be effectively managed to realize the
synergies anticipated to result therefrom.

The Company acquired Compass and TMA, among other reasons, in order to
achieve potential mutual benefits from combining each of their respective
expertise and product lines for the physical design of high-density,
high-performance ICs. Realization of these potential benefits will require,
among other things, integrating the companies' respective product offerings
and coordinating the combined company's sales and marketing and research and
development efforts. Avant!, Compass and TMA each have different systems and
procedures in many operational areas that must be rationalized and
integrated. There can be no assurance that such integration will be
accomplished effectively, expeditiously or efficiently. The difficulties of
such integration may be increased by the necessity of coordinating
geographically separated divisions, integrating personnel with disparate
business backgrounds and combining three different corporate cultures. The
integration of certain operations will require the dedication of management
resources that may temporarily distract attention from the Company's
day-to-day business. The business of the combined company may also be
disrupted by employee uncertainty and lack of focus during such integration.
In fact, a substantial number of Compass employees have been terminated by
the Company in an effort to streamline and integrate the operations of Avant!
and Compass. There can also be no assurance that the Company will be able to
retain all of its key technical, sales and other key personnel. Failure to
effectively accomplish the integration of the operations of Avant!, Compass
and TMA could have a material adverse effect on Avant!'s business, financial
condition and results of operations. Moreover, uncertainty in the
marketplace or customer hesitation relating to the two acquisitions could
negatively affect the Company's business, financial condition and results of
operations.

The Company has experienced periods of rapid growth and expansion that has
placed and will continue to place significant strains upon its management
systems and resources. The Company's ability to compete effectively and to
manage future growth, if any, will require the Company to continue to
implement and improve operational, financial and management information
systems on a timely basis and to expand, train, motivate and manage its
workforce. There can be no assurance that the Company's personnel, systems,
procedures and control will be adequate to support its operations.

The Company also recently acquired the assets of Datalink, a Taiwanese
distribution corporation. Pursuant to an asset purchase agreement (the
"Datalink Acquisition"), the Company will pay $900,000 to acquire Datalink
over five installments at specified times during the next two years.

Dependence Upon Key Personnel

Avant!'s future operating results depend in significant part upon the
continued service of its key management and technical personnel. Few of the
Company's employees are bound by employment or non-competition agreements,
and due to the intense competition for such personnel, as well as the
uncertainty caused by the integration of Avant!'s, Compass' and TMA's
businesses, it is possible that Avant! will be unable to retain such key
technical and managerial personnel. In fact, Avant! terminated a significant
number of Compass employees following the acquisition of Compass thereby
adding to any uncertainty which may be felt by Avant! employees. There are
only a limited number of qualified ICDA engineers, and competition for such
individuals is intense. If the Company is unable to attract, hire and retain
qualified personnel in the future, the development of new products and the
management of an increasingly complex business would be impaired which would
materially adversely affect the

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Company's business, financial condition and results of operations.
Additionally, if the criminal complaint filed relating to the matters
underlying the pending litigation between the Company and Cadence results in
a loss of the Company's personnel, then the Company's business, financial
condition and results of operations may be materially adversely affected.
See "Legal Proceedings".

Competition

The ICDA software market in which the Company competes is intensely
competitive and subject to rapid change. The Company currently faces
competition from major ICDA vendors, including Cadence, which currently holds
a dominant share of the market for IC physical design software, Mentor
Graphics Corporation ("Mentor") and Synopsys, Inc. ("Synopsys"). As the
Company expands its product offerings to include other library generation
tools and other EDA tools, it will compete increasingly with these
established EDA vendors. Certain of these established vendors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and a larger installed customer base
than the Company. It is possible that these large, well established EDA
companies may acquire the technology of one or more of the Company's
competitors in order to gain access to the markets in which the Company
competes. With significantly more financial resources than the Company and
large existing customer bases, these potential competitors could increase the
competition faced by the Company. Each of these competitors will likely be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, and to devote greater resources to the development,
promotion and sale of their products than the Company. Moreover, the
industry in which the Company competes is undergoing a trend toward
consolidation that is expected to result in large, more financially flexible
competitors with a broad range of product offerings. In addition to
competition from EDA vendors, the Company also faces competition from
semiconductor companies that have internal design groups that develop their
own customized EDA tools for their own particular needs and therefore may be
reluctant to purchase products offered by the Company or other independent
vendors. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not have a material adverse effect on its
business, financial condition and results of operations. Furthermore, the
Company has experienced pricing pressures in the past, and increased
competition from current competitors or new market entrants could result in
additional price reductions, reduced margins or loss of market share, any of
which could have a material adverse effect on the company's business,
financial condition and results of operations. If the Company is unable to
compete successfully against current and future competitors, the Company
business, financial condition and results of operations will be materially
adversely affected.

Potential Fluctuations in Quarterly Results

The quarterly operating results of the Company have varied, and it is
anticipated that the quarterly operating results of the Company will vary,
substantially from period to period depending on factors such as the outcome
of the litigation described under "-Litigation Risk", increased competition,
the size, timing and structure of significant licenses, the timing of revenue
recognition under its time-based license agreements, the timing of new or
enhanced product announcements, introductions, or delays in the introductions
of new or enhanced versions of the Company's products, changes in pricing
policies by the Company or its competitors, market acceptance of new and
enhanced versions of the Company's products, conditions in the semiconductor
industry, the cancellation of time-based licenses or maintenance agreements,
the dependency on products of third parties, including that of Cadence and
Mentor, which is incorporated in certain of the products of the Company, the
mix of direct and indirect sales, changes, in operating expenses, changes in
the Company's strategy, seasonal factors, personnel changes, economic
conditions in the Asian markets, the ability of the Company to continue to
market its products in Asian markets, foreign currency exchange rate and
general economic factors. Due to the foregoing factors, and particularly the
variability of the size, timing and structure of significant licenses,
quarterly revenue and operating results are difficult to forecast. In
particular, the Company has adopted a flexible pricing strategy pursuant to
which the Company offers both perpetual and time-based software licenses to
customers, depending on customer requirements and financial constraints.
Because each time-based license may have a different structure and could be
subject to cancellations, future revenue is unpredictable. The Company's
expense levels are based, in part, on expectations as to future revenue
levels. Accordingly, net income, if any, may be disproportionately affected
by a reduction in revenue in a quarter because only a small portion of the
Company's expenses fluctuate with revenue. If revenue

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levels are below expectations, the Company's business, financial
condition and results of operations are likely to be materially adversely
affected. Such shortfalls in the Company's revenue or operating results from
levels expected by public market analysts and investors could have an
immediate and significant material adverse effect on the market price of the
Company's Common Stock. Additionally, the Company may not learn of such
revenue shortfalls or earnings shortfalls or other failures to meet market
expectations for results of operations until late in the fiscal quarter,
which could result in an even more immediate and material adverse effect on
the trading price of the Company's Common Stock. In such event, the market
price of the Company's Common Stock would be materially adversely affected.
Due to the foregoing, the Company believes that period to period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.

Potential Volatility of Stock Price

The market prices of the Company's Common Stock have fluctuated significantly
in the past and the market price of the shares of the Company's Common Stock
is likely to be highly volatile and may be significantly affected by many
factors, including, but not limited to, the outcome of outstanding
litigation, actual or anticipated fluctuations in the Company's operating
results, announcements of technological innovations and new products by
competitors, new contractual relationships with strategic partners by the
Company or its competitors, proposed acquisitions by the Company or its
competitors and financial results that fail to meet public market analyst
expectations of performance. In addition, the U.S. equity markets have from
time to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stock of technology
companies. These broad market fluctuations may materially adversely affect
the market price of the Company's Common Stock in the future periods.

Cost of Integration; Transaction Expenses.

Transaction costs relating to the TMA acquisition and the anticipated
combination of certain operations of the Company and TMA are expected to
result in one-time charges to the Company's earnings in the quarter of March
31, 1998, the time at which the TMA acquisition was completed. Although it
will not be feasible to determine the actual amount of these charges until
the operational and transition plans are completed, the management of the
Company believes that the aggregate charge will be approximately $10.8
million before taxes, although such amounts may be increased by unanticipated
additional expenses incurred in connection with the TMA acquisition. This
aggregate charge is expected to include the estimated costs associated with
financial advisory, accounting and legal fees, printing expenses, filing fees
and other merger-related costs. In addition, in the third quarter of 1997,
the Company incurred an expense of approximately $41.2 million for acquired
in-process research and development costs associated with the Compass
acquisition.

Lengthy Sales Cycle

Because of the complexity and substantial cost of the Company's products,
licensing these products to customers typically involves a significant
technical evaluation and commitment of cash and other resources, with the
attendant delays frequently associated with customers' internal procedures to
approve large expenditures and to evaluate and accept new technologies that
affect key operations. In addition, certain of the Company's foreign
customers have lengthy purchasing cycles that may increase the amount of time
the Company must dedicate to placing its products with these customers. For
these and other reasons, the sales cycle associated with the licensing of the
Company's products has been and is expected to continue to be lengthy and
subject to a number of significant risks, including customers' budgetary
constraints and internal acceptance evaluations that are beyond the Company's
control. Because of the lengthy sales cycle and the large size of customers'
average orders, if revenue projected from a specific customer for a
particular period is not realized in that period, the Company's results of
operations for that period could be materially adversely affected.

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Product Concentration

The Company derives a significant portion of its total revenue from the
licensing and support of Aquarius products which are the subject of pending
litigation with Cadence. See "Legal Proceedings". In addition, prior the
merger, TMA derived a significant majority of its total revenue from the
licensing and maintenance of two software products, TSUPREM-4 and Medici.
The Company expects that revenue from the licensing and support of Apollo
(replaced Aquarius), TSUPREM-4 and Medici will account for a substantial
percentage of the Company's revenues for the foreseeable future. As a
result, the Company's business, financial condition and results of operations
are significantly dependent upon continued market acceptance and purchases of
Apollo, TSUPREM-4 and Medici. A decline in demand for any of these products
as a result of competition, technological change or other factors would have
a material adverse effect on the business, financial condition and results of
operations. These products could be rendered obsolete by future technical
advanced by competitors or even by certain of its customers or marketing
partners. There can be no assurance that Apollo, TSUPREM-4 and Medici will
achieve continued market acceptance and that the Company will be successful
in marketing such products or any new or enhanced products, or that
competitors will not introduce competing products that gain market
acceptance. Failure to develop or acquire additional products or product
lines, or to successfully market such products on a profitable basis, could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Substantial Dependence on International Sales

International revenue accounted for approximately 41%, 34% and 32% for the
years ended 1997, 1996 and 1995, respectively, of its total revenue from the
licensing and support of its software products . In 1997, Asian and European
sales represented 31% and 10% of the Company's total revenue, respectively.
In 1996 and 1995, international sales were primarily in Asia. The Company
expects that international license and service revenue will continue to
account for a significant portion of the Company's total revenue. The
Company's international revenue involves a number of risks, including the
impact of possible recessionary environments in economics outside the U.S.,
longer receivable collection periods and greater difficulty in accounts
receivable collection, difficulties in staffing and managing foreign
operations, political and economic instability, unexpected changes in
regulatory requirements, reduced protection of intellectual property rights
in some countries and tariffs and other trade barriers. Currency exchange
fluctuations in countries in which the Company licenses its products could
also materially adversely affect its business, financial condition and
results of operations by resulting in pricing that is not competitive with
products priced in local currencies. Furthermore, there can be no assurance
that in the future the Company will be able to continue to price its products
and services internationally in U.S. dollars because of changing sovereign
restrictions on importation and exportation of foreign currencies as well as
other practical considerations. In addition, the laws of certain countries
do not protect the Company's products and intellectual property rights to the
same extent as do the laws of the U.S. Accordingly, there can be assurance
that these factors will not have a material adverse effect on the Company's
future international sales and, consequently, on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance the Company will be able to sustain or increase revenue derived
from international licensing and service or that the foregoing factors will
not have a material adverse effect on the Company's future international
license and service revenue, and, consequently, on the Company's business,
financial condition and results of operations.

Dependence Upon Distributors and Manufacturer's Representatives

The Company relies on Third Party Sellers for licensing and support of its
products in Asia. A substantial portion of the Company's international
license and service revenue results from a limited number of these Third
Party Sellers, although the Company had no individual customer representing
over ten percent of revenue in any of 1997, 1996 or 1995. In 1997, the
Company consolidated its Japanese sales channel by forming a distributor,
MainGate Electronics, Inc. ("MainGate"), owned by the Company, Gerald C. Hsu,
the Company's Chairman of the Board, President and Chief Executive Officer,
and other parties (including other Avant! employees and former employees of
Avant!'s third party distributors). Sales of TMA product licenses to
customers in Japan are made exclusively through a single distributor,
Innotech Corporation ("Innotech") a company in which Cadence, a competitor of
Avant!, holds a minority interest. Effective April 1, 1998, MainGate will
assume sales and support of TMA

16
<PAGE>

products from Innotech. In Korea, license to TMA customers have been made
through a single independent sale representative, C&G Technology, Inc.,
("C&G"); however, TMA terminated its relationship with C&G in 1997 and now
sells directly in Korea thorough a newly formed subsidiary in Korea. Sale to
customers in Taiwan were also carried out through a single independent sales
representative, Business Technology , Inc. ("BTI"). TMA expects that sales
to customers in Japan, Korea and Taiwan will continue to make up a
significant proportion of TMA's total product revenue for the foreseeable
future. Futhermore, TMA's agreement with BTI renews automatically every year
but may not be terminated if either party gives notice 90 days prior to
expiration. There an be no assurance that Avant!'s current Third Party
Sellers or joint ventures will choose to or be able to market or service and
support the Company's products effectively, that economic conditions or
industry demand will not materially adversely affect these or other Third
Party Sellers or that these Third Party Sellers or joint venture will not
devote greater resources to marketing and supporting products of the
Company's competitors. Additionally, because of the Company's products are
used by highly skilled professional engineers, a Third Party Seller must
possess sufficient technical, marketing and sales resources in order to be
effective and must devote these resources to a lengthy sales cycle, customer
training and product service and support. Only a limited number of Third
Party Sellers must possess such resources. Accordingly, the loss of, or a
significant reduction in revenue from, one of Avant!'s Third Party Sellers or
joint venture or any other Third Party Sellers on which revenues may, in the
future, become dependent, could have a material adverse effect on the
Company's business, financial condition and results of operations.

New Products and Rapid Technological Change

The ICDA industry is characterized by extremely rapid technological change,
frequent new product introductions and enhancements, evolving industry
standards and rapidly changing customer requirements. The Company's future
business, financial condition and results of operations will depend in part
upon its ability to enhance its current products and to develop and introduce
new products on a timely and cost-effective basis that will keep pace with
technological developments and evolving industry standards and methodologies,
as well as address the increasingly sophisticated needs of customers. New
technologies developed by the Company or its competitors could render
existing products obsolete. The Company's success will depend upon its
ability to enhance existing products and to introduce new products on a
timely and cost-effective basis that meet changing customer requirements.
There can be no assurance that the Company will be successful in developing
new products or enhancing existing products or that such new or enhanced
products will receive market acceptance. On occasion, the Company has
experienced delays in the scheduled introductions of new and enhanced
products, and there can be no assurance that the Company will be able to
introduce products on a timely basis in the future. Delays in the scheduled
availability of products, for technological or other reasons, or a lack of
market acceptance of such products or the Company's failure to accurately
anticipate customer demand, would have a material adverse effect on its
business, financial condition and results operations.

Dependence Upon Semiconductor and Electronics Industries; General Economic
and Market Conditions

The Company is dependent upon the semiconductor and, more generally, the
electronics industries. Each of these industries is characterized by rapid
technological change, short product life cycles, fluctuations in
manufacturing capacity and pricing and gross margin pressures. Segments of
these industries have from time to time experienced significant economic
downturns characterized by decreased product demand, production
over-capacity, price erosion, work slowdowns and layoffs. Over the past few
years, these industries have experienced an extended period of significant
economic growth. There can be no assurance that economic growth in these
industries will continue, and if it does not, any downturn could be
especially severe on the Company. During such downturns, the number of new
IC design products often decreases. Because acquisitions of new licenses
from the Company are largely dependent upon the commencement of new design
projects, any slowdown in these industries could have a material adverse
effect on the Company's business, financial condition and results of
operations. For example, in the past, the Company has derived a substantial
portion of its product revenue from sales to manufacturers of memory chips
and other products that use advanced semiconductor technology. Recently,
manufacturers of memory chips have experienced intense market pressure to
reduce prices and manufacturing costs. These market pressures could lead
these or other manufacturers to reduce their research and development efforts
and consequently reduce or eliminate their use of the Company's products.
The Company's business, financial condition and results

17
<PAGE>

of operations may in the future reflect substantial fluctuations from period
to period as a consequence of patterns and general economic conditions in
either the semiconductor or electronics industry.

Limitations on Protection of Intellectual Property and Proprietary Rights

The Company relies on a combination of patents, trade secrets, copyrights and
trademarks, as well as contractual commitments, to protect its proprietary
rights in software products. The Company generally enters into
confidentiality or license agreements with its employees, distributors and
customers, and limits access to and distribution of its software,
documentation and other proprietary information. Despite these precautions,
there can be no assurance that a third party will not copy or otherwise
obtain and use the Company's products or technology without authorization, or
develop similar technology independently. In addition, effective patent,
copyright and trade secret protection may be unavailable or limited in
certain foreign countries. The Company expects that software companies will
increasingly be subject to infringement claims as the number of products and
competitors in the industry in which the Company currently competes grows and
the functionality of products in different industry segments overlaps. In
particular, the Company's current litigation with Cadence involves such
infringement claims. Responding to such claims, regardless of merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if available, may not be available on terms
acceptable to the Company, which could have a material adverse effect upon
the Company's business, financial condition and results of operations. There
can be no assurance that infringement claims will not be asserted against the
Company in the future or that any such claims will not require the company to
enter into royalty arrangements or result in costly litigation, which could
materially adversely affect the Company's business, financial condition and
results of operations. TMA licenses from third parties software code that
has been incorporated into certain of TMA's products. Such licenses contain
provisions that could lead to termination upon TMA's breach or abandonment.
Any such termination could have a material adverse effect upon the Company's
business, financial condition and results of operations.

Risk of Product Defects

Software products as complex as those offered by the Company may contain
defects or failures when introduced or when new versions are released. The
Company has in the past discovered software defects in certain of its
products and may experience delays or lost revenue to correct such defects in
the future. There can be no assurance that, despite testing by the Company,
errors will not be found in new products or releases after commencement of
commercial shipments, resulting in loss of market share or failure to achieve
market acceptance. Any such occurrence could have a material adverse effect
upon the Company's business, financial condition and results of operations.

Year 2000

During 1997, the Company licensed an enterprise-wide resource planning
software application package to replace its existing operational and
financial system. The Company currently is in the process of installing and
implementing the new system. The new system is warranted to be Year 2000
compliant.

The Company has undertaken a preliminary evaluation of the Company's products
to determine if the Company's products are Year 2000 compliant. The Company
believes that its products are Year 2000 compliant and that costs to be
incurred to make the Company's products Year 2000 compliant, if any, will not
have a material impact on the Company's results of operations.

The Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase software products such as those offered by the Company, which could
result in a material adverse effect on the Company's business, financial
condition and results of operation.

18
<PAGE>

ITEM 2. PROPERTIES

In February 1997, the Company signed a lease for its new headquarters in
Fremont, California. The lease covers four buildings with an aggregate of
approximately 281,000 square feet of space with an aggregate annual base rent
amount of approximately $4,800,000. The lease for three of the buildings
expires on September 30, 2010 and the lease for the fourth building expires
on August 31, 2012. The Company also occupies a facility near Research
Triangle Park in Durham, North Carolina with an annual base rent of
approximately $666,000. This lease expires on November 30, 2005. The
Company also leases sales and support offices in the United States, Europe,
Japan Korea and Taiwan. Avant! believes that its existing facilities are
adequate for its current needs.

ITEM 3. LEGAL PROCEEDINGS

Litigation Risk

The Company is subject to a number of litigation matters that, if decided
adversely to the Company, could affect the Company's future results.

CADENCE LITIGATION.

In addition to actual and punitive damages, which were not quantified by
Cadence, Cadence is seeking to enjoin the sale of the Company's place and
route products pending trial of the action. On March 18, 1997, the District
Court granted in part and denied in part Cadence's motion for a preliminary
injunction. Cadence appealed the order denying a preliminary injunction. On
September 23, 1997, the United States Court of Appeals for the Ninth Circuit
overruled the District Court's denial of Cadence's motion with respect to the
Company's ArcCell product, a product Avant! no longer sells, and held that a
preliminary injunction should be granted against the further sale of the
ArcCell product. The Court of Appeals did not enjoin the Company's Aquarius
place and route products, but rather remanded this aspect of Cadence's motion
to the District Court for further consideration. The Court of Appeals stated
that, if the Company's Aquarius products are determined to infringe Cadence
products, the sale of Aquarius products should be enjoined. The Company
requested a rehearing on the issue, but on November 21, 1997, the Ninth
Circuit denied this request. On December 19, 1997, the District Court
entered an injunction against continued sales or licensing of any product or
work copied or derived from Cadence's Design Framework II, specifically
including, but not limited to, ArcCell products. The injunction also barred
the Company from possessing or using any copies or any portion of the source
code or object code for ArcCell or any other product, to the extent that
portion is copied or derived from Cadence's Design Framework II. (The
Company no longer sells or licenses ArcCell products or code). The
injunction also required the Company to inform its customers of the
injunction, to obtain confirmation as to whether the customers have a
functioning copy of ArcCell or other such product, and to provide certain
information to the court. A copy of the injunction is attached hereto as
Exhibit 99.1. On January 25, 1998, the District Court entered a modified
preliminary injunction "to remove any implication that the Company's
customers are authorized by the preliminary injunction to continue to use the
enjoined products without exposure to claims of copyright violation." A copy
of the modified injunction is attached hereto as Exhibit 99.2. Cadence
continues to allege that the Company's Aquarius products infringe Cadence's
Design Framework II and the District Court is

19
<PAGE>

allowing Cadence to take discovery concerning the Company's Aquarius and
Apollo products to determine whether those products infringe. At the
December 19, 1997 hearing, the District Court did not rule on Cadence's
request to enjoin the sale, license or support of the Company's Aquarius
place and route products from which the Company derives a significant portion
of its total revenue. On February 28, 1998, the District Court requested an
additional briefing regarding whether Aquarius should be enjoined. The
District Court will hold future hearings regarding the Aquarius products.
There can be no assurance that the District Court will not, upon further
consideration, grant a preliminary injunction with respect to the sale of the
Aquarius products, which could have a material adverse effect on the
Company's business, financial position and results of operations.

CRIMINAL COMPLAINT.

SILVACO LITIGATION.

20
<PAGE>

Meta owes Silvaco royalties and license fees pursuant to a product
development and marketing program and unpaid commissions related to Silvaco's
sale of Meta's products and services under such program. Meta filed an
answer to the cross-complaint denying the allegations contained therein. In
July 1996, Silvaco filed a first amended cross-complaint, adding Shawn
Hailey, then the President, Chief Executive Officer and a major shareholder
of Meta, and, until July 1997, the Senior Vice President of the Company's
Silicon Division, as a personal defendant, and further alleging defamation,
interference with economic advantage, unfair competition and abuse of process
by acts or statements made by Meta or its agents.

PESIC LITIGATION.

MICROUNITY LITIGATION.

21
<PAGE>

complaint but has not yet responded. Precim believes it has defenses to
these claims and intends to defend itself vigorously. Although it is
reasonably possible the Company will incur a loss in relation to these
claims, it is currently unable to estimate the actual loss or range of loss.
In the event Precim's defenses are unsuccessful, Precim may be required to
pay damages to the plaintiffs, and such a judgment could have a material
adverse effect on the Company's business, financial condition and results of
operations.

SECURITIES CLASS ACTION CLAIMS.

Litigation Costs

The pending litigation and any future litigation against the Company and the
Company's employees, regardless of the outcome, is expected to result in
substantial costs and expenses to the Company. The Company charged to
expenses approximately $8,720,000 and $6,850,000 for the years 1997 and 1996,
respectively, related tot he various litigation issues. The Company
currently expects legal costs to continue in the future as a result of its
current litigation issues. Accordingly, any such litigation could have a
material adverse effect on the Company's business, financial position and
results of operations. Furthermore, if Avant! is required to satisfy the
default judgments in full in the Silvaco litigation, Avant! could be required
to pay up to $31.4 million in damages, which would have a material adverse
effect on Avant!'s business, financial condition and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company did not submit any matters to a vote of its shareholders during
the fourth quarter of the fiscal year ended December 31, 1997.

22
<PAGE>

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock has traded on the Nasdaq National Market under the
Nasdaq symbol "AVNT" since November 27, 1995. The Company's Common Stock
traded on the National Market System under the Nasdaq symbol ARCS from the
Company's initial public offering on June 7, 1995 until November 26, 1995.
The Company has not paid cash dividends in the past and none are expected to
be paid in the future. As of February 27, 1998, the Company had
approximately 221 shareholders of record.

The information required by Item 5 concerning the high and low sales prices
for the Company's common stock is set forth on page 14 of the Company's 1997
Annual Report to Shareholders and is incorporated herein by reference. Such
quotations reflect inter-dealer prices without mark-up, mark-down or
commissions and may not necessarily represent actual transactions.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The information required by this item is set forth on page 1 of the Company's
1997 Annual Report to Shareholders and is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information required by this item is set forth on pages 15 through 22 of the
Company's 1997 Annual Report to Shareholders and is incorporated herein by
reference.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements required by this item are included on
pages 24 through 39 of the Company's 1997 Annual Report to Shareholders and
are incorporated herein by reference. With the exception of the
aforementioned information and the information incorporated in Items 5, 6, 7
and 8, the Company's 1997 Annual Report to Shareholders is not to be deemed
filed as part of this Annual Report on Form 10-K. The report of the
Company's Independent Auditors on the Company's consolidated financial
statements is included on page 23 of the Company's 1997 Annual Report and is
incorporated herein by reference. The report of the Company's Independent
Auditors on the financial statement schedule and consent of independent
auditors is required by this item and is included as Exhibit 23.1 hereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

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

23
<PAGE>

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 as to directors is incorporated by
reference from the Company's Proxy Statement to be filed by the Company with
the Securities and Exchange Commission within 120 days of the Company's
fiscal year ended December 31, 1997.

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

<TABLE>

Name Age Position
- ---- --- --------
<S> <C> <C>
Gerald C. Hsu 50 President, Chief Executive Officer and
Chairman of the Board of Directors
Roy E. Jewell 43 CEO Staff, Corporate Affairs
General Manager of TCAD Business Unit
David H. Stanley 51 CEO Staff of Legal and
General Counsel
Linda Chinn 46 Head of Finance and Administration

</TABLE>

Gerald C. Hsu joined the Company in March 1994 as President, Chief Executive
Officer and a director, and has been Chairman of the Avant! Board of
Directors since November 1995. From July 1991 to March 1994, Mr. Hsu was
employed by Cadence, where his last position was President and General
Manager of the IC Design Group. From June 1988 to July 1991, Mr. Hsu was
employed by Sun Microsystems, Inc., an engineering workstation company, where
his last position was Director of Strategic Business Development. Mr. Hsu
holds an M.S. in Ocean Engineering from the Massachusetts Institute of
Technology, an M.S. in Mechanics and Hydraulics from the University of Iowa
and a B.S. in Applied Mathematics from the National Chung-Hsing University,
Taiwan. On April 11, 1997, the Santa Clara District Attorney filed a
criminal complaint alleging felony level offenses against, among others, Mr.
Hsu, the Company and certain other of the Company's employees for allegedly
violating various California Penal Code sections relating to the theft of
trade secrets. Mrs. Hsu has pleaded not guilty to such complaint and is
awaiting further proceedings.

Roy E. Jewell joined Avant! in January 1998 as CEO Staff for Corporate
Affairs and General Manager of Avant!'s TCAD business unit following the
acquisition of Technology Modeling Associates, Inc. ("TMA"), where he was
employed for 10 years, rising to the position of Chief Executive Officer in
July 1992. Before joining TMA, Mr. Jewell spent eight years at Texas
Instruments, a semiconductor company. Mr. Jewell, holds his B.S. and M.A.
degrees from the University of South Florida and his M.S. from the University
of Texas, Dallas.

David H. Stanley joined Avant! as CEO Staff of Legal and General Counsel in
November 1997. Prior to joining Avant!, Mr. Stanley was employed by Informix
Corporation, a database software company, where he served as General Counsel
for nine years. Mr. Stanley, holds a B.A. from Dartmouth College and a J.D.
from the University of San Francisco.

Linda Chinn was named Head of Finance and Administration in January 1998. Ms.
Chinn joined Avant! following a twenty year career in finance with Pacific
Bell, a telecommunications company. As the Assistant Treasurer at Pacific
Bell, Ms. Chinn supervised more than 2000 line employees in financial
operations. Ms. Chinn, holds a B.A. from Stanford and an M.B.A. from the
University of California, Berkeley.

The information required by Item 10 as to the filings of Forms 3, 4, and 5 as
required by Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference from the Company's Proxy to be filed by the Company
with the Securities and Exchange Commission within 120 days of the Company's
fiscal year ended December 31, 1997.

24
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference from the
Company's Proxy Statement to be filed by the Company with the Securities and
Exchange Commission within 120 days of the Company's fiscal year ended
December 31, 1997.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated by reference from the
Company's Proxy Statement to be filed by the Company with the Securities and
Exchange Commission within 120 days of the Company's fiscal year ended
December 31, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated by reference from the
Company's Proxy to be filed by the Company with the Securities and Exchange
Commission within 120 days of the Company's fiscal year ended December 31,
1997.

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

<TABLE>

PAGE NUMBER
IN ANNUAL REPORT
----------------
(a) 1. FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report 23
Consolidated Balance Sheets as of December 31, 1997 and 1996 25
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995 24
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 26
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995 27
Notes to Consolidated Financial Statements 28

</TABLE>

<TABLE>
PAGE NUMBER
IN THIS FORM 10-K
(a)2. FINANCIAL STATEMENT SCHEDULE -----------------

<S> <C>
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1997, 1996 and 1995 28

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

(a)3. Exhibits

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

</TABLE>
25
<PAGE>

(b) Reports on Form 8-K

The Company filed a report on Form 8-K/A, under item 7, dated November 25,
1997. Pursuant to this report, the Company filed audited financial
statements and unaudited pro forma condensed financial statements relating to
the Company's acquisition of Compass Design Automation, Inc.

26
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

AVANT! CORPORATION
------------------
(Registrant)

March 27, 1998 /s/ GERALD C. HSU
- -------------- -------------------
Gerald C. Hsu
President, Chief Executive Officer,
and Chairman of the Board of
Directors

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

<TABLE>

Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ GERALD C. HSU President (principal executive March 27, 1998
- ------------------ officer), Chief Executive Officer
Gerald C. Hsu and Chairman of the Board of
Directors

/s/ LINDA CHINN Head of Finance and Administration March 27, 1998
- ---------------- (Principal accounting officer and
Linda Chinn principal financial officer)

/s/ ERIC A. BRILL Director March 27, 1998
- -----------------
Eric A. Brill

/s/ Y. ERIC CHO Director March 27, 1998
- ---------------
Y. Eric Cho

/s/ TENCH COXE Director March 27, 1998
- --------------
Tench Coxe

/s/ CHARLES ST. CLAIR Director March 27, 1998
- ---------------------
Charles St. Clair

/s/ MORIYUKI CHIMURA Director March 27, 1998
- --------------------
Moriyuki Chimura

</TABLE>

27
<PAGE>

Schedule II

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

<TABLE>

Balance Additions Balance
At Beginning Charged Adjust- At End
of Period to Expense Deductions ments(1) of Period
------------ ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995 $ 437 $ 590 $ 128 $ - $ 899
Year ended December 31, 1996 899 454 591 - 762
Year ended December 31, 1997 762 1,385 493 2,496 4,150

</TABLE>

(1) Compass Design Automation, Inc. balance as of 9/12/97.

28
<PAGE>

INDEX TO EXHIBITS

(a)3. Exhibits

<TABLE>

EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of August 18, 1996 among
the Registrant, AGM Acquisition Corporation and Anagram, Inc. (2)
2.2 Agreement and Plan of Reorganization dated as of August 22, 1996 among
the Registrant, Natasha Merger Corporation and Meta-Software, Inc. (2)
2.3 Agreement and Plan of Reorganization dated as of October 9, 1996 among
the Registrant, DSM Acquisition Corporation and FrontLine Design
Automation, Inc. (3)
2.4 Agreement and Plan of Reorganization dated as of July 31, 1997, as
amended on August 27, 1997 among the Registrant, GB Acquisition
Corporation, VLSI Technology, Inc. and Compass Design Automation, Inc.
(6)
2.5 Agreement and Plan of Reorganization dated as of September 10, 1997
among the Registrant, Cardinal Merger Corporation and Technology
Modeling Associates, Inc. (5)
3.1 Restated Certificate of Incorporation (1)
3.2 Bylaws (1)
4.1 Amended and Restated Investors Rights Agreement between the Company and
the Investors specified therein dated September 24, 1993 (1)
4.2 Specimen Common Stock Certificate (1)
4.3 Registration Rights Agreement between the Registrant and certain
investors dated November 27, 1996 (4)
10.1 1995 Stock Option/Stock Issuance Plan (1)
10.2 Employee Stock Purchase Plan (1)
10.3 Form of Indemnification Agreement (1)
10.4 Indemnification Agreement entered into between the Company and Gerald C.
Hsu dated May 24, 1994 (1)
11.1 Statement regarding Computation of Net Income Per Share
21.1 List of subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors
99.1 Preliminary Injunction, Cadence Design Systems, Inc. v. Avant! Inc.
99.2 Modification of Preliminary Injunction, Cadence Design Systems, Inc. v.
Avant! Inc.

</TABLE>

______________
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 33-91128) as declared effective on June 6, 1995.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-4 (File No. 333-11659) as declared effective on September 30, 1996.
(3) Incorporated by reference from the Company's Report on Form 8-K filed with
the SEC on October 24, 1996.
(4) Incorporated by reference from the Company's Registration Statement on Form
S-3 (File No. 333-18445) as filed on January 27, 1997.
(5) Incorporated by reference from the Company's Registration Statement on Form
S-4 (File No. 333-42923) as filed on December 22, 1997.
(6) Incorporated by reference from the Company's Registration Statement on Form
S-3 (File No. 333-43087) as filed on January 13, 1998.

<PAGE>

Exhibit 11

AVANT! CORPORATION AND SUBSIDIARIES
STATEMENTS RE: PRIMARY AND DILUTED EARNINGS PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
(In thousands, except per share data)

<TABLE>
Years Ended
December 31,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic EPS:

Net income $ 6,541 $12,484 $10,524
Total weighted average number of common
shares outstanding 25,898 24,581 20,688

Basic earnings per share $ 0.25 $ 0.51 $ 0.51

Diluted EPS:

Net income $ 6,541 $12,484 $10,524

Weighted average number of common
shares outstanding 25,898 24,581 20,688
Common stock equivalents:
Stock options and awards 1,515 2,180 1,781
Preferred stock -- -- 851
Shares deemed to be outstanding to fund shareholder
distribution -- -- 319
------- ------- -------
Total weighted average number of common and
common equivalent shares outstanding 27,413 26,761 23,639

Diluted earnings per share $ 0.24 $ 0.47 $ 0.45

</TABLE>

<PAGE>

STUDIO 3 AVANT! ANNUAL REPORT

<PAGE>

<TABLE>

<S> <C>
SELECTED QUARTERLY FINANCIAL DATA 14

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15

INDEPENDENT AUDITORS' REPORT AND
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
FOR FINANCIAL REPORTING 23

CONSOLIDATED STATEMENTS OF INCOME 24

CONSOLIDATED BALANCE SHEETS 25

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 26

CONSOLIDATED STATEMENTS OF CASH FLOWS 27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28

</TABLE>

<PAGE>

SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Q1/97 Q2/97 Q3/97 Q4/97 Q1/96 Q2/96 Q3/96 Q4/96
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA PRICE AND PERCENTAGES)

<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Software $23,998 $25,370 $ 28,301 $29,214 $18,603 $ 19,807 $21,620 $22,104
Services 7,195 9,134 10,334 13,802 4,944 6,011 6,308 6,690
---------------------------------------------------------------------------------------
Total revenue 31,193 34,504 38,635 43,016 23,547 25,818 27,928 28,794

COSTS AND EXPENSES:
Costs of software 448 488 698 1,202 615 509 678 710
Costs of services 3,018 2,823 2,823 1,987 1,798 1,750 1,835 1,886
Selling and marketing 8,222 10,679 10,696 11,183 6,867 7,641 7,810 7,610
Research and development 5,965 6,507 7,218 9,883 4,781 4,814 5,538 5,563
General and administrative 3,806 3,519 4,293 5,777 2,735 3,852 4,022 4,841
In-process research and development - - 41,186 - - - 300 1,400
Merger expenses - - - - - - 920 8,380
---------------------------------------------------------------------------------------
Total operating expenses 21,459 24,016 66,914 30,032 16,796 18,566 21,103 30,390
---------------------------------------------------------------------------------------
Income (loss) from operations 9,734 10,488 (28,279) 12,984 6,751 7,252 6,825 (1,596)
Interest income and other, net 929 1,374 1,289 1,701 908 1,135 1,057 1,104
---------------------------------------------------------------------------------------
Income (loss) before income taxes 10,663 11,862 (26,990) 14,685 7,659 8,387 7,882 (492)
Provision (benefit) for income taxes 3,839 4,270 (9,716) 5,286 2,745 3,019 2,900 2,288
---------------------------------------------------------------------------------------
Net income (loss) $ 6,824 $ 7,592 $(17,274) $ 9,399 $ 4,914 $ 5,368 $ 4,982 $(2,780)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Earnings per share -- Basic:
Earnings (loss) per share 0.27 0.30 (0.66) 0.35 0.21 0.22 0.20 (0.11)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Total weighted average
number of common shares
outstanding 24,939 25,564 26,054 26,760 23,871 24,300 24,844 24,775
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Earnings per share -- Diluted:
Earnings (loss) per share 0.25 0.28 (0.66) 0.34 0.19 0.20 0.18 (0.11)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Total weighted average number
of common and common
equivalent shares outstanding 27,298 26,831 26,054 27,871 26,120 26,618 27,125 24,775
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Common stock price:
High $ 40.50 $32.75 $ 36.00 $ 31.88 $ 26.25 $ 27.75 $ 34.25 $ 37.00
Low $ 23.75 $ 9.75 $ 27.63 $ 14.75 $ 14.00 $ 16.25 $ 20.50 $ 25.50

PERCENTAGE OF TOTAL REVENUE

REVENUE:
Software 77% 74% 73% 68% 79% 77% 77% 77%
Services 23% 26% 27% 32% 21% 23% 23% 23%
---------------------------------------------------------------------------------------
Total revenue 100% 100% 100% 100% 100% 100% 100% 100%
---------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Costs of software 2% 2% 2% 3% 2% 2% 3% 2%
Costs of services 10% 8% 7% 5% 8% 7% 7% 7%
Selling and marketing 26% 31% 28% 26% 29% 29% 28% 26%
Research and development 19% 19% 19% 23% 20% 19% 20% 20%
General and administrative 12% 10% 11% 13% 12% 15% 14% 17%
In-process research and development - - 106% - - - 1% 5%
Merger expenses - - - - - - 3% 29%
---------------------------------------------------------------------------------------
Total operating expenses 69% 70% 173% 70% 71% 72% 76% 106%
---------------------------------------------------------------------------------------
Income (loss) from operations 31% 30% (73)% 30% 29% 28% 24% (6)%
Interest income and other, net 3% 4% 3% 4% 4% 4% 4% 4%
---------------------------------------------------------------------------------------
Income (loss) before income taxes 34% 34% (70)% 34% 33% 32% 28% (2)%
Provision (benefit) for income taxes 12% 12% (25)% 12% 12% 11% 10% 8%
---------------------------------------------------------------------------------------
Net income (loss) 22% 22% (45)% 22% 21% 21% 18% (10)%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Factors That May Affect
Future Results" as well as those discussed in this section and elsewhere in this
report, and the risks discussed in the "Risk Factors" section on Form S-3 as
declared effective by the Securities and Exchange Commission on January 13,
1998, and other risks detailed from time to time in the Company's Securities and
Exchange Commission reports, including the report on Form 10-K for the year
ended December 31, 1997.

OVERVIEW

Avant! Corporation (the Company) develops, markets and supports software
products that assist design engineers in the physical layout, design,
verification, simulation and timing analysis of advanced integrated circuits
(ICs). The Company's strategy is to focus on productivity enhancing software for
the integrated circuit design automation (ICDA) segment of the electronic design
automation (EDA) market.

The Company resulted from the merger of ArcSys, Inc. (ArcSys) and Integrated
Silicon Systems, Inc. (ISS) on November 27, 1995. Effective September 27, 1996,
October 29, 1996 and November 27, 1996, the Company merged with Anagram, Inc.
(Anagram), Meta-Software, Inc. (Meta) and FrontLine Design Automation, Inc.
(FrontLine), respectively. These mergers have all been accounted for by the
pooling-of-interests method, and accordingly, the Company's consolidated
financial statements give retroactive effect for all periods presented to
include the results of operations, financial position and cash flows of ISS,
Anagram, Meta and FrontLine. On September 12, 1997 and September 30, 1997, the
Company acquired Compass Design Automation, Inc. (Compass) and Datalink Far East
Ltd. (Datalink), respectlively. These acquisitions have been accounted for by
the purchase method, and accordingly, the Company's consolidated financial
statements do not include the results of operations, financial position or cash
flows prior to the aquisitions. On January 16, 1998, the Company acquired
Technology Modeling Associates in a transaction accounted for as a
pooling-of-interests. As this transaction occurred subsequent to December 31,
1997, it has not been reflected in the Company's financial statements, although
pro forma disclosure has been provided in Note 15.

The Company began shipping Hercules (formerly VeriCheck), its hierarchical
physical verification software, in the third quarter of 1992 and Aquarius
(formerly ArcCell), its cell-based place and route software product, in 1993.
ISS began shipping its initial physical layout software products in 1988 and
introduced its signal integrity analysis software in 1994. Anagram was founded
in March 1993 and began shipping Star-Sim, its high-capacity circuit simulation
and high-accuracy timing analysis software, in December 1994. Meta was founded
in 1980, when it introduced its simulation and library software products
including Star-Hspice. FrontLine was founded in 1993. In 1997, Avant! formed a
new subsidiary, Galax!. The acquisition of Compass was the foundation for Galax!
and its mission is to enable system-on-chip designers to create silicon
intellectual property by providing methodologies, services and design libraries.
Substantially all of the Company's license revenue for 1997, 1996 and 1995 was
derived from the licensing and support of Aquarius, Hercules, Star-Sim and
Star-Hspice.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENTAGE CHANGE
1997 1996 1995 1996-1997 1995-1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Software 73% 77% 80% 30% 49%
Services 27 23 20 69 75
-----------------------------------------------
Total revenue 100% 100% 100% 39% 54%
-----------------------------------------------
COSTS AND EXPENSES:
Costs of software 2 2 2 13 64
Costs of services 7 7 7 47 50
Selling and marketing 28 28 33 36 32
Research and development 20 20 23 43 35
General and administrative 12 14 9 13 143
In-process research and development 28 2 4 2323 (37)
Merger expenses - 9 5 (100) 159
-----------------------------------------------
Total operating expenses 97 82 83 64 52
-----------------------------------------------
Income from operations 3 18 17 (74) 63
Interest income and other, net 4 4 4 26 51
-----------------------------------------------
Income before income taxes 7 22 21 (56) 61
Provision for income taxes (pro forma in 1995) 3 10 9 (66) 76
-----------------------------------------------
Net income (pro forma in 1995) 4% 12% 12% (48)% 50%
-----------------------------------------------
-----------------------------------------------

</TABLE>

<PAGE>

COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

REVENUE. Revenue consists primarily of fees for licenses of the Company's
software products, maintenance and customer support. Prior to October 1, 1997,
the Company complied with the American Institute of Certified Public
Accountants' (AICPA) Statement of Position (SOP) 91-1, SOFTWARE REVENUE
RECOGNITION. Revenue from the sale of software licenses was recognized after
shipment of the products, delivery of permanent authorization codes and
fulfillment of acceptance terms, if any, providing that no significant vendor
and post-contract support obligations remained and collection of the related
receivable was probable. Any remaining insignificant vendor or post-contract
support obligations were accrued at the time the revenue was recognized. In
instances where there was a contingency regarding the sale, revenue recognition
was delayed until the contingency had been resolved. When the Company received
advance payments for software products, such payments were reported as deferred
revenue until all conditions for revenue recognition were met. The Company had
entered into certain license agreements under which software, support and other
services were provided to customers for a bundled price for a specific period of
time. Generally, revenue under such agreements was recognized ratably over the
contract period. Revenue from consulting services was recognized as the service
was performed. Maintenance revenue was deferred and recognized ratably over the
term of the maintenance agreement, which was typically 12 months. Revenue from
customer training, support and other services was recognized as the service was
performed.

In the fourth quarter of 1997, the Company adopted the provisions of the AICPA
SOP 97-2, SOFTWARE REVENUE RECOGNITION. SOP 97-2 generally requires revenue
earned on software arrangements involving multiple elements to be allocated to
each element based on the relative fair values of the elements. The revenue
allocated to software products, including time-based software licenses,
generally is recognized after shipment of the products, delivery of permanent
authorization codes and fulfillment of acceptance terms. The revenue allocated
to postcontract customer support (PCS) is recognized ratably over the term of
the support, and revenue allocated to service elements is recognized as the
services are performed. In connection with the adoption of SOP 97-2, the
Company's revenue for contracts with extended payment terms (generally greater
than twelve months) are recognized as payments become due. The effect of this
change is not material to the Company.

The Company's total revenue increased 39% to $147,348,000 in 1997 from
$106,087,000 in 1996 and 54% in 1996 from $68,868,000 in 1995. The percentage of
the Company's revenue attributable to software licenses decreased to 73% in 1997
from 77% in 1996 and 80% in 1995. The decrease in 1997 was due to the larger
user base and was also attributable to Compass' service and maintenance revenue.
The decrease in 1996 was due to the larger user base and resulting increase in
maintenance revenue.

Software revenue increased 30% to $106,883,000 in 1997 from $82,134,000 in 1996
and 49% in 1996 from $55,164,000 in 1995. Increases in software revenue were due
primarily to increased license revenue from the Company's place and route,
physical verification, simulation and timing software. Services revenue
increased 69% to $40,465,000 in 1997 from $23,953,000 in 1996 and 75% in 1996
from $13,704,000 in 1995, reflecting the growing base of installed systems and
addition of Galax! service business, beginning in September 1997. Through
December 31, 1997, price increases have not been a material factor in the
Company's revenue growth. The Company does not believe that period-to-period
comparisons of past revenue growth should be relied upon as indications of
future performance.

As discussed in the notes to the consolidated financial statements and in the
section entitled "Factors That May Affect Future Results," the Company is
involved in several litigation matters, including a lawsuit with Cadence Design
Systems, Inc. (Cadence). As a result of the litigation issues, some customers
may cancel or postpone orders of the Company's products. As of December 31,
1997, such cancellations and postponements had not had a material financial
impact on the Company's revenues. However, cancellations or a significant delay
of orders in the future may impact the Company's business, financial condition
and results of operations.

COSTS OF SOFTWARE. Costs of software consist primarily of expenses associated
with product documentation, production costs and personnel. Costs of software
increased to $2,836,000 in 1997 from $2,512,000 in 1996 and $1,529,000 in 1995.
In 1997, the increase was attributable to product documentation costs. In 1996,
the increase was attributable to a major product launch in 1996. Costs of
software, as a percentage of software revenue, were 2% for each of 1997, 1996
and 1995.

COSTS OF SERVICES. Costs of services consist of costs of maintenance and
customer support and direct costs associated with providing other services.
Maintenance includes activities undertaken after the product is available for
general release to customers to correct errors, make routine changes and provide
additional features. Customer support includes any installation assistance,
training classes, telephone question and answer services, newsletters, on-site
visits and software or data modifications. Costs of services increased to
$10,651,000 in 1997 from $7,269,000 in 1996 and $4,845,000 in 1995, representing
26%, 30% and 35% of services revenue for 1997, 1996 and 1995, respectively. The
increases in costs of

<PAGE>

services were due primarily to increases in personnel and expenses necessary
to support the Company's growing base of installed software. For both 1997
and 1996, the reduction in costs of services as a percentage of service
revenue reflects higher revenue growth and improved productivity of the
Company's customer support resources in serving its increasing customer base.

SELLING AND MARKETING. Selling and marketing expenses consist primarily of
costs, including sales commissions, of all personnel involved in the sales
process. This includes sales representatives, marketing associates and
application engineers. Selling and marketing expenses also include costs of
advertising, public relations, conferences and trade shows. Selling and
marketing expenses increased to $40,780,000 in 1997 from $29,928,000 in 1996 and
$22,741,000 in 1995. In 1997, the increase was due to increased advertising and
promotional activities, increased distributor commissions due to increased
revenue, and increased headcount in both domestic and European sales operations.
In 1996, the increase reflects higher sales commissions associated with
increased sales volumes and increases in headcount. Selling and marketing
expenses represented 28%, 28% and 33% of total revenue in 1997, 1996 and 1995,
respectively. The decrease in selling and marketing expenses as a percentage of
total revenue during 1997 and 1996 resulted primarily from revenue growth and
improved sales productivity. The Company expects to hire additional sales
personnel and to increase promotion and advertising costs throughout 1998.

RESEARCH AND DEVELOPMENT. Research and development expenses include all costs
associated with the development of new products and significant enhancement of
existing products. Research and development expenses increased to $29,573,000 in
1997 from $20,696,000 in 1996 and $15,318,000 in 1995. In 1997, the increase
resulted from higher personnel-related costs due to increased headcount,
resulting from the Compass acquisition, and higher incentive compensation. In
1996, the increase resulted from increased headcount. Research and development
expenses represented 20%, 20% and 23% of total revenue in 1997, 1996 and 1995,
respectively. The Company anticipates that it will continue to devote
substantial resources to product research and development throughout 1998.

Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, under which the Company
capitalizes software development costs once technological feasibility has been
established. The Company amortizes such amounts over three years. The amount of
software development costs capitalized for 1995 was $63,000. No software
development costs were capitalized for 1997 and 1996, because achievement of
technological feasibility in the form of a working model was typically
concurrent with general release.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased to
$17,395,000 in 1997 from $15,450,000 in 1996 and $6,362,000 in 1995. In 1997 and
1996, the increases resulted primarily from additional legal costs, relating to
the Company's various litigation matters, and increased personnel and related
costs necessary to support the Company's growth. General and administrative
expenses represented 12%, 14% and 9%, of total revenue in 1997, 1996 and 1995,
respectively. The Company charged to expenses approximately $8,720,000 and
$6,850,000 for the years 1997 and 1996 respectively, related to the various
litigation issues. The Company expects legal costs to continue in the future as
a result of its current litigation issues.

IN-PROCESS RESEARCH AND DEVELOPMENT. In September 1997, the Company acquired
Compass. In connection with the acquisition, net intangibles of $56,008,000 were
acquired, of which $41,186,000 related to acquired in-process research and
development. This amount was expensed, as the underlying technology had not
reached technological feasibility and, in management's opinion, had no probable
alternative future use. In October 1995, and September and December 1996, the
Company acquired rights to certain software technology under development. As the
acquired technology had not reached technological feasibility at the date of
acquisition, it was expensed upon acquisition.

MERGER EXPENSES. In connection with the 1996 mergers with Anagram, Meta, and
FrontLine, the Company incurred direct transaction costs and merger-related
integration expenses of approximately $9,300,000, consisting of transaction fees
for investment bankers, attorneys, accountants, financial printing and
shareholder meetings of approximately $5,352,000, charges for the elimination of
duplicate facilities of approximately $2,250,000, and severance and other
related costs of approximately $1,698,000. As of December 31, 1997, there were
no remaining accrued liabilities relating to the 1996 mergers.

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

17
<PAGE>

INCOME FROM OPERATIONS. The Company had income from operations of $4,927,000,
$19,232,000 and $11,790,000 in 1997, 1996 and 1995, respectively. The decrease
in income from operations in 1997 is attributable to the acquired in-process
research and development expense incurred in connection with the Compass
acquisition. The increase in 1996 is attributable to revenue growth net of
increased expenses necessary to support the Company's growth. Operating income
represented 3%, 18% and 17% of total revenue in 1997, 1996 and 1995,
respectively.

INTEREST INCOME AND OTHER, NET. Interest income and other was $5,293,000,
4,204,000 and $2,787,000 in 1997, 1996 and 1995, respectively. The majority of
the increase for 1997 was due to an increase in interest earned on investments.
In 1996, interest income increased due to larger cash balances resulting
primarily from the proceeds of the Company's initial public offering, which was
completed in June 1995, and the Meta initial public offering, which was
completed in November 1995.

INCOME TAXES. The Company accounts for income taxes in accordance with SFAS No.
109. Pro forma income taxes have been provided for 1995 as if Meta (an S
corporation for income tax reporting purposes) had been a C corporation. The
provision for income taxes (pro forma in 1995), as a percentage of pre-tax
income was 36%, 47% and 43% for 1997, 1996 and 1995, respectively. The
percentage in 1996 and 1995 (pro forma) was higher than the federal statutory
income tax rate of approximately 35% due primarily to the effect of certain
merger expenses that were not deductible for income tax purposes. As of December
31, 1997, the increase in deferred tax asset relates to future tax benefits
attributable to the Compass acquired in-process research and development.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $17,272,000, $20,002,000 and
$20,089,000 in 1997, 1996 and 1995, respectively. The decrease in 1997 was
attributable to increases in accounts receivable and due from affiliates,
decreases in accounts payable and accrued liabilities (net of liabilities
assumed from Compass), offset by an increase in operating income (net of
acquired in-process research and development). The increase in 1996 was a result
of increased net income, accrued liabilities and deferred revenue. Investing
activities provided $12,581,000 and used $41,352,000 and $28,267,000 of net cash
in 1997, 1996 and 1995, respectively. In 1997, net cash provided by investing
activities resulted from sales and maturities of securities, offset by purchases
of securities, purchase of Compass, and purchase of leasehold improvements for
the Company's new headquarter facilities, including furniture, computer
workstations and file servers, for use by the Company's employees. In 1996, net
cash used in investing activities relates primarily to net purchases of
short-term "available-for-sale" securities, which consist of short-term debt
securities, U.S. Government Agency debt securities, U.S. Treasury Bills,
municipal/corporate auction preferred stock, municipal bonds and demand deposit
investments in limited-maturity fixed-income mutual funds. Net cash provided by
financing activities was $8,168,000, $4,407,000 and $48,263,000 in 1997, 1996
and 1995, respectively. Net cash provided by financing activities increased in
1997 from 1996, primarily from issuance of common stock under the Company's
employee stock purchase plan and exercise of stock options. Net cash provided by
financing activities was lower in 1996 than in 1995 because, in 1995, the
Company received the proceeds from the Avant! initial public offering, which was
completed in June 1995 and the Meta initial public offering, which was completed
in November 1995. The Company did not issue any significant amounts of common
stock in 1997 and 1996 except for stock issued in connection with option
exercises, the employee stock purchase plan and the Compass acquisition.

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

As of December 31, 1997, the Company had $101,725,000 of cash and short-term
investments and $96,430,000 in working capital. As of December 31, 1997, the
Company had $49,455,000 in current liabilities, including $15,471,000 of
deferred revenue. As of December 31, 1997, the Company had a technology
acquisition payable of $903,000. In connection with the Silvaco litigation, the
Company was required to post a bond. The bond is collateralized by a $23,583,000
letter of credit.

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

FACTORS THAT MAY AFFECT FUTURE RESULTS

LITIGATION RISK

The Company is subject to a number of litigation matters that, if decided
adversely to the Company, could affect the Company's future results.

<PAGE>

CADENCE LITIGATION

On December 6, 1995, Cadence Design Systems, Inc. ("Cadence") filed an action
against the Company and certain of its officers in the United States District
Court for the Northern District of California alleging copyright infringement,
unfair competition, misappropriation of trade secrets, conspiracy, breach of
contract, inducing breach of contract and false advertising. The essence of the
complaint is that certain of the Company's employees who were formerly Cadence
employees allegedly misappropriated and improperly copied source code for
certain important functions of the Company's place and route products from
Cadence, and that the Company has allegedly competed unfairly by making false
statements concerning Cadence and its products. The action also alleges that the
Company induced certain individual defendants to breach their agreements of
employment and confidentiality with Cadence. The matter is currently awaiting
trial, pending further pretrial matters. A trial date has not been set. On July
25, 1997, a federal judge stayed the Cadence civil action pending completion of
the criminal proceedings described below, except for limited discovery on
certain matters approved by the District Court. Avant! posted a $5.0 million
bond pending the resumption of the civil action.

In addition to actual and punitive damages, which were not quantified by
Cadence, Cadence is seeking to enjoin the sale of the Company's place and route
products pending trial of the action. On March 18, 1997, the District Court
granted in part and denied in part Cadence's motion for a preliminary
injunction. Cadence appealed the order denying a preliminary injunction. On
September 23, 1997, the United States Court of Appeals for the Ninth Circuit
overruled the District Court's denial of Cadence's motion with respect to the
Company's ArcCell product, a product Avant! no longer sells, and held that a
preliminary injunction should be granted against the further sale of the ArcCell
product. The Court of Appeals did not enjoin the Company's Aquarius place and
route products, but rather remanded this aspect of Cadence's motion to the
District Court for further consideration. The Court of Appeals stated that, if
the Company's Aquarius products are determined to infringe Cadence products, the
sale of Aquarius products should be enjoined. The Company requested a rehearing
on the issue, but on November 21, 1997, the Ninth Circuit denied this request.
On December 19, 1997, the District Court entered an injunction against continued
sales or licensing of any product or work copied or derived from Cadence's
Design Framework II, specifically including, but not limited to, ArcCell
products. The injunction also barred the Company from possessing or using any
copies or any portion of the source code or object code for ArcCell or any other
product, to the extent that portion is copied or derived from Cadence's Design
Framework II. (The Company no longer sells or licenses ArcCell products or
code). The injunction also required the Company to inform its customers of the
injunction, to obtain confirmation as to whether the customers have a
functioning copy of ArcCell or other such product, and to provide certain
information to the court. On January 25, 1998, the District Court entered a
modified preliminary injunction "to remove any implication that the Company's
customers are authorized by the preliminary injunction to continue to use the
enjoined products without exposure to claims of copyright violation." Cadence
continues to allege that the Company's Aquarius products infringe Cadence's
Design Framework II and the District Court is allowing Cadence to take discovery
concerning the Company's Aquarius and Apollo products to determine whether those
products infringe. At the December 19, 1997 hearing, the District Court did not
rule on Cadence's request to enjoin the sale, license or support of the
Company's Aquarius place and route products from which the Company derives a
significant portion of its total revenue. On February 28, 1998, the District
Court requested an additional briefing regarding whether Aquarius should be
enjoined. The District Court will hold future hearings regarding the Aquarius
products. There can be no assurance that the District Court will not, upon
further consideration, grant a preliminary injunction with respect to the sale
of the Aquarius products, which could have a material adverse effect on the
Company's business, financial position and results of operations.

On January 16, 1996, the Company filed a counterclaim against Cadence alleging
antitrust violations, racketeering, false advertising, defamation, trade libel,
unfair competition, unfair trade practices, negligent and intentional
interference with prospective economic advantage and intentional interference
with contractual relations. On December 19, 1997, the Company stipulated to
temporarily dismissing its counterclaim in order to file more detailed
allegations. The Company refiled its counterclaim on January 29, 1998.

19
<PAGE>

conclusion of these claims, an estimate of any loss or range of loss cannot
be made, based on information the Company presently possesses. There can be
no assurance that an adverse judgement, if granted on any claim would not
have a material adverse effect on the Company's business, financial position
or results of operations. Furthermore, there can be no assurance that the
Company's relationships with its customers and/or partners will not be
adversely affected in the future as a result of the Cadence litigation.

CRIMINAL COMPLAINT

The Santa Clara County District Attorney's office is also investigating the
allegations of misappropriation of trade secrets set forth in Cadence's lawsuit,
described above. On April 11, 1997, the Santa Clara County District Attorney
filed a criminal complaint alleging felony level offenses against, among others,
the Company and the following employees and/or directors of the Company, Gerald
C. Hsu, President, Chief Executive Officer and Chairman of the Board of
Directors, Y. Eric Cho, a former officer and current member of the Board of
Directors, Y. Z. Liao, Corporate Fellow, Stephen Wuu, CEO Staff Operations,
Leigh Huang, Marketing Manager and Eric Cheng, Research and Development Manager,
for allegedly violating various California Penal Code Sections relating to the
theft of trade secrets. The Company and the individuals above have pleaded not
guilty and are awaiting further proceedings. The criminal complaint could result
in criminal fines against the Company, as well as the potential incarceration of
certain members of its management team. Such outcomes could result in canceled
or postponed orders, increased future expenditures, the loss of management and
other key personnel, additional shareholder litigation, loss of goodwill and
would have other material adverse effects on the Company's business, financial
position and results of operations.

SILVACO LITIGATION

In March 1993, Meta Software Inc., which the Company acquired in October 1996
and which is now a wholly owned subsidiary of the Company ("Meta"), filed a
complaint in the Superior Court of California for Santa Clara County against
Silvaco Data Systems, Inc. and related parties (collectively, "Silvaco") seeking
monetary damages and injunctive relief. Meta's complaint alleged, among other
things, that Silvaco breached its representative agreement with Meta by
withholding customer payments for products and services that had been delivered,
and by failing to pay royalties on software that Silvaco sold to others. In
August 1995, Meta was awarded $529,828 under the Superior Court's judicial
arbitration program. Both parties rejected the award and requested a trial de
novo on the issues involved. In August 1995, Silvaco filed a cross-complaint
against Meta alleging, among other things, that Meta owes Silvaco royalties and
license fees pursuant to a product development and marketing program and unpaid
commissions related to Silvaco's sale of Meta's products and services under such
program. Meta filed an answer to the cross-complaint denying the allegations
contained therein. In July 1996, Silvaco filed a first amended cross-complaint,
adding Shawn Hailey, then the President, Chief Executive Officer and a major
shareholder of Meta, and, until July 1997, the Senior Vice President of the
Company's Silicon Division, as a personal defendant, and further alleging
defamation, interference with economic advantage, unfair competition and abuse
of process by acts or statements made by Meta or its agents.

In August 1997, the Superior Court entered a default judgment against Mr.
Hailey for failure to timely answer the complaint. In October 1997, Mr.
Hailey's application for relief from the default judgment was denied. In
August 1997, the Superior Court entered a default judgment against Meta as to
the defamation and interference with economic advantage claims. On October
31, 1997, Meta's application for relief from the default judgment was denied.
On October 28, 1997, Silvaco first presented its theory of damages and a
trial began on November 3, 1997. On November 4, 1997, the Superior Court
dismissed Meta's remaining affirmative claims. On November 5, 1997, the
Superior Court awarded Silvaco $20 million in damages against Mr. Hailey and
Meta related to the defamation and interference with economic advantage
claims, and on November 6, 1997, the Superior Court awarded Silvaco $11.4
million in damages related to the unfair competition claim. On November 12,
1997, the Superior Court awarded nominal damages to Silvaco related to the
product development claim. Silvaco's claims based on the marketing program
and abuse of process were dismissed. The Company filed an appeal on behalf of
Shawn Hailey, and, if necessary, intends to file an appeal on its own behalf.
A default judgment in the aggregate amount of $31.4 million was entered
against the Company. As required, the Company posted a bond on behalf of
itself and Shawn Hailey in excess of the amount necessary to satisfy the
judgment. The bond is collateralized by a $23,583,000 letter of credit.

<PAGE>

claim, it is currently unable to estimate the actual loss or range of loss.
Payment of the damages previously awarded, and damages which may be awarded
in the future, would have a material adverse effect on the Company's
business, financial condition and results of operations.

PESIC LITIGATION

In September 1996, Katherine Ngai Pesic and Ivan Pesic commenced an action
entitled PESIC ET AL. V. WHITE ET AL., No.760469 in the Superior Court of
California for Santa Clara County naming as defendants the Company (as successor
in interest to Meta), Shawn Hailey, Meta's former Chief Executive Officer, and
Thomas N. White, Jr. and George S. Cole, both of whom were Meta's former counsel
in the Silvaco matter, described above. The action asserts claims for invasion
of privacy under California common law and the California Constitution and seeks
compensatory and punitive damages. Avant! has answered the complaint, but no
trial date has been set. The Company believes it has defenses to these claims
and intends to defend itself vigorously. Although it is reasonably possible the
Company will incur a loss in relation to these claims, it is currently unable to
estimate the actual loss or range of loss. In the event the Company's defenses
are unsuccessful, the Company may be required to pay damages to the plaintiffs,
and such a judgment could have a material adverse effect on the Company's
business, financial condition and results of operations.

MICROUNITY LITIGATION

On October 14, 1997, Microunity Systems Engineering, Inc. filed in the United
States District Court for the Northern District of California a complaint
against Precim Corporation ("Precim"), captioned MICROUNITY SYSTEMS ENGINEERING,
INC. V. PRECIM CORP., No. C 97 20904 JW (PVT). Precim was a wholly owned
subsidiary of Technology Modeling Associates, Inc., which was acquired by the
Company in January 1998. This lawsuit alleges liability for patent infringement,
unfair competition and tortious interference with prospective economic
advantage. The action requests unspecified damages and an injunction against
Precim. Precim has accepted service of the complaint but has not yet responded.
Precim believes it has defenses to these claims and intends to defend itself
vigorously. Although it is reasonably possible the Company will incur a loss in
relation to these claims, it is currently unable to estimate the actual loss or
range of loss. In the event Precim's defenses are unsuccessful, Precim may be
required to pay damages to the plaintiffs, and such a judgment could have a
material adverse effect on the Company's business, financial condition and
results of operations.

SECURITIES CLASS ACTION CLAIMS

On December 15, 1995, Paul Margetis and Helen Margetis filed in the United
States District Court for the Northern District of California a securities fraud
class action complaint against the Company. In addition, on December 19, 1995,
Fred Tarca filed in the United States District Court for the Northern District
of California a class action complaint against the Company for violations of the
federal securities laws. These class action lawsuits allege certain securities
law violations, including omissions and/or misrepresentation of material facts.
The alleged omissions and/or misrepresentations are largely consistent with
those outlined in the Cadence claim, described above. In February 1997,
plaintiff Tarca voluntarily dismissed his action and the Margetis plaintiffs
were certified as class representatives in their action. On July 25, 1997, a
federal judge stayed the Margetis action, except for certain documentary and
third-party discovery, pending resolution of the Cadence suit.

On May 30, 1997, Joanne Hoffman filed in the United States District Court for
the Northern District of California a purported class action alleging securities
claims on behalf of purchasers of the Company's stock between March 29, 1996 and
April 11, 1997, the date of the filing of the criminal complaints against the
Company and six of its employees and/or officers. Plaintiff alleges that the
Company and various of its officers misled the market as to the likelihood of
criminal charges being filed and as to the validity of the Cadence allegations.
The Company moved to dismiss the Hoffman complaint for failure to state a claim,
but the District Court in December 1997 denied the motion. The court also denied
without prejudice plaintiff Hoffman's motion for appointment as lead plaintiff.
Counsel for plaintiff has indicated that the stay of the Margetis securities
class action pending resolution of the Cadence suit will likely apply to this
securities action as well.

The Company believes it has defenses to all of the securities class action
claims, described above, and intends to defend itself vigorously. There can be
no assurance, however, that the Company's defenses will be successful. Although
it is reasonably possible the Company will incur a loss in relation to these
claims, it is currently unable to estimate the actual loss or range of loss,
either individually or in aggregate. In the event the Company's defenses are
unsuccessful, the Company may be required to pay damages to the securities
class action plaintiffs, and such a judgment would likely have a material
adverse effect on the Company's business, financial condition and results of
operations.

<PAGE>

OTHER FACTORS

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

The Company sells its software products and provides services to customers
located throughout the world. Managing global operations and sites located
throughout the world presents challenges associated with cultural differences
and organizational alignment. Moreover, each region in the global EDA market
exhibits unique characteristics that can cause purchasing patterns to vary
significantly from period to period. Although international markets historically
have provided the Company with significant revenue opportunities, periodic
economic downturns, trade balance issues, political instability and fluctuations
in interest and foreign currency exchange rates are all risks that could affect
global product and service demand.

Asian sales accounted for approximately 31%, 28% and 28% for 1997, 1996 and
1995, respectively. Amounts due from Asian customers, principally affiliates of
the Company, are not significant as of December 31, 1997. Many Asian countries
are currently experiencing banking and currency difficulties that could lead to
economic recession in those countries which could result in a decline in the
purchasing power of the Company's Asian customers. This in turn could result in
the cancellation or delay of orders for the Company's products from Asian
customers, thus adversely affecting the Company's results of operations.

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

On September 12, 1997, the Company acquired Compass Design Automation, Inc. and
on January 16, 1998, the Company acquired Technology Modeling Associates, Inc.
The Company's future operating results are contingent upon the successful
integration of these entities into its operations.

In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE
INCOME. This Statement establishes standards for reporting and displaying
comprehensive income and its components in the consolidated financial
statements. It does not, however, require a specific format for the statement,
but requires the Company to display an amount representing total comprehensive
income for the period in that financial statement. The Company is in the process
of determining its preferred format. This Statement is effective for fiscal
years beginning after December 15, 1997.

In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Statement establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. This Statement is effective for financial statements for
periods beginning after December 15, 1997.

The Company does not expect either SFAS 130 or 131 to have a significant effect
on its operating results.

The Company has recognized the need to ensure that its operating systems,
computer operations and products will not be adversely affected by the upcoming
calendar Year 2000. The Company will formulate and implement a comprehensive
plan to address all known issues as they relate to the Year 2000. The Company,
currently believes, based on a preliminary evaluation, that the costs will not
have a material adverse effect on the future financial results of the Company.

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board Of Directors
Avant! Corporation:

We have audited the accompanying consolidated balance sheets of Avant!
Corporation and subsidiaries (the Company) as of December 31, 1997 and 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Avant! Corporation
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.

/s/ KPMG PEAT MARWICK LLP

January 20, 1998
Mountain View, California

MANAGEMENT'S STATEMENT OF RESPONSIBILITY FOR FINANCIAL REPORTING

The consolidated financial statements contained in this annual report are the
responsibility of management. They have been prepared in accordance with
generally accepted accounting principles and necessarily include certain amounts
based on management's best estimates and judgments. The financial information
contained elsewhere in this annual report is consistent with that contained in
the consolidated financial statements.

Management is responsible for establishing and maintaining a system of internal
controls designed to provide reasonable assurance as to the integrity and
reliability of financial reporting. The concept of reasonable assurance is based
on the recognition that there are inherent limitations in all systems of
internal control, and that the cost of such systems should not exceed the
benefits to be derived therefrom.

It has always been the policy and practice of the Company to conduct its affairs
ethically and in a socially responsible manner. Management recognizes its
responsibility for fostering a strong ethical climate. This responsibility is
communicated to all employees in the Company's code of business conduct, which
is distributed throughout the Company.

/s/ GERALD C. HSU

GERALD C. HSU
CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE OFFICER

/s/ LINDA CHINN

LINDA CHINN
HEAD OF FINANCE AND ADMINISTRATION

<PAGE>

AVANT! CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<S> <C> <C> <C>
REVENUE:
Software $ 106,883 $ 82,134 $ 55,164
Services 40,465 23,953 13,704
---------------------------------------
Total revenue 147,348 106,087 68,868
---------------------------------------
COSTS AND EXPENSES:
Costs of software 2,836 2,512 1,529
Costs of services 10,651 7,269 4,845
Selling and marketing 40,780 29,928 22,741
Research and development 29,573 20,696 15,318
General and administrative 17,395 15,450 6,362
In-process research and development 41,186 1,700 2,693
Merger expenses -- 9,300 3,590
---------------------------------------
Total operating expenses 142,421 86,855 57,078
---------------------------------------
Income from operations 4,927 19,232 11,790

Interest income and other, net 5,293 4,204 2,787
---------------------------------------
Income before income taxes 10,220 23,436 14,577

Provision for income taxes 3,679 10,952 4,053
---------------------------------------
Net income $ 6,541 $ 12,484 $ 10,524
---------------------------------------
---------------------------------------
Earnings per share - Basic:
Earnings per share $ 0.25 $ 0.51 $ 0.51
---------------------------------------
---------------------------------------
Total weighted average number of
common shares outstanding 25,898 24,581 20,688
---------------------------------------
---------------------------------------
Earnings per share - Diluted:
Earnings per share $ 0.24 $ 0.47 $ 0.45
---------------------------------------
---------------------------------------
Total weighted average number of
common and common equivalent
shares outstanding 27,413 26,761 23,639
---------------------------------------
---------------------------------------
Pro forma net income and per share data:
Income before income taxes as reported $ 14,577
Pro forma provision for income taxes 6,227
--------
Pro forma net income $ 8,350
--------
--------
Pro forma earnings per share - Basic:
Earnings per share $ 0.40
--------
--------
Total weighted average number of
common shares outstanding 20,688
--------
--------
Pro forma earnings per share - Diluted:
Earnings per share $ 0.35
--------
--------
Total weighted average number of
common and common equivalent
shares outstanding 23,639
--------
--------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

AVANT! CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 71,088 $ 33,067
Short-term investments 30,637 84,256
Accounts receivable, net 21,237 13,321
Due from affiliates 6,171 --
Deferred income taxes 6,431 6,450
Prepaid expenses and other current assets 10,321 9,146
-------------------------
Total current assets 145,885 146,240

Equipment, furniture and fixtures, net 31,125 8,929
Deferred income taxes 16,208 --
Intangibles 15,461 --
Other assets 3,538 934
-------------------------
Total assets $ 212,217 $ 156,103
-------------------------
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations $ -- $ 52
Accounts payable 6,439 1,716
Accrued compensation 7,963 5,123
Accrued income taxes 6,690 --
Other accrued liabilities 12,486 8,162
Technology acquisition payable, current portion 406 642
Deferred revenue 15,471 13,824
-------------------------
Total current liabilities 49,455 29,519

Technology acquisition payable, less current portion 497 903
Other noncurrent liabilities 370 114
-------------------------
Total liabilities 50,322 30,536
-------------------------
SHAREHOLDERS' EQUITY:
Series A convertible preferred stock, $.0001 par value; 5,000 shares authorized;
no shares issued and outstanding in 1997 and 1996 -- --
Common stock, $.0001 par value; 75,000 and 50,000 shares authorized,
26,893 and 24,952 shares issued and outstanding in 1997 and 1996, respectively 3 3
Additional paid-in capital 140,076 111,327
Deferred stock compensation (1,807) (2,820)
Net unrealized loss on short-term investments (50) (75)
Retained earnings 23,673 17,132
-------------------------
Total shareholders' equity 161,895 125,567
-------------------------
Total liabilities and shareholders' equity $ 212,217 $ 156,103
-------------------------
-------------------------
Commitments and contingencies (Note 14)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<PAGE>

AVANT! CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ---------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCES AS OF DECEMBER 31, 1994 687 $ -- 14,463 $ 1 $26,558
Issuance of common stock -- -- 1,063 -- 660
Conversion of long-term debt to
common stock -- -- 100 -- 100
Issuance of common stock in public offering,
net of expenses -- -- 3,367 -- 52,381
Conversion of mandatorily redeemable
convertible preferred stock into
common stock -- -- 3,570 1 8,311
Conversion of preferred stock into
common stock (687) -- 687 -- --
Exercise of common stock options and
warrants, including related tax
benefits -- -- 570 -- 5,948
Repurchase of common stock -- -- (18) -- (3)
Issuance of common stock options
at below market value -- -- -- -- 588
Amortization of deferred compensation -- -- -- -- --
Issuance of common stock under
employee stock purchase plan -- -- 43 -- 534
Unrealized gain on short-term
investments -- -- -- -- --
Distributions to shareholders -- -- -- -- --
Compensation expense attributable to
stock appreciation rights -- -- -- -- 112
Net income -- -- -- -- --
-----------------------------------------------
BALANCES AS OF DECEMBER 31, 1995 -- -- 23,845 2 95,189
Issuance of common stock in acquisition
of technology -- -- 29 -- 1,500
Issuance of common stock for services -- -- 6 -- 140
Exercise of common stock options,
including related tax benefits -- -- 989 1 9,857
Issuance of common stock under
employee stock purchase plan -- -- 83 -- 1,921
Issuance of common stock options at
below market value -- -- -- -- 2,122
Amortization of deferred stock compensation -- -- -- -- --
Unrealized loss on short-term investments -- -- -- -- --
Compensation expense attributable to
stock appreciation rights -- -- -- -- 488
Reversal of prior year shareholder
distribution -- -- -- -- 46
Contributed capital related to stock
compensation expense -- -- -- -- 64
Net income -- -- -- -- --
-----------------------------------------------
BALANCES AS OF DECEMBER 31, 1996 -- -- 24,952 3 111,327
Issuance of common stock in acquisition
of Compass Design Automation, Inc. -- -- 522 -- 17,500
Exercise of common stock options,
including related tax benefits -- -- 1,287 -- 8,838
Issuance of common stock under
employee stock purchase plan -- -- 132 -- 2,309
Amortization of deferred stock compensation -- -- -- -- --
Unrealized gain on short-term investments -- -- -- -- --
Compensation expense attributable to
stock appreciation rights -- -- -- -- 102
Net income -- -- -- -- --
-----------------------------------------------

BALANCES AS OF DECEMBER 31, 1997 -- $ -- 26,893 $ 3 $140,076
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------

<CAPTION>
NET UNREALIZED
DEFERRED GAIN (LOSS) ON TOTAL
STOCK SHORT-TERM RETAINED SHAREHOLDERS'
COMPENSATION INVESTMENTS EARNINGS EQUITY
- -----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCES AS OF DECEMBER 31, 1994 $ (62) $(222) $ 5,250 $ 31,525
Issuance of common stock -- -- -- 660
Conversion of long-term debt to
common stock -- -- -- 100
Issuance of common stock in public offering,
net of expenses -- -- -- 52,381
Conversion of mandatorily redeemable
convertible preferred stock into
common stock -- -- -- 8,312
Conversion of preferred stock into
common stock -- -- -- --
Exercise of common stock options and
warrants, including related tax
benefits -- -- -- 5,948
Repurchase of common stock -- -- -- (3)
Issuance of common stock options
at below market value (588) -- -- --
Amortization of deferred compensation 133 -- -- 133
Issuance of common stock under
employee stock purchase plan -- -- -- 534
Unrealized gain on short-term
investments -- 311 -- 311
Distributions to shareholders -- -- (11,126) (11,126)
Compensation expense attributable to
stock appreciation rights -- -- -- 112
Net income -- -- 10,524 10,524
-------------------------------------------------
BALANCES AS OF DECEMBER 31, 1995 (517) 89 4,648 99,411
Issuance of common stock in acquisition
of technology (750) -- -- 750
Issuance of common stock for services -- -- -- 140
Exercise of common stock options,
including related tax benefits -- -- -- 9,858
Issuance of common stock under
employee stock purchase plan -- -- -- 1,921
Issuance of common stock options at
below market value (2,122) -- -- --
Amortization of deferred stock compensation 569 -- -- 569
Unrealized loss on short-term investments -- (164) -- (164)
Compensation expense attributable to
stock appreciation rights -- -- -- 488
Reversal of prior year shareholder
distribution -- -- -- 46
Contributed capital related to stock
compensation expense -- -- -- 64
Net income -- -- 12,484 12,484
-------------------------------------------------
BALANCES AS OF DECEMBER 31, 1996 (2,820) (75) 17,132 125,567
Issuance of common stock in acquisition
of Compass Design Automation, Inc. -- -- 17,500
Exercise of common stock options,
including related tax benefits -- -- -- 8,838
Issuance of common stock under
employee stock purchase plan -- -- -- 2,309
Amortization of deferred stock compensation 1,013 -- -- 1,013
Unrealized gain on short-term investments -- 25 -- 25
Compensation expense attributable to
stock appreciation rights -- -- -- 102
Net income -- -- 6,541 6,541
-------------------------------------------------

BALANCES AS OF DECEMBER 31, 1997 $ (1,807) $ (50) $ 23,673 $161,895
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

26
<PAGE>

AVANT! CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,541 $ 12,484 $ 10,524
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,973 2,657 2,112
Acquired in-process research and development 41,186 750 2,693
Gain on sale of securities -- (14) --
Compensation expense (benefit) attributable
to stock appreciation rights 102 (31) 484
Stock compensation expense -- 64 112
Loss on disposal of assets 462 -- 19
Equity earnings in joint ventures (212) -- --
Amortization of capitalized software costs 62 88 228
Amortization of deferred stock compensation 1,013 569 133
Deferred income taxes (16,189) (2,397) (1,431)
Tax benefit related to stock options 2,285 4,730 1,302
Deferred rent (29) (39) 110
Stock issued for services -- 140 --
Changes in operating assets and liabilities, net of effects
from purchase of Compass Design Automation:
Accounts receivable, net (3,583) (482) (2,974)
Due from affiliates (6,171) -- --
Prepaid expenses and other assets (1,253) (3,807) (799)
Accounts payable (12,075) 716 277
Accrued compensation (478) 920 650
Accrued income taxes 4,217 (5,283) (899)
Other accrued liabilities (1,768) 4,698 3,722
Deferred revenue (3,811) 4,239 3,826
--------------------------------------
Net cash provided by operating activities 17,272 20,002 20,089
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (65,731) (206,593) (79,568)
Maturities and sales of short-term investments 119,375 169,156 56,471
Purchases of equipment, furniture, and fixtures (25,190) (4,583) (5,107)
Capitalized software development costs -- -- (63)
Investment in joint ventures 310 668 --
Purchase of Compass Design Automation,
net of cash acquired (16,183) -- --
--------------------------------------
Net cash provided by (used in) investing activities 12,581 (41,352) (28,267)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders -- (1,754) (9,327)
Principal payments under capital lease obligations (52) (133) (235)
Payments on technology acquisition payable (642) (755) (393)
Issuance of preferred stock, net -- -- 500
Repurchase of common stock -- -- (3)
Exercise of stock options 6,553 5,128 4,646
Issuance of common stock under employee stock purchase plan 2,309 1,921 534
Issuance of common stock, net -- -- 52,541
--------------------------------------
Net cash provided by financing activities 8,168 4,407 48,263
--------------------------------------
Net increase (decrease) in cash and cash equivalents 38,021 (16,943) 40,085
--------------------------------------
Cash and cash equivalents, beginning of year 33,067 50,010 9,925
--------------------------------------
Cash and cash equivalents, end of year $ 71,088 $ 33,067 $ 50,010
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

27
<PAGE>

AVANT! CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995

1. NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

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

PRINCIPLES OF PRESENTATION AND USE OF ESTIMATES

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
consolidated financial statements have been restated to reflect the effect of
the mergers with Integrated Silicon Systems, Inc. (ISS), Anagram, Inc.
(Anagram), Meta-Software, Inc. (Meta), and FrontLine Design Automation, Inc.
(FrontLine), all of which were accounted for as poolings of interests. The
Compass Design Automation, Inc. (Compass) and the Datalink Far East Ltd.
(Datalink) acquisitions, which occurred on September 12, 1997 and September
30, 1997, respectively, were accounted for under the purchase method.
Accordingly, the Company's consolidated financial statements do not include
the results of operations, financial position or cash flows prior to the
acquisitions.

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

REVENUE RECOGNITION

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

SOFTWARE REVENUE

Revenue consists primarily of fees for licenses of the Company's software
products, maintenance and customer support. Prior to October 1, 1997, the
Company complied with the American Institute of Certified Public Accountants'
(AICPA) Statement of Position (SOP) 91-1, SOFTWARE REVENUE RECOGNITION. Revenue
from the sale of software licenses was recognized after shipment of the
products, delivery of permanent authorization codes and fulfillment of
acceptance terms, if any, providing that no significant vendor and post-contract
support obligations remain and collection of the related receivable is probable.
Any remaining insignificant vendor or post-contract support obligations were
accrued at the time the revenue is recognized. In instances where there was a
contingency regarding the sale, revenue recognition was delayed until the
contingency had been resolved. When the Company received advance payments for
software products, such payments were reported as deferred revenue until all
conditions for revenue recognition were met. The Company had entered into
certain license agreements under which software, support and other services were
provided to customers for a bundled price for a specific period of time.
Generally, revenue under such agreements was recognized ratably over the
contract period.

In the fourth quarter of 1997, the Company adopted the provisions of the AICPA
SOP 97-2, SOFTWARE REVENUE RECOGNITION. SOP 97-2 generally requires revenue
earned on software arrangements involving multiple elements to be allocated to
each element based on the relative fair values of the elements. The revenue
allocated to software products, including time-based software licenses,
generally is recognized after shipment of the products, delivery of permanent
authorization codes and fulfillment of acceptance terms. In connection with the
adoption of SOP 97-2, the Company's revenue for contracts with extended payment
terms (generally greater than twelve months) is recognized as payments become
due. The effect of this change is not material to the Company.

SERVICES REVENUE

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

CASH AND CASH EQUIVALENTS

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

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

SHORT-TERM INVESTMENTS

Short-term investments, which are classified as available-for-sale, consist
of demand deposit investments in limited maturity fixed-income mutual funds,
short-term debt securities, U.S. Government Agency debt securities, U.S.
Treasury Bills, municipal/corporate auction preferred stock and municipal
bonds are reported at fair value. The cost of securities sold is determined
using the specific identification method when computing realized gains and
losses. Fair value is determined using available market information.

EQUIPMENT, FURNITURE AND FIXTURES

Equipment, furniture and fixtures are stated at cost. Equipment, furniture and
fixtures are depreciated using the straight-line method over the estimated
useful lives of the assets which range from three to thirteen years. Leasehold

<PAGE>

improvements are depreciated using the straight-line method over the shorter of
the lease term or the estimated useful life of the asset. Expenditures for
repairs and maintenance are charged to expense as incurred.

INTANGIBLES

Intangibles consist principally of goodwill representing purchased technology
and other intangible assets resulting from the excess of the cost of a
purchased business over the cost of the net assets acquired. Goodwill is
amortized using the straight-line method over five years. Goodwill and
related intangibles and accumulated amortization as of December 31, 1997 was
$16,511,000 and $1,050,000, respectively. The Company assesses the
recoverability of the excess of goodwill based on undiscounted future cash
flows. The amount of any impairment would be the difference between the
excess of the carrying value of goodwill over the undiscounted future cash
flows. As of December 31, 1997, the Company does not consider its goodwill to
be impaired.

The Company accesses the recoverability of its identifiable tangible and
intangible assets under SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement
requires identifiable tangible and intangible assets to be evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. If an asset is considered to
be impaired, the carrying amount of that asset is reduced to its fair value
resulting in a charge to income. As of December 31, 1997, the Company did not
consider any of its intangibles to be impaired.

RELATED PARTY TRANSACTIONS

Included in prepaid expenses and other current assets and other noncurrent
assets is $825,000 due from officers relating to relocation costs and a loan and
$377,000 to affiliates for working capital advances (see Note 13).

OTHER ACCRUED LIABILITIES

In 1997, legal costs and other costs of $4,800,000 and $7,686,000, respectively,
are included in other accrued liabilities. In 1996, merger costs, legal costs
and other costs of $3,910,000, $1,841,000 and $2,411,000 are included in other
accrued liabilities.

SOFTWARE DEVELOPMENT COSTS

Certain software development costs for new products and product enhancements are
capitalized upon the establish-ment of technological feasibility, which is
defined by the Company as the completion of a working model of the software.
Capitalization of computer software development costs ceases, and amortization
begins, when the product is available for general release to customers. The
ongoing assessment of the realizability of these costs requires judgment related
to anticipated future product revenues, estimated economic life and changes in
hardware and software technology. No amounts were capitalized in 1997 or 1996 as
achievement of technological feasibility was typically concurrent with
availability for general release, and $63,000 was capitalized in 1995. At
December 31, 1997, all software development costs capitalized were fully
amortized.

Amortization of software development costs is provided on a product-by-product
basis. Annual amortization is the greater of the amount computed using the ratio
of current product revenue to the total of current and anticipated future
product revenue or the straight-line method over the remaining estimated
economic life of the product. All current products have estimated economic lives
of three years. Amortization of software development costs for the years 1997,
1996 and 1995 was $62,000, $88,000 and $228,000, respectively. Amortization of
software development costs is included in costs of software in the accompanying
consolidated statements of income.

INCOME TAXES

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

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

NET INCOME AND NET INCOME PER COMMON SHARE

In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, EARNINGS PER SHARE. SFAS No. 128 requires the presentation of both
basic and diluted earnings per share (EPS). Basic earnings per share is computed
based on the weighted-average number of common shares outstanding during each
year. Diluted earnings per share is based on the sum of the weighted-average
number of common shares outstanding plus common stock equivalents arising out of
employee stock options and convertible preferred stock. Earnings per share
information for all prior periods have been restated to conform to the
requirements of the standard.

The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the years presented:

<PAGE>

<TABLE>

(IN THOUSANDS, EXCEPT PER SHARE DATA)

INCOME SHARES
1997 (NUMERATOR) (DENOMINATOR) EPS
- -------------------------------------------------------------------------
<S> <C> <C> <C>

BASIC EPS:
Net Income $6,541 25,898 $0.25
Effect of dilutive securities -- 1,515 (0.01)
------------------------------------
DILUTED EPS:
Net Income $6,541 27,413 $0.24
------------------------------------
------------------------------------
1996
- -------------------------------------------------------------------------
BASIC EPS:
Net Income $12,484 24,581 $0.51
Effect of dilutive securities -- 2,180 (0.04)
------------------------------------
DILUTED EPS:
Net Income $12,484 26,761 $0.47
------------------------------------
------------------------------------

1995
- -------------------------------------------------------------------------
BASIC EPS:
Net Income $10,524 20,688 $0.51
Effect of dilutive securities -- 2,951 (0.06)
------------------------------------
DILUTED EPS:
Net Income $10,524 23,639 $0.45
------------------------------------
------------------------------------
</TABLE>

During 1995, the calculation includes shares deemed to be outstanding, which
represent the number of shares sufficient to fund Meta's final S corporation
distribution.

STOCK OPTION AND STOCK PURCHASE PLANS

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

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's foreign subsidiaries is the U.S
dollar. Accordingly, the financial statements of those subsidiaries, which
are maintained in the local currency, are remeasured into U.S. dollars in
accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. All exchange gains
or losses from remeasurement of monetary assets and liabilities that are not
denominated in U.S. dollars are recognized currently in income.

RECENT PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, REPORTING COMPREHENSIVE INCOME. This Statement establishes standards for
reporting and displaying comprehensive income and its components in the
consolidated financial statements. It does not, however, require a specific
format for the statement, but requires the Company to display an amount
representing total comprehensive income for the period in that financial
statement. The Company is in the process of determining its preferred format.

In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The Statement establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders.

These statements are effective for financial statements for periods beginning
after December 15, 1997. The Company does not expect either SFAS 130 or 131 to
have a significant effect on its financial position or operating results.

RECLASSIFICATION

Certain amounts in the 1996 and 1995 consolidated financial statements have been
reclassified to conform to the 1997 presentation.

2. EQUIPMENT, FURNITURE AND FIXTURES
At December 31, equipment, furniture and fixtures consisted of the following:

<TABLE>

(IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $ 7,011 $ 2,124
Equipment 29,897 13,840
Leasehold improvements 4,953 749
Construction in progress 6,760 --
-------------------------
48,621 16,713
Less accumulated depreciation 17,496 7,784
-------------------------
$ 31,125 $ 8,929
-------------------------
-------------------------

</TABLE>

3. SUPPLEMENTAL CASH FLOW
INFORMATION

Interest of $112,000, $141,000 and $51,000 was paid in 1997, 1996 and 1995,
respectively. Income taxes of $7,809,000, $11,076,000 and $2,041,000 were paid
during 1997, 1996 and 1995, respectively. Deferred compensation of $2,872,000
and $588,000 was recognized in 1996 and 1995, respectively, for stock options
issued below market value. An income tax benefit attributable to employee stock
plans of $2,285,000, $4,730,000 and $1,302,000 was credited to equity in the
years ended December 31, 1997, 1996 and 1995, respectively. In 1997, noncash
investing activities includes 522,192 shares of common stock with a fair market
value of $17,500,000 issued in connection with the Compass acquisition. The
Company issued $750,000 of common stock for the acquisition of technology during
1996. Other accrued liabilities were reduced $102,000, $488,000 and $112,000
through the issuance of common stock related to accrued stock appreciation

<PAGE>

rights in 1997, 1996 and 1995, respectively. Conversion of long-term debt to
common stock was $100,000 in 1995. In connection with the Company's initial
public offering in 1995, mandatorily redeemable convertible preferred stock was
converted to common stock in the amount of $8,312,000.

4. MERGERS AND ACQUISITIONS

On September 30, 1997, the Company acquired the assets of Datalink Far East
Ltd., a Taiwan corporation ("Datalink"), pursuant to an asset purchase
agreement. The Company will pay $900,000 to acquire Datalink over five
installments at specified times during the next two years. The Company paid
$450,000 on October 1, 1997 and the balance will be paid in four equal
installments on December 31, 1998, March 31, 1999, June 30, 1999 and September
30, 1999. The acquisition has been accounted for by the purchase method and is
reflected in other assets on the balance sheet.

On September 12, 1997, the Company acquired Compass, a subsidiary of VLSI
Technology, Inc., in exchange for $17,500,000 cash and 522,192 shares of its
common stock, issued with a fair market value of $17,500,000, and costs of
acquisition of $4,948,000. The net purchase price of $39,948,000 was allocated
as follows: $6,701,000 to current assets; $4,441,000 to equipment, furniture and
fixtures; $41,186,000 to in-process research and development; $14,822,000 to
goodwill and other identifiable intangibles and $27,202,000 to assumed
liabilities. The acquisition has been accounted for by the purchase method, and
accordingly, the Company's consolidated financial statements do not include the
results of operations, financial position or cash flows of Compass prior to
September 12, 1997. The following pro forma consolidated results of operations
give effect to the acquisition as if it had occurred on January 1, 1996.

The unaudited pro forma consolidated results of operations of the Company and
Compass for 1997 and 1996 are as follows:

<TABLE>

(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Pro forma revenue $ 180,394 $ 160,272
Pro forma net income $ 24,535 $ 5,274
Basic pro forma earnings per share $ 0.95 $ 0.21
Diluted pro forma earnings per share $ 0.90 $ 0.20

</TABLE>

Included in pro forma revenue and net income for 1997 and 1996 are revenues of
$33,046,000 and $54,185,000, respectively, and net loss of $8,365,000 and
$3,656,000, respectively, from Compass operations. Included in the combined pro
forma net income amounts are amortization of goodwill and other intangibles over
the expected useful lives ranging from four to five years and related tax
benefit.

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

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

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

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

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

In connection with the 1996 mergers with FrontLine, Meta and Anagram, the
Company incurred direct transaction costs and merger-related integration
expenses of approximately $9,300,000, consisting of transaction fees for
investment bankers, attorneys, accountants, financial printing and
shareholder meetings of approximately $5,352,000, charges for the elimination
of duplicate facilities of approximately $2,250,000, and severance costs and
certain other related costs of approximately $1,698,000. Of the $9,300,000 of
merger-related costs, approximately $8,400,000 related to cash expenditures
while approximately $900,000 related to noncash charges. As of December 31,
1997, there were no remaining accrued liabilities relating to the 1996
mergers.

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

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

31
<PAGE>

5. MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK

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

6. SHAREHOLDERS' EQUITY

INITIAL PUBLIC OFFERING AND CHANGES IN AUTHORIZED COMMON AND PREFERRED STOCK

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

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

In May 1996, the Company increased its authorized number of shares of common
stock from 25,000,000 to 50,000,000 shares. In May 1997, the Company increased
its authorized number of shares of common stock from 50,000,000 shares to
75,000,000.

SHAREHOLDER DISTRIBUTIONS

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

1995 STOCK OPTION/ISSUANCE PLAN

The Company approved the 1995 Stock Option/Stock Issuance Plan (the 1995 Plan)
in April 1995, under which all remaining outstanding stock options and shares
available for grant under the Company's 1993 Stock Option/Stock Issuance Plan
and 1,000,000 additional shares of the Company's common stock has been
authorized for issuance. The 1995 Plan is intended to serve as a successor to
the 1993 Stock Option/Stock Issuance Plan (see below) and has terms similar to
those of the 1993 Stock Option/Stock Issuance Plan. Under the 1995 Plan, the
term of options is generally ten years with a vesting requirement of 25% after
one year of service and monthly, thereafter, fully vesting through the fourth
year of service. Under the Plan, each individual serving as a nonemployee Board
of Directors' member on the date the Underwriting Agreement for the initial
public offering was executed received an option grant on such date for 20,000
shares of common stock, provided such individual had not otherwise been in the
prior employ of the Company. Each individual who becomes a nonemployee Board of
Directors' member thereafter receives a 20,000 share option grant on the date
such individual joins the Board of Directors provided such individual has not
been in the prior employ of the Company. In addition, at each annual
shareholders' meeting, beginning with the 1996 Annual Shareholders' Meeting,
each individual who continues to serve as a non-employee Board of Directors'
member after the meeting receives an additional option grant to purchase 5,000
shares of common stock whether or not such individual has been in the prior
employ of the Company.

1993 STOCK OPTION/STOCK ISSUANCE PLAN

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

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

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

<PAGE>

In connection with the mergers discussed in Note 4, various ISS, Anagram, Meta
and FrontLine option plans were assumed by the Company, thereby allowing
participants to purchase Avant! stock in amounts and at prices adjusted to
reflect the relative exchange ratios of the mergers.

1992 STOCK OPTION/APPRECIATION PLAN

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

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

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

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

<TABLE>

(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Net income as reported $ 6,541 $12,484 $ 8,350
Additional compensation
cost resulting from:
Stock options (6,539) (4,592) (1,774)
Employee stock purchase
rights (Note 9) (1,032) (1,046) (309)
----------------------------------
Pro forma $ (1,030) $ 6,846 $ 6,267
----------------------------------
----------------------------------
Basic earnings (loss) per share
As reported $ 0.25 $0.51 $ 0.40
Pro forma $ (0.04) $0.28 $ 0.30

Diluted earnings (loss) per share
As reported $ 0.24 $0.47 $ 0.35
Pro forma $ (0.04) $0.26 $ 0.26
- ------------------------------------------------------------------------

</TABLE>

The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: expected
volatility of 74%, 57% and 57%, risk-free interest rates of 6.05%, 5.27% and
7.86%, respectively, expected lives of six months after vesting and no dividend
yield.

The effects of applying SFAS No. 123 for disclosing compensation cost may not be
representative of the effects on reported net income for future years because
pro forma net income reflects compensation costs for stock options granted in
1997, 1996 and 1995 and does not consider compensation cost for stock options
granted prior to January 1, 1995.

A summary of the status of the Company's stock option plans as of December 31,
1997, 1996 and 1995, and changes during the years ending on those dates is
presented below:

<TABLE>

1997 1996 1995
------------------ ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 3,863 $12.84 3,477 $ 9.42 2,600 $ 6.42
Granted 2,471 23.88 1,737 17.61 1,788 14.00
Exercised (1,287) 5.20 (989) 3.41 (570) 11.21
Canceled (754) 21.19 (362) 14.10 (341) 7.16
-----------------------------------------------------
Outstanding at
end of year 4,293 $18.87 3,863 $12.84 3,477 $ 9.42
-----------------------------------------------------
Options exercisable
at end of year 1,215 $14.55 1,996 $ 7.57 1,444 $ 5.36
Weighted average
fair value of
options granted
during the year $14.85 $ 7.28 $ 5.96
- -------------------------------------------------------------------------------

</TABLE>

<PAGE>

The following summarizes information about stock options outstanding as of
December 31, 1997:

<TABLE>

OPTIONS OUTSTANDING OPTIONS OUTSTANDING
-------------------------------------- ----------------------
RANGE WTD AVG WTD WTD
OF NUMBER REMAINING AVG NUMBER AVG
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE (000) LIFE (YRS) PRICE (000) PRICE
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.05- 3.52 528 7.10 $ 0.63 280 $ 0.74
$ 5.31- 9.81 293 7.90 8.75 115 8.66
$10.92-14.62 242 7.70 13.67 108 13.68
$15.08-19.33 1,582 8.60 16.36 490 16.99
$20.50-24.69 348 8.40 22.77 94 22.02
$25.13-28.52 202 8.70 25.51 17 25.99
$30.00-34.00 830 9.20 31.26 44 33.52
$35.00-38.79 210 8.40 35.85 35 37.07
$41.25-44.50 58 7.90 41.81 32 41.85
- -----------------------------------------------------------------------------
$ 0.05-44.50 4,293 8.40 $18.87 1,215 $14.55
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------

</TABLE>

7. LEASES

OPERATING LEASES

The Company leases its Fremont, California, Research Park Triangle, North
Carolina, and certain sales facilities under operating lease agreements which
expire over the next thirteen years. Rental expense incurred by the Company
under operating lease agreements totaled $3,879,000, $2,164,000 and $1,366,000
for the years ended December 31, 1997, 1996 and 1995, respectively.

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

<TABLE>

<S> <C>
1998 $ 5,123
1999 5,822
2000 6,150
2001 6,153
2002 6,129
Thereafter 46,951
-------
$76,328
-------
-------

</TABLE>

8. INCOME TAXES

The components of income tax expense (benefit), as presented in the accompanying
consolidated statements of income, are comprised of federal taxes, state taxes
and certain foreign taxes. The pro forma provision for income taxes reflects the
income tax expense that would have been reported if Meta (an S corporation for
income tax reporting purposes) had been a C corporation for the year ended
December 31, 1995. The components of income taxes and pro forma income taxes as
of December 31, 1997, 1996 and 1995, are as follows:

<TABLE>

(IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
PROVISION FOR INCOME TAXES:
CURRENT:
Federal $ 14,617 $ 7,127 $ 1,736
Foreign 637 725 1,609
State 2,329 767 837
----------------------------------
Total 17,583 8,619 4,182
----------------------------------
DEFERRED:
Federal (14,112) (2,144) (826)
State (2,077) (253) (605)
----------------------------------
Total (16,189) (2,397) (1,431)
----------------------------------
Charge in lieu of taxes
attributable to employee
stock plans 2,285 4,730 1,302
----------------------------------
Total provision for
income taxes $ 3,679 $10,952 $ 4,053
----------------------------------
----------------------------------
</TABLE>

<TABLE>
<S> <C>
PRO FORMA INCOME TAXES:
CURRENT:
Federal $ 2,989
Foreign 1,609
State 1,240
--------
Total 5,838
--------
DEFERRED:
Federal (396)
State (517)
--------
Total (913)
--------
Charge in lieu of taxes
attributable to employee
stock plans 1,302
--------
Total provision for
income taxes $ 6,227
--------
--------

</TABLE>

34
<PAGE>

The Company's effective tax rate and pro forma effective rate differs from the
federal statutory income tax rate of 35% as follows:

<TABLE>

(IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
at statutory rate $ 3,577 $ 8,203 $ 5,102
State tax expense 505 1,540 491
Nondeductible merger costs 1,732 2,355 938
Change in valuation allowance -- -- (89)
Tax exempt income (839) (307) (306)
Tax credits (431) (387) (148)
Foreign sales corporation (1,025) (980) (96)
S corporation benefit -- -- (575)
Establishment of deferred tax
assets in conjunction with
Meta's transition from an S
corporation to C corporation
status -- -- (1,725)
Foreign taxes 145 -- 423
Other 15 528 38
---------------------------------
Actual income
tax expense $ 3,679 $ 10,952 $ 4,053
---------------------------------
---------------------------------
Income tax expense
at statutory rate $ 5,102
State tax expense 815
Nondeductible merger costs 938
Change in valuation allowance (89)
Tax exempt income (306)
Tax credits (253)
Foreign sales corporation (96)
Other 116
-------
Pro forma income
tax expense $ 6,227
-------
-------

</TABLE>

The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1997 and
1996 are as follows:

<TABLE>

(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accrued liabilities $ 1,388 $1,343
Allowance for doubtful accounts 582 305
Net operating loss carryforwards -- 201
Deferred revenue 5,262 4,682
Property and equipment, principally
due to depreciation 166 760
Purchased technology 16,480 --
Other (482) 91
---------------------
Total gross deferred tax assets 23,396 7,382
---------------------
Deferred tax liability-Accrual to
cash conversion 757 932
---------------------
Net deferred tax assets $22,639 $6,450
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------

</TABLE>

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

9. EMPLOYEE BENEFIT PLANS

401(k) PLAN

The Company has a 401(k) retirement savings plans covering substantially all
employees in the United States. Contributions are matched at the discretion of
the Board of Directors. The matching contributions amounted to $1,467,000,
$769,000 and $115,000 for 1997, 1996 and 1995, respectively

EMPLOYEE STOCK PURCHASE PLAN

The Company has a Qualified Employee Stock Purchase Plan, which permits eligible
employees to purchase newly issued common stock of the Company up to an
aggregate of 250,000 shares. Under this plan, employees may purchase from the
Company a designated number of shares through payroll deductions at a price per
share equal to 85% of the lesser of the fair market value of the Company's
common stock as of the date of the grant or the date the right to purchase is
exercised. Under the Plan, the Company sold 132,000, 83,000 and 43,000 shares to
employees in 1997, 1996 and 1995, respectively.

The fair value of employee purchase rights, for purposes of SFAS No. 123
disclosure (see Note 6) was estimated using the Black-Scholes model with the
following assumptions for 1997, 1996 and 1995, respectively: expected volatility
of 74%, 57% and 57%, respectively, risk-free interest rates of 6.05%, 5.61% and
7.76%, respectively, and no dividend yield. The weighted average fair value of
those purchase rights (including the 15% discount to the fair value of the
Company's common stock) granted in 1997, 1996 and 1995 were $8.49, $8.17 and
$13.25, respectively.

10. CONCENTRATIONS OF CREDIT RISK

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

To reduce credit risk, the Company performs ongoing credit evaluations of its
customers' financial condition. The Company maintains reserves for potential
credit losses, but historically has not experienced any significant losses
related to individual customers or groups of customers in any geographic area.
The Company's allowance for doubtful accounts was $4,150,000, $762,000 and
$899,000 as of December 31, 1997, 1996 and 1995, respectively.

<PAGE>

11. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

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

The Company's export revenues are all denominated in U.S. dollars. International
revenue accounted for approximately 41%, 34%, and 32% of total revenue in the
years ended December 31, 1997, 1996, and 1995, respectively. In 1997, Asian and
European sales represented 31% and 10%, respectively. In 1996 and 1995,
international sales were primarily in Asia.

12. ACQUISITIONS OF TECHNOLOGY

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

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

13. JOINT VENTURES

During 1997 and 1996, respectively, the Company entered into joint ventures with
Maingate Electronics, KK (Maingate) of Japan and DavanTech Co., Ltd.,
(DavanTech) of Korea. The joint ventures were formed for the purpose of
consolidating distribution in their respective countries. The Company has
ownership of 35% and 39.6% of Maingate and DavanTech, respectively, and accounts
for them by the equity method. The Company's Chairman of the Board, President
and Chief Executive Officer owns 40% of Maingate and 2.6% of DavanTech. These
investments are included in other assets with the Company's share of the net
income of each company recorded in other income and expense.

The Company recognizes software license revenue sold to these joint ventures
when cash is collected by the joint ventures from the end users. Revenues from
sales to Maingate and DavanTech during 1997 were $4,778,000 and $723,000,
respectively. At December 31, 1997, due from affiliates included $5,694,000 and
$477,000 from Maingate and DavanTech, respectively.

14. COMMITMENTS AND CONTINGENCIES

CADENCE LITIGATION

On December 6, 1995, Cadence Design Systems, Inc. ("Cadence") filed an action
against the Company and certain of its officers in the United States District
Court for the Northern District of California alleging copyright infringement,
unfair competition, misappropriation of trade secrets, conspiracy, breach of
contract, inducing breach of contract and false advertising. The essence of the
complaint is that certain of the Company's employees who were formerly Cadence
employees allegedly misappropriated and improperly copied source code for
certain important functions of the Company's place and route products from
Cadence, and that the Company has allegedly competed unfairly by making false
statements concerning Cadence and its products. The action also alleges that the
Company induced certain individual defendants to breach their agreements of
employment and confidentiality with Cadence. The matter is currently awaiting
trial, pending further pretrial matters. A trial date has not been set. On July
25, 1997, a federal judge stayed the Cadence civil action pending completion of
the criminal proceedings described below, except for limited discovery on
certain matters approved by the District Court. Avant! posted a $5.0 million
bond pending the resumption of the civil action.

<PAGE>

injunction "to remove any implication that the Company's customers are
authorized by the preliminary injunction to continue to use the enjoined
products without exposure to claims of copyright violation." Cadence
continues to allege that the Company's Aquarius products infringe Cadence's
Design Framework II, and the District Court is allowing Cadence to take
discovery concerning the Company's Aquarius and Apollo products to determine
whether those products infringe. At the December 19, 1997 hearing, the
District Court did not rule on Cadence's request to enjoin the sale, license
or support of the Company's Aquarius place and route products from which the
Company derives a significant portion of its total revenue. On February 28,
1998, the District Court requested an additional briefing regarding whether
Aquarius should be enjoined. The District Court will hold future hearings
regarding the Aquarius products. There can be no assurance that the District
Court will not, upon further consideration, grant a preliminary injunction
with respect to the sale of the Aquarius products, which could have a
material adverse effect on the Company's business, financial position and
results of operations.

On January 16, 1996, the Company filed a counterclaim against Cadence alleging
antitrust violations, racketeering, false advertising, defamation, trade libel,
unfair competition, unfair trade practices, negligent and intentional
interference with prospective economic advantage and intentional interference
with contractual relations. On December 19, 1997, the Company stipulated to
temporarily dismissing its counterclaim in order to file more detailed
allegations. The Company refiled its counterclaim on January 29, 1998.

The Company believes it has defenses to all of Cadence's claims and intends to
defend itself vigorously. If, however, the Company's defenses are unsuccessful,
the Company may ultimately be permanently enjoined from selling certain place
and route products and may be required to pay damages to Cadence. In addition,
upon further consideration by the District Court, the Company could be
preliminarily enjoined from selling its Aquarius place and route products. In
such event, the Company's business, financial condition and results of
operations would be materially adversely affected. In addition, it is likely
that an adverse judgment against the Company would result in a steep decline in
the market price of the Company's Common Stock. Although it is reasonably
possible the Company may incur a loss upon conclusion of these claims, an
estimate of any loss or range of loss cannot be made, based on information the
Company presently possesses. There can be no assurance that an adverse
judgement, if granted on any claim would not have a material adverse effect on
the Company's business, financial position or results of operations.
Furthermore, there can be no assurance that the Company's relationships with its
customers and/or partners will not be adversely affected in the future as a
result of the Cadence litigation.

CRIMINAL COMPLAINT

The Santa Clara County District Attorney's office is also investigating the
allegations of misappropriation of trade secrets set forth in Cadence's lawsuit,
described above. On April 11, 1997, the Santa Clara County District Attorney
filed a criminal complaint alleging felony level offenses against, among others,
the Company and the following employees and/or directors of the Company, Gerald
C. Hsu, President, Chief Executive Officer and Chairman of the Board of
Directors, Y. Eric Cho, a former officer and current member of the Board of
Directors, Y. Z. Liao, Corporate Fellow, Stephen Wuu, CEO Staff Operations,
Leigh Huang, Marketing Manager and Eric Cheng, Research and Development Manager,
for allegedly violating various California Penal Code Sections relating to the
theft of trade secrets. The Company and the individuals above have pleaded not
guilty and are awaiting further proceedings. The criminal complaint could result
in criminal fines against the Company, as well as the potential incarceration of
certain members of its management team. Such outcomes could result in canceled
or postponed orders, increased future expenditures, the loss of management and
other key personnel, additional shareholder litigation, loss of goodwill and
would have other material adverse effects on the Company's business, financial
position and results of operations.

SILVACO LITIGATION

37
<PAGE>

advantage, unfair competition and abuse of process by acts or statements made
by Meta or its agents.

In August 1997, the Superior Court entered a default judgment against Mr. Hailey
for failure to timely answer the complaint. In October 1997, Mr. Hailey's
application for relief from the default judgment was denied. In August 1997, the
Superior Court entered a default judgment against Meta as to the defamation and
interference with economic advantage claims. On October 31, 1997, Meta's
application for relief from the default judgment was denied. On October 28,
1997, Silvaco first presented its theory of damages and a trial began on
November 3, 1997. On November 4, 1997, the Superior Court dismissed Meta's
remaining affirmative claims. On November 5, 1997, the Superior Court awarded
Silvaco $20 million in damages against Mr. Hailey and Meta related to the
defamation and interference with economic advantage claims, and on November 6,
1997, the Superior Court awarded Silvaco $11.4 million in damages related to the
unfair competition claim. On November 12, 1997, the Superior Court awarded
nominal damages to Silvaco related to the product develop-ment claim. Silvaco's
claims based on the marketing program and abuse of process were dismissed. The
Company filed an appeal on behalf of Shawn Hailey, and, if necessary, intends to
file an appeal on its own behalf. A default judgment in the aggregate amount of
$31.4 million was entered against the Company. As required, the Company posted a
bond on behalf of itself and Shawn Hailey in excess of the amount necessary to
satisfy the judgment. The bond is collateralized by a $23,583,000 letter of
credit.

Meta intends to pursue all remedies available to it in connection with the
litigation with Silvaco. Meta believes it has substantial appellate issues which
could cause the judgment to be remanded to the trial court for further
proceedings. Should Meta be permitted to participate fully in further trial
court proceedings, Meta believes it would have substantial defenses to Silvaco's
claims. However, there can be no assurance that any such remedies will be
successful. Although it is reasonably possible Meta will incur a loss in
relation to this claim, it is currently unable to estimate the actual loss or
range of loss. Payment of the damages previously awarded, and damages which may
be awarded in the future, would have a material adverse effect on the Company's
business, financial condition and results of operations.

PESIC LITIGATION

In September 1996, Katherine Ngai Pesic and Ivan Pesic commenced an action
entitled PESIC ET AL. V. WHITE ET AL., No. 760469 in the Superior Court of
California for Santa Clara County naming as defendants the Company (as successor
in interest to Meta), Shawn Hailey, Meta's former Chief Executive Officer, and
Thomas N. White, Jr. and George S. Cole, both of whom were Meta's former counsel
in the Silvaco matter, described above. The action asserts claims for invasion
of privacy under California common law and the California Constitution and seeks
compensatory and punitive damages. Avant! has answered the complaint, but no
trial date has been set. The Company believes it has defenses to these claims
and intends to defend itself vigorously. Although it is reasonably possible the
Company will incur a loss in relation to these claims, it is currently unable to
estimate the actual loss or range of loss. In the event the Company's defenses
are unsuccessful, the Company may be required to pay damages to the plaintiffs,
and such a judgment could have a material adverse effect on the Company's
business, financial condition and results of operations.

MICROUNITY LITIGATION

On October 14, 1997, Microunity Systems Engineering, Inc. filed in the United
States District Court for the Northern District of California a complaint
against Precim Corporation ("Precim"), captioned MICROUNITY SYSTEMS ENGINEERING,
INC. V. PRECIM CORP., No. C 97 20904 JW (PVT). Precim was a wholly owned
subsidiary of Technology Modeling Associates, Inc., which was acquired by the
Company in January 1998 (see Note 15). This lawsuit alleges liability for patent
infringement, unfair competition and tortious interference with prospective
economic advantage. The action requests unspecified damages and an injunction
against Precim. Precim has accepted service of the complaint but has not yet
responded. Precim believes it has defenses to these claims and intends to defend
itself vigorously. Although it is reasonably possible the Company will incur a
loss in relation to these claims, it is currently unable to estimate the actual
loss or range of loss. In the event Precim's defenses are unsuccessful, Precim
may be required to pay damages to the plaintiffs, and such a judgment could have
a material adverse effect on the Company's business, financial condition and
results of operations.

SECURITIES CLASS ACTION CLAIMS

On December 15, 1995, Paul Margetis and Helen Margetis filed in the United
States District Court for the Northern District of California a securities fraud
class action complaint against the Company. In addition, on December 19, 1995,
Fred Tarca filed in the United States District Court for the Northern District
of California a class action complaint against the Company for violations of the
federal securities laws. These class action lawsuits allege certain securities
law violations, including omissions and/or misrepresentation of material facts.
The alleged omissions and/or misrepresentations are largely consistent with
those outlined in the Cadence claim, described above. In February 1997,
plaintiff Tarca voluntarily dismissed his action and the Margetis plaintiffs
were certified as class representatives in their action. On July 25, 1997, a
federal judge stayed the Margetis action,

<PAGE>

except for certain documentary and third-party discovery, pending resolution
of the Cadence suit.

On May 30, 1997, Joanne Hoffman filed in the United States District Court for
the Northern District of California a purported class action alleging securities
claims on behalf of purchasers of the Company's stock between March 29, 1996 and
April 11, 1997, the date of the filing of the criminal complaints against the
Company and six of its employees and/or officers. Plaintiff alleges that the
Company and various of its officers misled the market as to the likelihood of
criminal charges being filed and as to the validity of the Cadence allegations.
The Company moved to dismiss the Hoffman complaint for failure to state a claim,
but the District Court in December 1997 denied the motion. The court also denied
without prejudice plaintiff Hoffman's motion for appointment as lead plaintiff.
Counsel for plaintiff has indicated that the stay of the Margetis securities
class action pending resolution of the Cadence suit will likely apply to this
securities action as well.

The Company believes it has defenses to all of the securities class action
claims, described above, and intends to defend itself vigorously. There can be
no assurance, however, that the Company's defenses will be successful. Although
it is reasonably possible the Company will incur a loss in relation to these
claims, it is currently unable to estimate the actual loss or range of loss,
either individually or in aggregate. In the event the Company's defenses are
unsuccessful, the Company may be required to pay damages to the securities class
action plaintiffs, and such a judgment would likely have a material adverse
effect on the Company's business, financial condition and results of operations.

15. SUBSEQUENT EVENTS--
BUSINESS COMBINATION

On January 16, 1998, Avant! acquired Technology Modeling Associates, Inc. (TMA)
in a transaction accounted for as a pooling of interests. The Company has issued
approximately 5,376,000 shares of its common stock valued at approximately
$95,000,000 in exchange for all of the outstanding common stock of TMA. The
Company also assumed approximately 1,022,000 in TMA stock options, thereby
allowing TMA participants to purchase Avant! stock in amounts and at prices
adjusted to reflect the relative exchange ratios of the merger.

The pro forma revenue, net income (loss), and net income (loss) per share for
Avant! and TMA combined are as follows:

<TABLE>
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
DEFERRED:
Pro Forma Revenue:
Avant! $ 147,348 $ 106,087 $ 68,868
TMA 17,038 17,959 12,593
------------------------------------
$ 164,386 $ 124,046 $ 81,461
------------------------------------
Pro Forma Net Income (Loss):
Avant! $ 6,541 $ 12,484 $ 8,350
TMA (1,520) 1,224 1,282
------------------------------------
5,021 13,708 9,632
Adjustment for deferred taxes 424 -- --
------------------------------------
Pro Forma Net Income $ 5,445 $ 13,708 $ 9,632
------------------------------------
Earnings per share - Basic:
Earnings per share $ 0.18 $ 0.49 $ 0.42
------------------------------------
Total weighted average
number of common
shares outstanding 31,073 27,954 23,128
------------------------------------
Earnings per share - Diluted:
Earnings per share $ 0.16 $ 0.44 $ 0.35
------------------------------------
Total weighted average
number of common
and common equivalent
shares outstanding 33,074 30,877 27,286
</TABLE>

<PAGE>

Exhibit 21.1 Subsidiaries of Registrant

<TABLE>

NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
<S> <C>
Integrated Silicon Systems, Inc. North Carolina

ISS Software Inc. California

ISS Corporate Services, Inc. North Carolina

ArcSys UK Limited England

Avant! Export FSC, Inc. Barbados

FrontLine Design Automation, Inc. California

Meta-Software, Inc. California

Anagram, Inc. California

Avant! Japan KK Japan

Meta-Software KK Japan

Meta-Software SA Switzerland

Meta-Software Deutschland, GMBH Germany

AvanWise, Inc. Delaware

AvanSmart, Inc. Delaware

Nexsyn Design Technologies, Inc. California

Gemstone Corporation, LLC Delaware

Compass Design Automation, Inc. Delaware

Galax!, Inc. Delaware

Compass Design Automation, GMBH Germany

Compass Design Automation, International BV Netherlands

Compass Foreign Sales Corporation Barbados

Compass Japan, KK Japan

Precim Corporation Oregon

Technology Modeling Associates, Inc. California

</TABLE>

<PAGE>

Exhibit 23.1 Consent of KPMG Peat Marwick LLP

REPORT ON FINANCIAL STATEMENT SCHEDULE AND CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Avant! Corporation:

The audits referred to in our report dated January 20, 1998, included the
related consolidated financial statement schedule as of December 31, 1997,
and for each of the years in the three-year period ended December 31, 1997,
included in the annual report on Form 10-K. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated financial
statement schedule based on our audits. In our opinion, such consolidated
financial schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

We consent to incorporation by reference in the registration statements (Nos.
333-18445 and 333-43087 ) on Form S-3, in the registration statement (No.
333-42923) on Form S-4 and in the registration statements (Nos. 333-16981,
333-16303, 333-15159, 333-06405, 333-77196 and 333-77242) on Form S-8 of
Avant! Corporation of our report dated January 20, 1998, relating to the
consolidated balance sheets of Avant! Corporation as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997, and the related consolidated financial statement schedule,
which reports appear in the December 31, 1997 annual report on Form 10-K of
Avant! Corporation.

/s/ KPMG PEAT MARWICK LLP

Mountain View, California
March 27, 1998

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME
FILED AS PART OF THIS FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 71,088
<SECURITIES> 30,637
<RECEIVABLES> 25,387
<ALLOWANCES> 4,150
<INVENTORY> 0
<CURRENT-ASSETS> 145,885
<PP&E> 48,621
<DEPRECIATION> 17,496
<TOTAL-ASSETS> 212,217
<CURRENT-LIABILITIES> 49,455
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 161,892
<TOTAL-LIABILITY-AND-EQUITY> 212,217
<SALES> 0
<TOTAL-REVENUES> 147,348
<CGS> 2,836
<TOTAL-COSTS> 13,487
<OTHER-EXPENSES> 128,934
<LOSS-PROVISION> 1,385
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,220
<INCOME-TAX> 3,679
<INCOME-CONTINUING> 6,541
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,541
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24

</TABLE>

<PAGE>

FILED
DEC 19 1997
RICHARD W. WIERING
CLERK, U.S. DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

CADENCE DESIGN SYSTEMS, INC., NO. C 95-20828 RMW(PVT)

Plaintiff, PRELIMINARY INJUNCTION

AVANT!, INC., et al.,

Defendants.
- ---------------------------------

Plaintiff's motion for a preliminary injunction pursuant to Federal Rule
of Civil Procedure 65 was heard on September 10, 1996 and on December 19,
1997 following the mandate issued by the Ninth Circuit with respect to the
court's order of March 18, 1997. The court has read all papers submitted both
before and after the hearing, listened to the oral argument of the parties,
considered the input of its technical expert and been guided by the Ninth
Circuit's opinion. The court incorporates its findings and conclusions from
the March 18, 1997 order as modified by the Ninth Circuit's opinion.

IT IS HEREBY ORDERED THAT defendant Avant!, its officers, agents,
servants, employees and attorneys and any and all persons in active concert
with them who receive actual notice of this order, by personal service or
otherwise (collectively, "Avant!"), are hereby restrained

<PAGE>

and enjoined, pending trial, from:

1. Infringing Cadence's copyrights in Cadence's Design Framework II
software product or directly or indirectly marketing, selling, leasing,
licensing, copying or transferring any product or work copied or derived from
Cadence's Design Framework II, specifically including, but not limited to,
Avant!'s ArcCell, ArcCellBV, and ArcCellXO products (collectively,
"ArcCell"); and

2. Possessing or using any copies, in any medium including printed
matter and electronic media, of any portion of the source code or object code
for ArcCell or any other product, to the extent that that portion is copied
or derived from Cadence's Design Framework II, and Avant! is further ordered
to return to Cadence any such copies under its possession or control by
January 30, 1998 provided, however, that Avant!'s counsel, and independent
experts working with them, may retain copies of said code solely for purposes
of this litigation.

IT IS HEREBY FURTHER ORDERED THAT defendant Avant! is to forthwith
deliver by mail or otherwise a copy this Order to all current or former
purchasers, licensees, users or recipients of ArcCell or any product copied or
derived from Cadence's Design Framework II and obtain confirmation from them
as to whether they have a functioning copy of ArcCell or such product. Avant!
is to file under seal with the court by January 30, 1998 a list: (1)
identifying each such purchaser, licensee, user, or recipient; (2) whether
each has a functioning copy; and, if not, (3) when and how it became
non-functioning. Avant! is to require, to the extent it has a legal right to
do so, any such purchaser, licensee, user or recipient to return the ArcCell
or such other product to Avant! or destroy it. Avant! is to provide Cadence
by January 30, 1998 with a list of the names and addresses of any such
purchaser, licensee, user or recipient who still maintains a functional copy
of ArcCell or such other product and when it will become non-functional.

This Order does not affect or in any way release Avant! from those
activities that were enjoined by this court's order of March 18, 1997. In the
March 18, 1997 order the court ordered Cadence to post a bond of $50,000 for
the payment of such damages as may be incurred or suffered by Avant! if it be
found that Avant! has been wrongfully enjoined or restrained. That bond shall

<PAGE>

remain in effect but must be modified to ensure coverage of this current
Order.

DATED: 12/19/97
/s/ Ronald M. Whyte
-------------------------
RONALD M. WHYTE
United States District Judge

<PAGE>

FILED
JAN 26 1998
RICHARD W. WIERING
CLERK, U.S. DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

CADENCE DESIGN SYSTEMS, INC., NO. C 95-20828 RMW(PVT)

Plaintiff, MODIFICATION OF PRELIMINARY
INJUNCTION

AVANT!, INC., et al.,

Defendants.

Plaintiff moves for modification of the preliminary injunction issued on
December 19, 1997. The court has read the papers submitted. The court grants
Cadence's request for reconsideration and modifies the preliminary injunction
to remove any implication that Avant!'s licensees are authorized by the
preliminary injunction to continue to use the enjoined products without
exposure to claims of copyright violation. The court incorporates its
findings and conclusions as set forth in the December 19, 1997 order and
hereby issues its Modified Order.

IT IS HEREBY ORDERED THAT defendant Avant!, its officers, agents,
servants, employees and attorneys and any and all persons in active concert
with them who receive actual notice of this Modified Order, by personal
service or otherwise (collectively, "Avant!"), are hereby restrained and
enjoined, pending trial, from:

<PAGE>

IT IS HEREBY FURTHER ORDERED THAT defendant Avant! is to forthwith
deliver by mail or otherwise a copy this Modified Order to all current or
former purchasers, licensees, users or recipients of ArcCell or any product
copied or derived from Cadence's Design Framework II and obtain confirmation
from them as to whether they have a functioning copy of ArcCell or such
product. Avant! is to file under seal with the court by January 30, 1998 a
list: (1) identifying each such purchaser, licensee, user, or recipient; (2)
whether each has a functioning copy; and, if not, (3) when and how it became
non-functioning. Avant! is to require, to the extent it has a legal right to
do so, any such purchaser, licensee, user or recipient to return the ArcCell
or such other product to Avant! or destroy it. Avant! is to provide Cadence
by January 30, 1998 with a list of the names and addresses of any such
purchaser, licensee, user or recipient who still maintains a functional copy
of ArcCell or such other product and when it will become non-functional.
NOTHING IN THIS MODIFIED ORDER IS INTENDED TO AUTHORIZE ANYONE TO USE ANY
AVANT! PRODUCT SUBJECT TO THIS ORDER OR TO SUGGEST THEY COULD DO SO WITHOUT
EXPOSURE TO A CLAIM OF VIOLATION OF THE COPYRIGHT LAWS.

This Modified Order does not affect or in any way release Avant! from
those activities that were enjoined by this court's order of March 18, 1997.
In the March 18, 1997 order the court ordered Cadence to post a bond of
$50,000 for the payment of such damages as may be incurred or suffered by
Avant! if it be found that Avant! has been wrongfully enjoined or restrained.
That bond

<PAGE>

shall remain in effect but must be modified to ensure coverage of this
current Modified Order.

DATED: 1/24/98
/s/ Ronald M. Whyte
-------------------------
RONALD M. WHYTE
United States District Judge