AVANT CORP, 10-Q, 1998-08-14

AVANT CORP
10-Q, 1998-08-14
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 1998

[ ] 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)

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

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

The number of shares outstanding of the registrant's common stock as of July 31,
1998 was 32,723,863.

<PAGE>

AVANT! CORPORATION

FORM 10-Q

June 30, 1998

INDEX
<TABLE>
<CAPTION>

Page
----

<S> <C>
PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 1

Condensed Consolidated Statements of Income for the Three and Six Months
Ended June 30, 1998 and 1997 2

Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 3

Notes to Consolidated Financial Statements 4

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8

PART 2. OTHER INFORMATION

Item 1. Legal Proceedings 14

Item 4. Submission of Matters to a Vote of Security Holders 17

Item 6. Exhibits and Reports on Form 8-K 17

Signature Page 18

Exhibit Index 19
</TABLE>

<PAGE>

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

AVANT! CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 106,906 $ 77,523
Short-term investments 34,430 57,394
Accounts receivable, net 25,955 24,777
Due from affiliates 4,202 6,171
Deferred income taxes 8,954 7,658
Prepaid expenses and other current assets 13,523 11,644
--------- --------
Total current assets 193,970 185,167
Equipment, furniture and fixtures, net 32,218 33,649
Deferred income taxes 11,232 16,208
Intangibles 16,403 15,461
Other assets 13,570 3,851
--------- --------
Total assets $ 267,393 $ 254,336
--------- --------
--------- --------

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 5,394 $ 7,009
Accrued compensation 6,412 9,000
Accrued income taxes 9,707 6,717
Other accrued liabilities 10,359 14,195
Deferred revenue 18,577 17,945
--------- --------
Total current liabilities 50,449 54,866
Other noncurrent liabilities 1,241 1,294
--------- --------
Total liabilities 51,690 56,160
--------- --------

Commitments and contingencies

Shareholders' equity:
Common stock, $.0001 par value; 75,000 authorized; 32,690 and 32,282
shares issued and outstanding at June 30, 1998 and December 31,
1997, respectively 3 3
Additional paid-in capital 178,217 174,180
Deferred compensation (2,094) (2,698)
Other accumulated comprehensive income (loss) 136 (50)
Retained earnings 39,441 26,741
--------- --------
Total shareholders' equity 215,703 198,176
--------- --------
Total liabilities and shareholders' equity $ 267,393 $ 254,336
--------- --------
--------- --------

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

AVANT! CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software $ 37,025 $ 28,712 $ 73,871 $ 56,032
Services 16,989 11,055 32,159 19,982
-------- -------- -------- --------
Total revenue 54,014 39,767 106,030 76,014
Costs and expenses:
Costs of software 1,212 847 2,389 1,579
Costs of services 3,152 3,239 6,614 6,758
Selling and marketing 13,388 12,581 27,157 22,532
Research and development 13,306 8,172 26,656 15,770
General and administrative 5,449 3,936 10,615 8,233
Merger expenses -- -- 10,747 --
-------- -------- -------- --------
Total operating expenses 36,507 28,775 84,178 54,872
Income from operations 17,507 10,992 21,852 21,142
Interest income and other, net 804 1,794 2,926 3,169
-------- -------- -------- --------
Income before income taxes 18,311 12,786 24,778 24,311
Income taxes 6,225 4,637 12,078 8,830
-------- -------- -------- --------
Net income $ 12,086 $ 8,149 $ 12,700 $ 15,481
-------- -------- -------- --------
-------- -------- -------- --------

Earnings per share - Basic:
Earnings per share $ 0.37 $ 0.27 $ 0.39 $ 0.51
-------- -------- -------- --------
-------- -------- -------- --------
Total weighted average number
of common shares outstanding 32,558 30,622 32,461 30,327
-------- -------- -------- --------
-------- -------- -------- --------

Earnings per share - Diluted:
Earnings per share $ 0.35 $ 0.25 $ 0.37 $ 0.47
-------- -------- -------- --------
-------- -------- -------- --------
Total weighted average number
of common and common equivalent
Shares outstanding 34,587 32,274 34,011 32,593
-------- -------- -------- --------
-------- -------- -------- --------

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

AVANT! CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

Six Months Ended
June 30,
----------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,700 $ 15,485
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,324 2,555
Deferred income taxes 3,680 2,087
Stock compensation expense 1,244 836
Tax benefit related to stock options 326 (146)
Equity (income) loss in joint ventures (1,159) 220
Deferred rent 303 (19)
Provision for doubtful accounts 770 660
Changes in operating assets and liabilities:
Accounts receivable (2,932) (3,050)
Due from affiliates 1,969 --
Prepaid expenses and other assets (4,189) (5,263)
Accounts payable (1,615) (1,436)
Accrued compensation (2,588) (517)
Accrued income taxes 2,990 --
Other accrued liabilities (4,126) (99)
Deferred revenue 632 (7,125)
--------- ---------
Net cash provided by operating activities 16,329 4,188
--------- ---------

Cash flows from investing activities:
Net purchase and maturities of short-term investments 23,150 52,163
Purchases of equipment, furniture and fixtures (4,950) (8,718)
Purchase of equity investments (6,250) --
Additional purchase price related to Compass acquisition (1,901) --
Collection of notes receivable -- 250
--------- ---------
Net cash provided by investing activities 10,049 43,695
--------- ---------

Cash flows from financing activities:
Principal payments under capital lease obligations (66) (104)
Payments on technology acquisition payable -- (794)
Repurchase of common stock -- (957)
Repayment from shareholder -- 118
Issuance of common stock -- 290
Issuance of common stock under stock plans 3,071 4,772
--------- ---------
Net cash provided by financing activities 3,005 3,325
--------- ---------

Net increase in cash and cash equivalents 29,383 51,208
Cash and cash equivalents, beginning of period 77,523 54,141
--------- ---------
Cash and cash equivalents, end of period $ 106,906 $ 105,349
--------- ---------
--------- ---------

Cash paid:
Interest $ 94 $ 140
Income taxes $ 3,708 $ 6,284

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

AVANT! CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. The consolidated financial statements
have been restated to reflect the effect of the merger with Technology Modeling
Associates, Inc. ("TMA"). In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of financial position and results of operations have been made.
Operating results for interim periods are not necessarily indicative of results
which may be expected for a full year. The information included in this Form
10-Q should be read in conjunction with the Company's annual report on Form 10-K
for the year ended December 31, 1997, filed with the Securities and Exchange
Commission (SEC).

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. Certain financial
statement items have been reclassified to conform to the current period's
presentation.

2. NET INCOME PER SHARE

Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of common shares outstanding and
common stock equivalent shares from stock options, and warrants, when dilutive,
using the treasury stock method. Excluded from the computation of diluted
earnings per share for the three months ended June 30, 1998 and June 30, 1997,
are options to acquire 395,000 and 1,316,000 shares, respectively, of common
stock with a weighted-average exercise price of $31.35 and $30.12, respectively,
and for the six months ended June 30, 1998 and June 30, 1997, are options to
acquire 402,000 and 824,000 shares, respectively, of common stock with a
weighted-average exercise price of $31.18 and $34.08, respectively, because
their effects would be anti-dilutive.

Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>

Diluted EPS:

Net Income $12,086 $ 8,149 $12,700 $15,481
------- ------- ------- -------
------- ------- ------- -------

Weighted average number of common shares outstanding 32,558 30,622 32,461 30,327
Dilutive Stock options 2,029 1,652 1,550 2,266
------- ------- ------- -------
Total weighted average number of common
and common equivalent shares outstanding 34,587 32,274 34,011 32,593
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic $ 0.37 $ 0.27 $ 0.39 $ 0.51
------- ------- ------- -------
------- ------- ------- -------

Diluted $ 0.35 $ 0.25 $ 0.37 $ 0.47
------- ------- ------- -------
------- ------- ------- -------

</TABLE>

3. RECENT PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income, which establishes standards for
reporting and disclosure of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS 130 is effective for fiscal years beginning after December 15,
1997 and requires reclassification of financial statements for earlier periods
to be provided for comparative purposes. The Company has not determined the
manner in which it will present the information required by SFAS No. 130 in its
annual financial statements for the year ending December 31, 1998. The Company's
total comprehensive income for all periods presented herein would not be
materially different from those amounts reported as net income in the
consolidated statements of income.

4
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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
issued for fiscal years beginning after December 15, 1997. The Company has not
yet determined whether it has any separately reportable business segments.

In March 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-1. Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP No. 98-1 requires that certain costs related to
the development or purchase of internal-use software be capitalized and
amortized over the estimated useful life of the software. SOP No. 98-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 1998. The Company does not expect the adoption of SOP No. 98-1 to
have a material impact on its results of operations.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. For a
derivative not designated as a hedging instrument, changes in the fair value of
the derivative are recognized in earnings in the period of change. This
statement will be effective for all annual and interim periods beginning after
June 15, 1999 and management does not believe the adoption of SFAS No. 133 will
have a material effect on the financial position of the Company.

4. MERGERS

In connection with the merger with TMA in January, 1998, the Company
recorded direct transaction costs and merger-related integration expenses of
approximately $10.7 million. As of June 30, 1998, the Company had $3.3
million remaining in accrued merger expenses, consisting $0.9 million for
transaction costs, $0.6 million for severance and certain other related costs
and $1.8 million for the elimination of duplicated facilities. The Company
expects that all significant amounts included in the June 30, 1998 reserve
balance will be paid within the next six months. Of the $10.7 million of
merger-related costs, approximately $8.3 million related to cash expenditures
while approximately $2.4 million related to noncash charges.

On April 9, 1998, the Company's subsidiary, Galax!, announced the signing
of a letter of intent to acquire Arcus Technology Limited, an ASIC solutions
company. The closing of the transaction is subject to regulatory and other
customary closing conditions.

5. LITIGATION

The Company is involved in various litigation matters as discussed below as
well as in Item 1 of Part 2 of this Form 10-Q. The Company has charged to
expenses approximately $4,300,000 and $2,960,000 in litigation expenses during
the six months ended June 30, 1998 and 1997, respectively.

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. A trial date has not
been set. On July 25, 1997, the District Court 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 million bond pending the resumption of the civil action. In an order
dated May 21, 1998, the District Court continued the stay previously entered.

5
<PAGE>

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 had stopped selling or licensing ArcCell products or
code in mid, 1996.) 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 claim 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. 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. On May 21, 1998, the District Court entered
an order denying Cadence's request to enjoin the sale of Aquarius and denying
Cadence's request to lift the stay of the civil action. On July 8, 1998, Cadence
applied again for an injunction against the sale of Aquarius on the basis that
Aquarius contains code that is substantially similar to Cadence's Design
Framework II and that Aquarius contains specific protected ideas from Cadence's
Design Framework II. The Company's opposition to this application is scheduled
to be filed by August 14, 1998. No date for the hearing on these applications
has been set. There can be no assurance that the District Court will not 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 District Court's May 21, 1998 order also stayed the Company's counterclaims
against Cadence.

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 or Apollo 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 former 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 Company and the individual
defendants have filed a motion to recuse the District Attorney's office from
prosecuting the case. 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.

6
<PAGE>

Silvaco Litigation.

In March 1993, Meta Software Inc. ("Meta"), which the Company acquired in
October 1996 and which is now a wholly owned subsidiary of the Company, 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, from October 1996 when Meta was acquired 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. A
default judgment in the aggregate amount of $31.4 million was entered against
the Company. The Company filed appeals on behalf of Shawn Hailey, and, on its
own behalf. 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 that
could cause the judgment to be reversed and 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 the Company 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.

On March 31, 1998, Silvaco Data Systems and Silvaco International, Inc.
filed an additional lawsuit, against the Company and Roy Jewell, the Company's
CEO Staff, Corporate Affairs and General Manager of the TCAD Business Unit, in
the Superior Court of California for Santa Clara County. The complaint alleges
causes of action for defamation, negligent and intentional interference with
economic advantage, and unfair competition and business practices based on
statements allegedly made by the Company that Silvaco claims disparaged Silvaco
and its TCAD products. Silvaco is seeking $20 million in compensatory damages,
punitive damages, and an injunction. The Company intends to defend itself
vigorously against the allegations made in this litigation. 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.

Pesic Litigation.

7
<PAGE>

Company 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. ("Microunity")
filed in the United States District Court for the Northern District of
California a complaint against Precim Corporation ("Precim"). Precim was a
wholly owned subsidiary of Technology Modeling Associates ("TMA"), 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 answered the complaint and filed
counterclaims against Microunity seeking a declaration that the patents at issue
are invalid and that Precim does not infringe. Trial has been scheduled for
September 20, 1999. 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 has also granted plaintiff's motion for appointment as lead plaintiff.
Recently, the plaintiff filed a motion for class certification, noticied for
hearing on September 4, 1998. 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.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Act of 1934, including statements
regarding the Company's expectations, beliefs, hopes, intentions or strategies
regarding the future. Forward looking statements include statements regards
future sales, market growth and competition. All forward looking statements
included in this document are based upon information available to the Company as
of the date hereof, and the Company assumes no obligation to update any such
forward looking statement. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Quarterly
Results" and "Factors That May Affect Future Operations" as well as those
discussed in this section and elsewhere in this Form 10-Q, and the risks
discussed in the "Risk Factors" section included in the Company's Registration
Statement on Form S-3 filed with the SEC 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.

8
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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, November 27, 1996 and January 16, 1998,
the Company merged with Anagram, Inc ("Anagram"), Meta-Software Inc. ("Meta"),
FrontLine Design Automation ("FrontLine"), and Technology Modeling Associates
("TMA"), 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 positions, and cash flows of ISS,
Anagram, Meta, FrontLine, and TMA. On September 12, 1997 and September 30, 1997,
the Company acquired Compass Design Automation, Inc. ("Compass") and Datalink
Far East, Ltd. ("Datalink"), respectively. 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 dates of acquisition.

The Company began shipping Hercules (formerly VeriCheck), its hierarchical
physical verification software, in 1992, and Aquarius, its cell-based place and
route software product, in 1993. Anagram was founded in March 1993, and began
shipping Star-Sim, its high-capacity circuit simulation and high-accuracy timing
analysis software, in December 1994. Meta was founded in 1980, when it
introduced its simulation and library software products including Star-Hspice.
FrontLine was founded in 1993. TMA was founded in 1979 and began its device and
process simulation products, Medici and TSUPREM-4 in 1985 and 1988,
respectively.

In January of 1998, Avant! announced and began shipping five new products
specifically designed to address VDSM challenges. They are Apollo, its next
generation place and route product, Milkyway, VDSM's only common database and
graphical user interface, Saturn, a breakthrough VDSM synthesis optimization
tool, Mars-Rail, power driven design and analysis tool, and Star-Time, a
high-speed high capacity full chip timing simulation tool. At June 1998's Design
Automation Conference, Avant! announced a Single Pass design solution which
eliminates traditional design iterations due to timing, power and noise
concerns. Avant! also released two additional new physical design products,
Columbia-CE, a shaped-based routing editor, and Mars-Xtalk, a tool to overcome
noise problems in designs. A number of TCAD products were also released: Optical
Proximity Correction (Taurus-OPC), a tool to anticipate and correct deep
submicron lithography variations; Taurus-Process and Taurus-Device, tools for
process and device simulation; and the Silicon Early Access suite of tools where
Star-RC, Raphael-NES, HSpice and Design for Manufacturing all work together to
provide early silicon information to Apollo, Saturn and Mars. Our library
business unit also released the industry's first 0.18 micron and 0.25 micron
foundry portable "Fast Track" libraries.

9
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Results of Operations

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

Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software 69 72 70 74
Services 31 28 30 26
--- --- --- ---
Total revenue 100% 100% 100% 100%
--- --- --- ---
Costs and expenses:
Costs of software 2 2 2 2
Costs of services 6 8 6 9
Selling and marketing 25 32 26 29
Research and development 25 20 25 21
General and administrative 10 10 10 11
Merger expenses -- -- 10 --
--- --- --- ---
Total operating expenses 68 72 79 72
--- --- --- ---
Income from operations 32 28 21 28
Interest income and other, net 1 4 2 4
--- --- --- ---
Income before income taxes 33 32 23 32
Provision for income taxes 11 12 11 12
--- --- --- ---
Net income 22% 20% 12% 20%
--- --- --- ---
--- --- --- ---
</TABLE>

Comparison of Three and Six Months Ended June 30, 1998 and 1997

Revenue. The Company's total revenue increased 36% to $54.0 million for the
three months ended June 30, 1998 from $39.8 million for the three months ended
June 30, 1997. The percentage of the Company's total revenue attributable to
software licenses decreased to 69% for the three months ended June 30, 1998 from
72% for the three months ended June 30, 1997. The decrease in software license
as a percentage of total revenue, for the three months ended June 30, 1998, is
primarily due to the increased user base and resulting increase in service and
maintenance revenue. Total revenue increased 39% to $106.0 million for the six
months ended June 30, 1998 from $76.0 million for the six months ended June 30,
1997. The percentage of the Company's total revenue attributable to software
licenses decreased to 70% for the six months ended June 30, 1998 compared to 74%
for the six months ended June 30, 1997.

Software revenue increased 29% to $37.0 million for the three months ended
June 30, 1998 from $28.7 million for the three months ended June 30, 1997.
Increases in software revenue were due primarily to increased license revenue
from the Company's place and route, physical verification, analysis and library
software. Software revenue increased 32% to $73.9 million for the six months
ended June 30, 1998 from $56.0 million for the six months ended June 30, 1997.
Increases in software revenue were due primarily to increased license revenue
from the Company's place and route, physical verification, analysis and library
software. To date, price increases have not been a material factor in the
Company's revenue growth. Services revenue increased 53% to $17.0 million for
the three months ended June 30, 1998 from $11.1 million for the three months
ended June 30, 1997. The increase reflects the growing base of installed
systems, integration of Compass' maintenance and services revenue. Services
revenue increased 61% to $32.2 million for the six months ended June 30, 1998
from $20.0 million for the six months ended June 30, 1997. The increase reflects
the growing base of installed systems, integration of Compass' maintenance
revenue and addition of the Compass Design services business.

As discussed in the notes to the consolidated financial statements and Item
1 of Part 2, the Company is involved in litigation with Cadence Design Systems,
Inc., and other litigation issues. As a result of the Cadence litigation, some
customers may cancel or postpone orders of the Company's products. As of June
30, 1998, there had not been a material financial impact on the Company's
revenues as a result of the Cadence litigation; however significant order delays
or cancellations in the future may impact the Company's business, financial
condition and results of operations.

10
<PAGE>

Costs of Software and Services. Costs of software consist primarily of
expenses associated with product documentation, production costs and personnel.
Costs of software increased to $1.2 million from $0.8 million for the three
months ended June 30, 1998 and 1997, respectively. As a percentage of software
revenue, costs of software remained at 3% for the three months ended June 30,
1998 and 1997, respectively. 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 was $3.2 million
for both the three months ended June 30, 1998 and 1997, respectively. Costs of
services as a percentage of services revenue decreased to 19% from 29% for the
six months ended June 30, 1998 and 1997. The reduction in costs of services as a
percentage of service revenue reflects higher revenue growth due to a larger
user base, integration of Compass' service and maintenance revenue and improved
productivity of the Company's support resources in serving its increasing
customer base. Costs of software increased to $2.4 million from $1.6 million for
the six months ended June 30, 1998 and 1997, respectively. As a percentage of
software revenue, costs of software remained at 3% for the six months ended June
30, 1998 and 1997, respectively. Costs of services decreased to $6.6 million
from $6.8 million for the six months ended June 30, 1998 and 1997, respectively.
Costs of services as a percentage of services revenue decreased to 21% from 34%
for the three months ended June 30, 1998 and 1997. The reduction in costs of
services as a percentage of service revenue reflects higher revenue growth due
to a larger user base and integration of Compass' service and maintenance
revenue and improved productivity of the Company's support resources in serving
its increasing customer base.

Selling and Marketing Expenses. 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,
benchmarking personnel and field application engineers. Selling and marketing
expenses also include costs of advertising, public relations, conferences and
trade shows. Selling and marketing expenses increased to $13.4 million from
$12.6 million for the three months ended June 30, 1998 and 1997, respectively.
The increase was primarily due to the Compass operations, which were acquired in
September 1997, offset by a decrease in distributor commissions. As a percentage
of total revenue, selling and marketing expenses decreased to 25% from 32% for
the three months ended June 30, 1998 and 1997, respectively. As a percentage of
revenue, selling and marketing expenses have decreased, due to a more rapid
growth rate in revenue. Selling and marketing expenses increased to $27.2
million from $22.5 million for the six months ended June 30, 1998 and 1997,
respectively. The net increase is due to increases in the Compass operations,
primarily in personnel, increases in advertising and marketing expenses and a
decrease in distributor commissions. As a percentage of total revenue, selling
and marketing expenses decreased to 26% from 29% for the six months ended June
30, 1998 and 1997, respectively. As a percentage of revenue, selling and
marketing expenses have decreased, due to a more rapid growth rate in revenue.

Research and Development Expenses. 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 $13.3 million from $8.2 million for the three months ended June 30,
1998 and 1997, respectively. Research and development expenses increased to 25%
from 20% of total revenue for the three months ended June 30, 1998 and 1997,
respectively. The increases in expenses resulted from increased personnel and
facility costs, from the development of new products and enhancement of existing
products, and $3.0 million from the Compass operations. The increase in research
and development expenses as a percentage of revenue, was due to the commitment
from the Company to devote substantial resources to product research and
development. Research and development expenses increased to $26.7 million from
$15.8 million for the six months ended June 30, 1998 and 1997, respectively.
Research and development expenses increased to 25% from 21% of total revenue for
the six months ended June 30, 1998 and 1997, respectively. The increases in
expenses are from personnel costs, including incentive bonus expenses, and
related facility costs and $6.4 million from the Compass operations, which were
acquired in September 1997.

General and Administrative Expenses. General and administrative expenses
increased to $5.4 million from $3.9 million for the three months ended June 30,
1998 and 1997, respectively. The increase was primarily due to increases in
legal and personnel costs. As a percentage of total revenue, general and
administrative expenses remained at 10% for the three months ended June 30, 1998
and 1997, respectively. General and administrative expenses increased to $10.6
million from $8.2 million for the six months ended June 30, 1998 and 1997,
respectively. The increase was primarily due to increases in legal and
personnel, as well as occupancy costs, professional costs and the addition of
Compass operations. As a percentage of total revenue, general and administrative
expenses decreased to 10% from 11% for the six months ended June 30, 1998 and
1997, respectively.

Merger expenses. In connection with the merger with TMA in January, 1998,
the Company recorded direct transaction costs and merger-related integration
expenses of approximately $10.7 million. As of June 30, 1998, the Company had
$3.3 million remaining in accrued merger expenses, consisting $ 0.9 million for
transaction costs, $ 0.6 million for severance and certain other related costs
and $ 1.8 million for the elimination of duplicated facilities. The

11
<PAGE>

Company expects that all significant amounts included in the June 30, 1998
reserve balance will be paid within the next six months. Of the $10.7 million
of merger-related costs, approximately $8.3 million related to cash
expenditures while approximately $2.4 million related to noncash charges.

Interest Income and Other, Net. Interest income and other decreased to $
0.8 million from $1.8 million for the three months ended June 30, 1998 and 1997,
respectively. The decrease relates primarily to a foreign exchange loss of $ 0.6
million. Interest income and other decreased to $2.9 million from $3.2 million
for the six months ended June 30, 1998 and 1997, respectively. The decrease is
due to increased equity earnings on joint ventures, offset by foreign exchange
losses.

Income Tax Expense. The provision for income taxes was $6.2 million and
$4.6 million for the three months ended June 30, 1998 and 1997, respectively.
The provision for income taxes as a percentage of pre-tax income was 34% and 36%
for the three months ended June 30, 1998 and 1997, respectively. The provision
for income taxes was $12.1 million and $8.8 million for the three months ended
June 30, 1998 and 1997, respectively. The provision for income taxes as a
percentage of pre-tax income was 34%, excluding merger expenses, and 36% for the
six months ended June 30, 1998 and 1997, respectively.

Quarterly Results

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

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

Liquidity and Capital Resources

Net cash provided by operations was $16,329,000 for the six months ended
June 30, 1998. The Company's investing activities provided $10,049,000 of net
cash for the six months ended June 30, 1998. Net cash provided resulted from the
sales and maturities of securities offset by purchases of equity investments and
purchases of computer equipment and office furniture. Net cash provided by
financing activities was $3,005,000 for the six months ended June 30, 1998.
Financing activities consisted of the exercise of stock options and issuance of
common stock under the employee stock purchase plan.

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

As of June 30, 1998, the Company had $141,336,000 of cash, cash equivalents
and short-term investments, compared to $ 134,917,000 at December 31, 1997.
Working capital also increased from $ 130,301,000 at December 31, 1997 to $
143,521,000 at June 30, 1998. In connection with the Silvaco litigation, the
Company was required to post a bond. The bond is collaterized by a $23,583,000
letter of credit.

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

12
<PAGE>

Factors That May Affect Future Operations

As discussed in the notes to the consolidated financial statements and Item
1 of Part 2 of this Form 10-Q, the Company is involved in a number of litigation
matters. An adverse outcome in any of the described litigation matters could
have a material adverse effect on the Company's business, financial condition
and results of operations.

On January 16, 1998, the Company completed its merger with TMA. The
Company's future operating results are contingent upon the successful
integration of these entities into its operations.

Asian sales accounted for approximately 21% of total revenue for the six
month ended June 30, 1998. Amounts due from Asian customers, principally
affiliates of the Company, are not significant as of June 30, 1998. 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 EDA business is highly competitive. 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'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 successfully develop 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.

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. 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.

During 1997, the Company licensed an enterprise-wide resource planning
software application package to replace its existing operational and financial
systems. 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.

13
<PAGE>

PART 2. OTHER INFORMATION

Item 1. Legal Proceedings

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 had stopped selling or licensing ArcCell products or
code in mid, 1996.) 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 claim 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. 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. On May 21, 1998, the District Court entered
an order denying Cadence's request to enjoin the sale of Aquarius and denying
Cadence's request to lift the stay of the civil action. On July 8, 1998, Cadence
applied again for an injunction against the sale of Aquarius on the basis that
Aquarius contains code that is substantially similar to Cadence's Design
Framework II and that Aquarius contains specific protected ideas from Cadence's
Design Framework II. The Company's opposition to this application is scheduled
to be filed by August 14, 1998. No date for the hearing on these applications
has been set. There can be no assurance that the District Court will not 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.

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<PAGE>

District Court, the Company could be preliminarily enjoined from selling its
Aquarius or Apollo 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.

Silvaco Litigation.

In March 1993, Meta, which the Company acquired in October 1996 and which
is now a wholly owned subsidiary of the Company, 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, from October 1996 when Meta was acquired 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.

15
<PAGE>

successful. Although it is reasonably possible the Company 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
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, as discussed above in the
Silvaco litigation section. The action asserts claims for invasion of privacy
under California common law and the California Constitution and seeks
compensatory and punitive damages. The Company 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 ("Microunity"), Inc.
filed in the United States District Court for the Northern District of
California a complaint against Precim Corporation ("Precim"). Precim was a
wholly owned subsidiary of TMA, 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
answered the complaint and filed counterclaims against Microunity seeking a
declaration that the patents at issue are invalid and that Precim does not
infringe. Trial has been scheduled for September 20, 1999. 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.

16
<PAGE>

has also granted plaintiff's motion for appointment as lead plaintiff.
Recently, the plaintiff filed a motion for class certification, noticied for
hearing on September 4, 1998. The stay of the Margetis securities class action
pending resolution of the Cadence suit will likely apply to this securities
action as well.

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

On May 15, 1998, the Annual Meeting of Shareholders of the Company was held
at which the following matters were submitted to and voted on by the
shareholders. The results of the votes are set forth below:

1. The following persons were elected to the Board of Directors to hold
office until the next Annual Meeting, or until their successors are
elected and qualified:

<TABLE>
<CAPTION>
Vote for Vote against Vote withheld Broker non-vote
-------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Gerald C. Hsu 26,332,152 -- 305,852 --
Eric A. Brill 26,346,174 -- 291,830 --
Charles L. St. Clair 26,336,478 -- 301,526 --
Moriyuko Chimura 26,350,825 -- 287,179 --
James Andrews 26,344,965 -- 293,039 --
</TABLE>

2. Shareholders approved an amendment to the Company's 1995 Stock
Option/Stock Issuance Plan to increase the total number of shares of
Common Stock authorized for issuance thereunder by 1,000,000 shares
and to provide for automatic increases in future years. 12,027,079
votes were for the amendment, 9,748,135 votes were against the
amendment, 78,933 votes were withheld and 4,783,857 votes were broker
non-vote.

3. Shareholders approved the amendment to the Company's Employee Stock
Purchase Plan to increase the number of shares of the Corporation's
Common Stock available for issuance thereunder by 250,000 shares and
to provide for automatic increases in future years. 21,188,087 votes
were for the amendment, 589,698 votes were against the amendment,
76,362 votes were withheld and 4,783,857 votes were broker non-vote.

4. Shareholders approved the selection of KPMG Peat Marwick LLP as the
Company's independent certified public accountant for the fiscal year
ending December 31, 1998. 26,528,649 votes were for the election,
37,136 votes were against the amendment, and 72,219 votes were
withheld and 0 votes were broker non-vote.

5. Shareholders disapproved the amendment to the Company's Restated
Certificate of Incorporation and amended and Restated Bylaws providing
for the classification of the Board of Directors into three classes,
with members of each class serving for staggered terms. 9,727,585
votes were for the amendment, 12,060,198 votes were against the
amendment, 88,994 votes were withheld and 4,761,227 votes were broker
non-vote.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

The exhibits filed as part of this Quarterly Report on Form 10-Q are listed
on the Exhibit Index immediately preceding such exhibits and are
incorporated herein by reference.

(b) Reports on Form 8-K

The Company filed Form 8-K/A on June 11, 1998, to report an Other Event
under item number 5. The Company's financial statements were restated to
reflect the combination with Technology Modeling Associates, Inc., which
was accounted for as a pooling of interests. The business combination
occurred January 16, 1998.

17
<PAGE>

SIGNATURES

Pursuant to the requirements 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)

August 14, 1998 /s/ GERALD C. HSU
- --------------- ------------------
Gerald C. Hsu
President, Chief Executive Officer
and Chairman of the Board of Directors

August 14, 1998 /s/ LINDA CHINN
- --------------- ----------------
Linda Chinn
Head of Finance and Administration
(principal accounting officer
and principal financial officer)

18
<PAGE>

INDEX TO EXHIBITS

(a)3. Exhibits

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
Acquistion 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 (7)

10.2 Employee Stock Purchase Plan (7)

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)

21.1 List of subsidiaries of the Company (8)

27.1 Financial Data Schedule

99.1 Preliminary Injunction, Cadence Design Systems, Inc. v. Avant!
Inc. (8)

99.2 Modification of Preliminary Injunction, Cadence Design Systems,
Inc. v. Avant! Inc. (8)
</TABLE>
19

<PAGE>

(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 Registration Statement 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.

(7) Incorporated by reference from the Company's Schedule 14A filed with the
SEC on April 7, 1998.

(8) Incorporated by reference from the Company's Report on Form 10K filed
with the SEC on March 31, 1998.

</TABLE>

20
<PAGE>

SIGNATURES

Pursuant to the requirements 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)

August 14, 1998
----------------------------
Gerald C. Hsu
President, Chief Executive Officer
and Chairman of the Board of Directors

August 14, 1998
----------------------------
Linda Chinn
Head of Finance and Administration
(principal accounting officer and principal
financial officer)

<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 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 106,906
<SECURITIES> 34,430
<RECEIVABLES> 31,500
<ALLOWANCES> 5,545
<INVENTORY> 0
<CURRENT-ASSETS> 193,970
<PP&E> 54,203
<DEPRECIATION> 21,985
<TOTAL-ASSETS> 267,393
<CURRENT-LIABILITIES> 50,449
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 215,700
<TOTAL-LIABILITY-AND-EQUITY> 267,393
<SALES> 0
<TOTAL-REVENUES> 106,030
<CGS> 2,389
<TOTAL-COSTS> 9,003
<OTHER-EXPENSES> 75,175
<LOSS-PROVISION> 770
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,778
<INCOME-TAX> 12,078
<INCOME-CONTINUING> 12,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,700
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.37

</TABLE>