AVANT CORP, 10-Q, 1999-07-14

AVANT CORP
10-Q, 1999-07-14
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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, 1999

[ ] 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. Yes [ x ] No [ ]

The number of shares outstanding of the registrant's common stock as of July
8, 1999 was 33,479,106.

<PAGE>

AVANT! CORPORATION

FORM 10-Q

June 30, 1999

INDEX

<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION PAGE
- ------------------------------------ ----
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of
June 30, 1999 andDecember 31, 1998 1

Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1999 and 1998 2

Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1999 and 1998 3

Notes to Condensed Consolidated Financial Statements 4

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK DERIVATIVES AND FINANCIAL INSTRUMENTS 12

PART 2. OTHER INFORMATION
- ------------------------------------

Item 1. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS 13

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20

Item 3. DEFAULTS UPON SENIOR SECURITIES 20

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21

Item 5. OTHER INFORMATION 21

Item 6. EXHIBITS AND REPORTS ON FORM 8-K 21

SIGNATURE PAGE 22
- --------------

EXHIBIT INDEX 23
- -------------

</TABLE>
<PAGE>

ITEM 1. FINANCIAL STATEMENTS

PART 1. FINANCIAL INFORMATION

AVANT! CORPORATION
CONDENSED CONSOLIDATED BALANCE
SHEETS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 44,133 $ 121,206
Short-term investments 147,933 21,389
Accounts receivable, net 43,385 33,325
Due from affiliates 7,882 8,947
Deferred income taxes 18,694 14,418
Prepaid expenses and other current assets 11,922 14,566
--------------- ---------------
Total current assets 273,949 213,851
Equipment, furniture and fixtures, net 26,526 28,758
Deferred income taxes 17,205 15,965
Goodwill and other intangibles, net 36,501 41,343
Other assets 16,109 17,469
--------------- ---------------
Total assets $ 370,290 $ 317,386
--------------- ---------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,456 $ 5,632
Accrued compensation 11,974 10,109
Other accrued liabilities 9,846 10,126
Accrued income taxes 33,021 25,457
Deferred revenue 36,030 28,985
--------------- ---------------
Total current liabilities 100,327 80,309
Other noncurrent liabilities: 1,892 1,879
--------------- ---------------
Total liabilities 102,219 82,188
--------------- ---------------

Commitments and contingencies

Stockholders' equity:
Series A convertible preferred stock, $.0001 par value; 5,000
shares authorized; none issued and outstanding - -
Series A junior participating preferred stock, $.0001 par
value; 75,000 shares authorized; none issued and
outstanding - -
Common stock, $.0001 par value; 75,000 authorized;
33,566 and 33,059 shares issued and outstanding
at June 30, 1999 and December 31, 1998, respectively 3 3
Additional paid-in capital 186,206 182,081
Deferred compensation (431) (792)
Other accumulated comprehensive income (loss) (850) 2
Retained earnings 53,904 53,904
Current year profit 29,239 -
--------------- ---------------
Total stockholders' equity 268,071 235,198
--------------- ---------------
Total liabilities and stockholders' equity $ 370,290 $ 317,386
--------------- ---------------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

<PAGE>

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

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Software $ 46,605 $ 37,025 $ 88,474 $ 73,871
Services 23,417 16,989 47,532 32,159
--------------- ------------ ------------ ------------
Total revenue 70,022 54,014 136,006 106,030
--------------- ------------ ------------ ------------
Costs and expenses:
Costs of software 1,205 1,212 2,460 2,389
Costs of services 4,131 3,152 8,240 6,614
Selling and marketing 17,653 13,388 33,942 27,157
Research and development 16,534 13,306 32,763 26,656
General and administrative 8,538 5,449 15,555 10,615
Merger expenses - - - 10,747
--------------- ------------ ------------ ------------
Total operating expenses 48,061 36,507 92,960 84,178
--------------- ------------ ------------ ------------
Income from operations 21,961 17,507 43,046 21,852
Interest income and other, net 1,640 804 3,736 2,926
--------------- ------------ ------------ ------------
Income before income taxes 23,601 18,311 46,782 24,778
Provision for income taxes 8,850 6,225 17,543 12,078
--------------- ------------ ------------ ------------
Net income 14,751 12,086 29,239 12,700

Other comprehensive income - change in unrealized gain (loss)
on short-term investments, net of related tax effects (481) 75 (533) 123
--------------- ------------ ------------ ------------
Total comprehensive income $ 14,270 $ 12,161 $ 28,706 $ 12,823
--------------- ------------ ------------ ------------
--------------- ------------ ------------ ------------

Earnings per share - Basic:
Earnings per share $ 0.44 $ 0.37 $ 0.88 $ 0.39
--------------- ------------ ------------ ------------
--------------- ------------ ------------ ------------

Total weighted average number of common
shares outstanding 33,505 32,558 33,379 32,461
--------------- ------------ ------------ ------------
--------------- ------------ ------------ ------------

Earnings per share - Diluted:
Earnings per share $ 0.43 $ 0.35 $ 0.84 $ 0.37
--------------- ------------ ------------ ------------
--------------- ------------ ------------ ------------

Total weighted average number of common
and common equivalent shares outstanding 34,305 34,587 34,859 34,011
--------------- ------------ ------------ ------------
--------------- ------------ ------------ ------------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

<PAGE>

AVANT! CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 29,239 $ 12,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,656 8,324
Amortization of deferred compensation 361 604
Deferred income taxes (5,516) 3,680
Stock compensation expense - 640
Loss on disposal of equipment 91 -
Tax benefit related to stock options 633 326
Equity loss in joint ventures (20) (1,159)
Deferred rent 324 303
Provision for doubtful accounts 1,915 770
Changes in operating assets and liabilities:
Accounts receivable, net (11,975) (2,932)
Due from affiliates 1,065 1,969
Prepaid expenses and other assets 4,024 (4,189)
Accounts payable 3,824 (1,615)
Accrued compensation 1,865 (2,588)
Accrued income taxes 7,564 2,990
Other accrued liabilities (298) (4,126)
Deferred revenue 7,045 632
------------- ------------
Net cash provided by operating activities 49,797 16,329
------------- ------------

Cash flows from investing activities:
Purchases of short-term investments (356,988) (335,950)
Maturities and sales of short-term investments 229,592 359,100
Purchases of equipment, furniture, fixtures and other assets (2,673) (4,950)
Additional purchase price related to Compass acquisition - (1,901)
Purchase of equity investments - (6,250)
------------- ------------
Net cash (used by) provided by investing (130,069) 10,049
------------- ------------

Cash flows from financing activities:
Principal payments under capital lease obligations (293) (66)
Exercise of stock options 3,233 -
Issuance of common stock under employee stock purchase plan 259 3,071
------------- ------------

Net cash provided by financing activities 3,199 3,005
------------- ------------

Net increase (decrease) in cash and cash equivalents (77,073) 29,383
Cash and cash equivalents, beginning of period 121,206 77,523
------------- ------------
Cash and cash equivalents, end of period $ 44,133 $106,906
------------- ------------
------------- ------------

Cash paid:
Interest $ 55 $ 94
Income taxes paid $ 13,624 $ 3,708
</TABLE>

See accompanying notes to condensed consolidated financial statements.

<PAGE>
AVANT! CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements include the accounts of
Avant! Corporation (Avant! or the Company) and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
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, 1998, 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, 1999 and 1998,
are options to acquire 3,893,000 and 395,000 shares, respectively, of common
stock with a weighted-average exercise price of $17.17 and $31.35,
respectively, and for the six months ended June 30, 1999 and 1998, are
options to acquire 1,292,000 and 402,000 shares, respectively, of common
stock with a weighted-average exercise price of $22.84 and $31.18,
respectively, because their effects would be anti-dilutive.

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Diluted EPS:

Net Income $ 14,751 $ 12,086 $ 29,239 $ 12,700
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Weighted average number of common
shares outstanding 33,505 32,558 33,379 32,461
Stock options 800 2,029 1,480 1,550
------------ ------------ ------------ ------------
Total weighted average number
of common and common
equivalent shares outstanding 34,305 34,587 34,859 34,011
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Basic earnings per share $ 0.44 $ 0.37 $ 0.88 $ 0.39
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Diluted earnings per share $ 0.43 $ 0.35 $ 0.84 $ 0.37
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

3. RECENT PRONOUNCEMENTS

The FASB recently 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
recognizes all derivatives as either assets or liabilities in the statement
of financial position and measure those

<PAGE>

instruments at fair value. The Company must adopt SFAS No. 133 by January 1,
2001. Management does not believe the adoption of SFAS No. 133 will have a
material effect on the financial position or results of operations of the
Company.

The Company has adopted the provisions of SFAS No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
standards for the reporting by public business enterprises of information
about operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on
the way that management organizes the operating segments within the Company
for making operating decisions and assessing financial performance.

The Company's chief operating decision-maker is considered to be the
Company's Chief Executive Officer ("CEO"). The CEO reviews financial
information presented on a consolidated basis accompanied by disaggregated
information about revenues by geographic region for purposes of making
operating decisions and assessing financial performance. The consolidated
financial information reviewed by the CEO is identical to the information
presented in the accompanying consolidated statement of operations.
Therefore, the Company operates in a single operating segment: electronic
design automation software and services. There have been no differences from
the last annual report as of December 31, 1998 in the basis of segmentation
or in the basis of measurement of segment profit or loss. Furthermore, since
the Company operates in a single operating segment, total assets and
operating income disclosed in the condensed consolidated financial statements
as of June 30, 1999 represent the total assets and operating income of the
segment. Revenue and asset information regarding operations in the different
geographic regions is as follows (in thousands):

<TABLE>
<CAPTION>
North America Europe Asia Consolidated
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Three months ended June 30, 1998 $ 33,892 $ 10,097 $ 10,025 $ 54,014
Three months ended June 30, 1999 48,051 6,172 15,799 70,022
Six months ended June 30, 1998 67,645 16,201 22,184 106,030
Six months ended June 30, 1999 90,478 16,872 28,656 136,006

Identifiable assets:
Six months ended June 30, 1998 $ 250,809 $ 13,770 $ 2,814 $ 267,393
Six months ended June 30, 1999 352,132 13,214 4,944 370,290

Long-lived assets:
Six months ended June 30, 1998 $ 30,697 $ 1,293 $ 228 $ 32,218
Six months ended June 30, 1999 25,083 801 642 26,526

</TABLE>

As discussed 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 return, or cancel, or postpone orders
of, the Company's products. As of June 30, 1999, such cancellations,
postponements and returns had not had a material financial impact on the
Company's revenues. However, cancellations, returns, or a significant delay
of orders in the future would have a material adverse effect on the Company's
business, financial condition and results of operations.

4. MERGERS

On May 5, 1999 and April 27, 1999 Avant! entered into definitive agreements
to acquire Chrysalis Symbolic Design Inc. (Chrysalis) and Xynetix Design
Systems, Inc. (Xynetix), respectively. The agreements provide that Avant!
will issue shares of Avant! common stock in exchange for all outstanding
Chrysalis and Xynetix equity. The proposed merger transactions are structured
as tax-free reorganizations and will be accounted for as poolings of
interests, and are expected to close in the third quarter of 1999. The
closing of the mergers are subject to regulatory approval, the availability
of pooling-of-interests accounting treatment, and other customary closing
conditions.

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 $10,747,000, consisting of transaction fees for
investment bankers, attorneys, accountants, financial printing and
stockholders meeting of approximately $5,400,000, charges for the elimination
of duplicate facilities of approximately $2,247,000 and severance and certain
other related costs of approximately $3,100,000. As of June 30, 1999, there
were no material remaining accrued liabilities relating to this merger. Of
the $10,747,000 of merger related costs, approximately $7,900,000 related to
cash expenditures while approximately $2,847,000 related to non-cash charges.

5. LEGAL PROCEEDINGS

Avant! and its subsidiaries are engaged in various litigation matters,
including: a civil action brought by Cadence Design Systems, Inc.; the
criminal indictment of Avant! and certain of its employees, officers and
directors; securities class action and defamation claims stemming from the
Cadence litigation and the criminal indictment; civil actions brought by
Silvaco Data Systems, Inc.; a civil action brought by Katherine Ngai Pesic
and Ivan Pesic and the Nequist action. The pending litigation against Avant!
and any future litigation against Avant! or its employees, regardless of the
outcome, may result in substantial costs and expenses and significant
diversion of effort by Avant!'s management. These various matters could
seriously harm Avant!'s business, financial condition and results of
operations.

CADENCE LITIGATION

On December 6, 1995, Cadence filed an action against Avant! 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 Avant!'s employees who were formerly Cadence employees
allegedly misappropriated and improperly copied source code for certain
important functions of Avant!'s place and route products from Cadence,
including Cadence's Design Framework II ("DFII") product, and that Avant! has
allegedly competed unfairly by making false statements concerning Cadence and
its products. The action also alleges that Avant! induced certain individual
defendants to breach their agreements of employment and confidentiality with
Cadence. Trial on Cadence's allegations regarding its DFII product has been
scheduled for October 12, 1999. Trial on the remaining allegations has not
yet been scheduled.

In addition to actual and punitive damages, which have not been quantified by
Cadence, Cadence is seeking to enjoin the sale of Avant!'s place and route
products pending trial of the action. 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, Avant!'s ArcCell products. The
injunction also barred Avant! 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 DFII. (Avant!
had stopped selling or licensing ArcCell products or code in mid 1996.) On
December 7, 1998, the District Court entered an injunction against Avant!
prohibiting Avant! from directly or indirectly marketing, selling, leasing,
licensing, copywriting or transferring the Aquarius, Aquarius XO and Aquarius
BV products. The injunction also prohibits Avant! from marketing, selling,
leasing, licensing, copying or transferring any translation code for an
Aquarius product that infringes any protected right of Cadence. With certain
exceptions related to the pending litigation, the injunction prohibits Avant!
from possessing or using any copies of any portion of the source code or
object code for the Aquarius products to the extent that such portion is
copied or derived from the DFII product of Cadence. The preliminary
injunction against Avant!'s Aquarius products could seriously harm Avant!'s
business, financial condition and results of operations.

On January 16, 1996, Avant! 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. Avant! filed an amended counterclaim on January
29, 1998.

5
<PAGE>

Avant! believes it has defenses to Cadence's claims and intends to defend
itself vigorously. In April 1999, Avant! and Cadence filed motions for
summary adjudication as to whether a 1994 release between Avant! and Cadence
applies to Avant!'s continued use of alleged Cadence intellectual property
that was in Avant!'s place and route product at the time of the release.
Prior to the May 14, 1999 hearing on these motions, the court provided a
tentative ruling that the court was inclined to deny Avant!'s motion and to
grant Cadence's motion. The tentative ruling also identified certain issues
for the parties to address at the hearing. The court took both motions under
submission following the May 14, 1999 hearing, and the court has not yet
issued a ruling on either motion. A ruling granting Avant!'s motion would
serve as a total or partial defense regarding Avant!'s alleged use of Cadence
DF II code in Avant!'s ArcCell and Aquarius products. A ruling granting
Cadence's motion would make it likely that Cadence will prevail on its claims
regarding Avant!'s use of DF II code in ArcCell. While such a ruling would
also increase the risk that Cadence may prevail on its DF II claims regarding
Aquarius, Avant! believes it has additional meritorious defenses with respect
to Aquarius that it does not have with respect to ArcCell. The court could
also deny both Avant!'s and Cadence's motions for summary adjudication and
rule that Avant!'s release defense must be resolved at trial. Such a ruling
would mean that Avant! will be able to raise the release as a defense at the
trial regarding the use of Cadence DF II code in Avant!'s ArcCell and
Aquarius products. The court had previously enjoined ArcCell and Aquarius,
based in part on finding that the release defense was not available to Avant!
and that Cadence was likely to prevail on its DF II claims.

If Avant!'s defenses are unsuccessful, Avant! may ultimately be permanently
enjoined from selling certain place and route products, and may be required
to pay monetary damages to Cadence. In addition, upon further consideration
by the District Court, Avant! could be preliminarily enjoined from selling
its Apollo place and route products. In addition, it is likely that an
adverse judgment against Avant! would result in a steep decline in the market
price of Avant!'s common stock. Accordingly, an adverse judgement, if granted
on any claim, would seriously harm Avant!'s business, financial position and
results of operations. Furthermore, it is possible that Avant!'s
relationships with its customers and/or partners will be seriously harmed in
the future as a result of the Cadence litigation.

CRIMINAL INDICTMENT

On December 16, 1998, after a grand jury investigation, the Santa Clara
County District Attorney's office filed a criminal indictment alleging felony
level offenses related to the allegations of misappropriation of trade
secrets set forth in Cadence's lawsuit against, among others, Avant! and the
following current or former employees and/or directors of Avant!:

- Gerald C. Hsu, President, Chief Executive Officer and Chairman of the
board of directors;

- Y. Eric Cho, consultant for Avant!, former officer and former member
of Avant! board of directors;

- Y. Z. Liao, Corporate Fellow;

- Stephen Wuu, Executive Operating Officer, Sales;

- Leigh Huang, consultant for Avant!;

- Eric Cheng, Research and Development Manager; and

- Mike Tsai, former officer and former member of Avant! board of
directors.

The indictment charges the defendants listed above with conspiring to commit
trade secret theft, trade secret theft, inducing the theft of a trade secret,
conspiracy to commit fraudulent practices in connection with the offer or
sale of a security and fraudulent practices in connection with the offer or
sale of a security. The criminal indictment could result in additional
defense costs and criminal fines against Avant!, as well as the potential
incarceration of certain members of its management team and its chairman of
the board of directors. Such outcomes would seriously harm Avant!'s business,
financial condition and results of operations and may also result in canceled
or postponed orders, increased future expenditures, the loss of management
and other key personnel, additional stockholder litigation and loss of
reputation and goodwill. Trial has currently been set for September 27, 1999.

SILVACO LITIGATION

In March 1993, Meta Software Inc., which Avant! acquired in October 1996 and
which is now a wholly owned subsidiary of Avant!, filed a complaint in the
Superior Court of California for Santa Clara County against Silvaco Data
Systems, Inc. seeking monetary damages and injunctive relief. In August 1995,
Silvaco filed a cross-complaint against Meta and Shawn Hailey, then the
President and Chief Executive Officer of Meta, alleging, among other things,
that Meta owed 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. In November 1997, a
judgment in the aggregate amount of $31.4 million was entered against Avant!.
Avant! filed appeals on its own behalf and on behalf of Mr. Hailey. If
Avant!'s and Mr. Hailey's appeals are unsuccessful, Avant! will be required
to pay substantial monetary damages to Silvaco. Payment of the damages
previously awarded, and damages which may be awarded in the future, would
seriously harm Avant!'s business, financial condition and results of
operations.

<PAGE>

On March 31, 1998, Silvaco filed an additional lawsuit, against Avant! and
Roy Jewell, a former member of Avant!'s Executive Staff, in the Superior
Court of California for Santa Clara County. The lawsuit alleges causes of
action for defamation, negligent and intentional interference with economic
advantage, unfair competition, Lanham Act violations and consumer fraud.
Silvaco is seeking $20 million in compensatory damages, punitive damages and
an injunction. Avant! believes it has defenses to these claims and intends to
defend itself vigorously. In the event Avant!'s defenses are unsuccessful,
Avant! may be required to pay damages to Silvaco, and such a judgment would
seriously harm Avant!'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
Avant! (as successor in interest to Meta), Shawn Hailey, Meta's former
President and Chief Executive Officer, and Thomas N. White, Jr. and George S.
Cole, both of whom were Meta's former counsel in the Meta v. Silvaco matter
discussed above. The action asserts claims for invasion of privacy under
California common law and the California Constitution and seeks compensatory
and punitive damages. Trial has been scheduled for October 18, 1999. Avant!
believes it has defenses to these claims and intends to defend itself
vigorously. In the event that Avant!'s defenses are unsuccessful, Avant! may
be required to pay damages to the plaintiffs, and such a judgment could
seriously harm Avant!'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 Avant!. This lawsuit alleges 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 Cadence's civil lawsuit, described above.
In addition, on May 30, 1997, Joanne Hoffman filed in the United States
District Court for the Northern District of California a class action lawsuit
alleging securities claims on behalf of purchasers of Avant!'s stock between
March 29, 1996 and April 11, 1997, the date of the filing of a criminal
complaint against Avant! and six of its employees and/or directors. Plaintiff
alleges that Avant! and its officers misled the market as to the likelihood
of criminal charges being filed and as to the validity of the Cadence
allegations. The District Court has granted Avant!'s motion to coordinate the
Hoffman action for pretrial purposes with the earlier-filed Margetis action.
Avant! believes it has defenses to these securities class action claims, and
intends to defend itself vigorously. In the event Avant!'s defenses are
unsuccessful, Avant! may be required to pay damages to the securities class
action plaintiffs, and such a judgment would seriously harm Avant!'s
business, financial condition and results of operations.

NEQUIST LITIGATION

On July 15, 1998, Eric Nequist, a Cadence employee, filed in the Santa Clara
County Superior Court a complaint against Avant!. The complaint alleges
causes of action for defamation, intentional infliction of emotional
distress, negligent and intentional interference with economic advantage,
abuse of process and violations of California Business and Profession Code
section 17200. No trial date has been set, and the parties have been ordered
to mediation. Avant! has moved that this litigation be stayed pending
resolution of the criminal case against Avant!, and Avant!'s motion is
currently pending before the Sixth District Court of Appeal. The Sixth
District has stayed certain discovery pending resolution of that motion.
Avant! believes it has defenses to Mr. Nequist's claims and intends to defend
itself vigorously. In the event Avant!'s defenses are unsuccessful, Avant!
may be required to pay damages to Mr. Nequist, and such a judgment could
seriously harm Avant!'s business, financial condition and results of
operation.

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 has charged to
expenses approximately $4,433,000 and $7,347,000 in litigation expenses
during the three and six months ended June 30, 1999, respectively, related to
the various litigation issues. The Company currently expects legal costs to
substantially increase in the future as a result of its current litigation
issues. Accordingly, any such litigation could seriously harm Avant!'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 over $31.4 million in damages,
which would seriously harm Avant!'s business, financial condition and results
of operations.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION

This report contains forward-looking statements that involve risks and
uncertainties. Our 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 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 Annual Report on Form 10-K for the year ended
December 31, 1998 filed with the Securities and Exchange Commission (SEC) on
March 31, 1999, and other risks detailed from time to time in our Securities
and Exchange

<PAGE>

Commission reports. In addition, past results and trends should not be used
by investors to anticipate future results and trends.

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
January 16, 1998, November 27, 1996, October 29, 1996 and September 27, 1996
the Company merged with Technology Modeling Associates ("TMA"), FrontLine
Design Automation ("FrontLine"), Meta-Software Inc. ("Meta"), and Anagram,
Inc ("Anagram"), 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
TMA, FrontLine, Meta, Anagram and ISS. On November 19, 1998, November 13,
1998, September 12, 1997, September 30, 1997 and December 31, 1996, the
Company acquired ACEO Technology Inc. ("ACEO"), interHDL Inc. ("interHDL"),
Compass Design Automation, Inc. ("Compass"), Datalink Far East, Ltd.
("Datalink") and Nexsyn Design Technology Inc. ("Nexsyn"), 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 (formerly ArcCell), 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.

At the June 1998 Design Automation Conference, Avant! announced the
SinglePass Design solution which significantly reduces the Time-to-Money for
System-on-a-Chip Design by eliminating traditional design iterations due to
timing, power and noise concerns. Since then, Avant!'s SinglePass solution
has seen broad market acceptance that is transforming the way in which
System-on-a-Chip design is accomplished. At the June 1999 Design Automation
Conference, Avant! announced its SinglePass initiative with the announcement
of 3 new products and 3 significant enhancements to products within the flow.
New products include Apollo-II, Avant!'s next generation place and route
product, Discovery, its new full custom-layout editor, and Jupiter, the
front-end tool for RTL Analysis, Design Planning, and Very Deep Submicron
(VDSM) Physical Synthesis. Notable enhancements to SinglePass include
Apollo-II, its next generation place and route product, Saturn, a DSM
synthesis optimization tool, and Hercules-II, Avant!'s next generation
physical verification product. All tools within SinglePass reside on
Milkyway, the industry's only common VDSM database. In addition to these
advanced technologies, SinglePass also contains circuit simulation and full
chip extraction and mask synthesis technology as evident in the Star-Hspice,
Star-Sim, and Star-Time simulators, the Star-RC full-chip parasitic
extractor, and Taurus-OPC, the Company's Optical Proximity Correction
product. Avant!'s SinglePass initiative is complemented by another company
initiative named Silicon Early Access (SEA). SEA combines the advanced
Technology Computer Aided Design (TCAD) products to reduce the time to
develop and leverage advanced semiconductor processes. As part of Silicon
Early Access, the company's library business provides market leading standard
cell libraries for process technologies as aggressive as 0.18 micron.

8
<PAGE>

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:

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenue:
Software 67 69 65 70
Services 33 31 35 30
------------ ------------ ------------ -------------
Total revenue 100% 100% 100% 100%

Costs and expenses:
Costs of software 2 2 2 2
Costs of services 6 6 6 6
Selling and marketing 25 25 25 26
Research and development 24 25 24 25
General and administrative 12 10 11 10
Merger expenses - - - 10
------------ ------------ ------------ -------------
Total operating expenses 69 68 68 79
------------ ------------ ------------ -------------
Income from operations 31 32 32 21
Interest income and other, net 3 2 2 2
------------ ------------ ------------ -------------
Income before income taxes 34 34 34 23
Provision for income taxes 13 12 13 11
------------ ------------ ------------ -------------
Net income 21% 22% 21% 12%
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>

COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998

REVENUE. Revenue consists primarily of fees for licenses of the Company's
software products, maintenance and customer support. In the fourth quarter of
1997, the Company adopted the provisions of AICPA SOP 97-2, SOFTWARE REVENUE
RECOGNITION (SOP 97-2). 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; revenue allocated to service elements is recognized
as the services are performed. In connection with the adoption of SOP 97-2,
revenue for contracts with extended payment terms (generally greater than
twelve months) are recognized as payments become due. The effect of adopting
SOP 97-2 on October 1, 1997 was not material.

In December 1998, the AcSEC issued SOP 98-9, SOFTWARE REVENUE RECOGNITION,
WITH RESPECT TO CERTAIN ARRANGEMENTS, which requires recognition of revenue
using the "residual method" in a multiple element arrangement when fair value
does not exist for one or more of the delivered elements in the arrangement.
Under the "residual method", the total fair value of the undelivered elements
is deferred and subsequently recognized in accordance with SOP 97-2. The
Company does not expect a material change to its accounting for revenues as a
result of the provisions of SOP 98-9.

The Company's total revenue increased 30% to $70.0 million for the three
months ended June 30, 1999 from $54.0 million for the three months ended June
30, 1998. The percentage of the Company's total revenue attributable to
software licenses decreased to 67% for the three months ended June 30, 1999
compared to 69% for the three months ended June 30, 1998. The decrease in
software licenses as a percentage of total revenue, for the three months ended
June 30, 1999 is primarily due to the increased user base and resulting
increase in service and maintenance revenue. Total revenue increased 28% to
$136.0 million for the six months ended June 30, 1999 from $106.0 million for
the six months ended June 30, 1998. The percentage of the Company's total
revenue attributable to software licenses decreased to 65% for the six months
ended June 30, 1999 compared to 70% for the six months ended June 30, 1998.
Revenues from sales to Maingate Electronics, KK (Maingate) of Japan and
Davantech Co. Ltd. (DavanTech) of Korea, of which the Company has ownership
of 35% and 39.6% respectively, for the quarter ended June 30, 1999 were
$4,924,000 and $566,000 and for the six months ended June 30, 1999 were
$14,004,000 and $1,483,000, respectively.

<PAGE>

Software revenue increased 26% to $46.6 million for the three months ended
June 30, 1999 from $37.0 million for the three months ended June 30, 1998.
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 20% to $88.5 million for the six
months ended June 30, 1999 from $73.9 million for the six months ended June
30, 1998. 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
38% to $23.4 million for the three months ended June 30, 1999 from $17.0
million for the three months ended June 30, 1998. The increase reflects the
growing base of installed systems. Services revenue increased 48% to $47.5
million for the six months ended June 30, 1999 from $32.2 million for the six
months ended June 30, 1998. The increase reflects the growing base of
installed systems.

COSTS OF SOFTWARE AND SERVICES. Costs of software consist primarily of
expenses associated with product documentation, production costs and
personnel. Costs of software remains at $1.2 million for the three months
ended June 30, 1999 and 1998, respectively. As a percentage of software
revenue, costs of software remained at 2% for the three months ended June 30,
1999 and 1998, 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 increased to $4.1 million from $3.2 million for the three

<PAGE>

months ended June 30, 1999 and 1998, respectively. Costs of services as a
percentage of services revenue decreased to 18% from 19% for the three months
ended June 30, 1999 and 1998. The reduction in costs of services as a
percentage of service revenue reflects higher revenue growth and improved
productivity of the Company's support resources in serving its increasing
customer base.

Costs of software increased to $2.5 million from $2.4 million for the six
months ended June 30, 1999 and 1998, respectively. As a percentage of
software revenue, costs of software remained at 2% for the six months ended
June 30, 1999 and 1998, respectively. Costs of services increased to $8.2
million from $6.6 million for the six months ended June 30, 1999 and 1998,
respectively. Costs of services as a percentage of services revenue decreased
to 17% from 21% for the six months ended June 30, 1999 and 1998. The
reduction in costs of services as a percentage of service revenue reflects
higher revenue growth due to a larger user base 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,
trade shows and allowance for doubtful accounts. Selling and marketing
expenses increased to $17.7 million from $13.4 million for the three months
ended June 30, 1999 and 1998, respectively. The increase was primarily due to
increased headcount and advertising expenses. As a percentage of total
revenue, selling and marketing expenses remained at 25% for the three months
ended June 30, 1999 and 1998, respectively. Selling and marketing expenses
increased to $34.0 million from $27.2 million for the six months ended June
30, 1999 and 1998, respectively. The increase was primarily due to increased
headcount, allowance for doubtful accounts and advertising expenses. The
allowance for doubtful accounts was increased $1.9 million during the six
months ended June 30, 1999 to reflect increased sales levels and collection
experience. As a percentage of total revenue, selling and marketing expenses
decreased to 25% from 26% for the six months ended June 30, 1999 and 1998,
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 $16.5 million from $13.3 million for the three months ended June 30, 1999
and 1998, respectively. The increase was primarily due to the new research
and development center open in China and the impact of the acquisitions of
interHDL and ACEO in November 1998. As a percentage of revenue, research and
development expenses decreased to 24% from 25% for the three months ended
June 30, 1999 and 1998, respectively. Research and development expenses
increased to $32.8 million from $26.7 million for the six months ended June
30, 1999 and 1998, respectively. The increase was primarily due the new
research and development center open in China, the impact of the acquisitions
of interHDL and ACEO in November 1998 and increased incentive compensation
expense. As a percentage of revenue, research and development expenses
decreased to 24% from 25% for the six months ended June 30, 1999 and 1998,
respectively. The Company anticipates that it will continue to devote
substantial resources to product research and development throughout 1999.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $8.5 million from $5.4 million for the three months ended June
30, 1999 and 1998, respectively. The increase was primarily due to increases
in legal and personnel costs. Legal expense increased to $4.4 million from
$3.1 million for the three months ended June 30, 1999 and 1998, respectively.
As a percentage of total revenue, general and administrative expenses
increased to $12% from 10% for the three months ended June 30, 1999 and 1998,
respectively. General and administrative expenses increased to $15.6 million
from $10.6 million for the six months ended June 30, 1999 and 1998,
respectively. The increase was primarily due to increases in legal and
personnel costs. Legal expense increased to $7.3 million from $4.9 million
for the six months ended June 30, 1999 and 1998, respectively. As a
percentage of total revenue, general and administrative expenses increased to
11% from 10% for the six months ended June 30, 1999 and 1998, 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, consisting of transaction fees for
investment bankers, attorneys, accountants, financial printing and
stockholders meeting of approximately $5.4 million, charges for the
elimination of duplicate facilities of approximately $2.2 million and
severance and certain other related costs of approximately $3.1 million. As
of June 30, 1999, there were no material remaining accrued liabilities
relating to the merger. Of the $10.7 million of merger related costs,
approximately $7.9 million related to cash expenditures while approximately
$2.8 million related to non-cash charges.

INTEREST INCOME AND OTHER, NET. Interest income and other increased to $1.6
million from $0.8 million for the three months ended June 30, 1999 and 1998,
respectively. The increase relates primarily to an increase in interest
income and lower foreign exchange loss. Interest income and other increased
to $3.7 million from $2.9 million for the six months

11
<PAGE>

ended June 30, 1999 and 1998, respectively. The increase is due to increased
interest income and lower foreign exchange loss.

INCOME TAX EXPENSE. The provision for income taxes was $8.9 million and $6.2
million for the three months ended June 30, 1999 and 1998, respectively. The
provision for income taxes, as a percentage of pre-tax income and excluding
merger expense, was 37.5% and 34% for the three months ended June 30, 1999
and 1998, respectively. The provision for income taxes was $17.5 million and
$12.1 million for the three months ended June 30, 1999 and 1998,
respectively. The provision for income taxes, as a percentage of pre-tax
income and excluding merger expense, was 37.5% and is 34% for the six months
ended June 30, 1999 and 1998, respectively. The increase in tax rates, both
for the quarter and six months ended June 30, 1999, was due primarily to the
effect of increased goodwill amortization, which is not deductible for income
tax purposes.

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 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 $49,797,000 for the six months ended June
30, 1999. The increase was attributable to the increase in operating income,
accounts payable, accrued income taxes and deferred revenue, offset by an
increase in accounts receivable and deferred income taxes. The Company's
investing activities used $130,069,000 of net cash for the six months ended
June 30, 1999 resulting from the purchase of investment securities and
purchases of computer equipment and office furniture. Net cash provided by
financing activities was $3,199,000 for the six months ended June 30, 1999
consisting primarily of the exercise of stock options.

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 and did by $1.9
million in the six months ended June 30, 1999 to reflect increased sales
levels and collection experience. The Company believes that its allowance for
doubtful accounts is adequate.

As of June 30, 1999, the Company had $192,066,000 of cash, cash equivalents
and short-term investments, compared to $142,595,000 at December 31, 1998.
Working capital also increased from $ 133,542,000 at December 31, 1998 to
$173,700,000 at June 30, 1999. 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 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK DERIVATIVES
AND FINANCIAL INSTRUMENTS

Information relating to quantitative and qualitative disclosure about market
risk is set forth in Part 2, Item 1 of this Form 10Q and in the Company's
1998 Annual Reports to Stockholders under the caption "Factors That may
Affect Future Results" in Management's Discussion and Analysis of Financial
Condition and Results of Operations. Such information is incorporated herein
by reference.

<PAGE>

FOREIGN CURRENCY HEDGING INSTRUMENTS

The Company transacts business in various foreign currencies. Accordingly, the
Company is subject to exposure from adverse movements in foreign currency
exchange rates. This exposure is primarily related to payments from MainGate, a
Japanese distributor. As of June 30, 1999, the Company had no hedging contracts
outstanding.

The Company assesses the need to utilize financial instruments to hedge currency
exposures on an ongoing basis. The Company does not use derivative financial
instruments for speculative trading purposes, nor does the Company hedge its
foreign currency exposure in a manner that entirely offsets the effects of
changes in foreign exchange rates. The Company regularly reviews its hedging
program and may as part of this review determine at any time to change its
hedging program.

FIXED INCOME INVESTMENTS

The Company's exposure to market risks for changes in interest rates relate
primarily to investments in debt securities issued by U.S. government agencies
and corporate debt securities. The Company places its investments with high
credit quality issuers and, by a prudent policy, limits the amount of credit
exposure to any one issuer.

The Company's general policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. All
highly liquid investments with a maturity of three months or less at the date
of purchase are considered to be cash equivalents; investments with
maturities between three and twelve months are considered to be short-term
investments; investments with maturities in excess of twelve months are
considered to be long-term investments. The Company does not expect any
material loss with respect to its investment portfolio.

The following table presents the carrying value and related weighted average
annualized return rates for the Company's investment portfolio. The carrying
value approximates fair value at June 30, 1999.

<TABLE>
<CAPTION>
Carrying Average
Amount Return Rate
-------- -----------
<S> <C> <C>
Cash equivalents-variable rates $ 44,133 4.73%
Short-term investments-variable rates 147,933 5.32%
-------- -----
$192,066 5.18%
-------- -----
-------- -----
</TABLE>

PART 2. OTHER INFORMATION

ITEM 1. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

WE ARE INVOLVED IN SEVERAL LITIGATION MATTERS THAT COULD SERIOUSLY HARM OUR
BUSINESS

Avant! and its subsidiaries are engaged in various litigation matters,
including: a civil action brought by Cadence Design Systems, Inc.; the criminal
indictment of Avant! and certain of its employees, officers and directors;
securities class action and defamation claims stemming from the Cadence
litigation and the criminal indictment; civil actions brought by Silvaco Data
Systems, Inc.; a civil action brought by Katherine Ngai Pesic and Ivan Pesic and
the Nequist action. The pending litigation against Avant! and any future
litigation against Avant! or its employees, regardless of the outcome, may
result in substantial costs and expenses and significant diversion of effort by
Avant!'s management. These various matters could seriously harm Avant!'s
business, financial condition and results of operations.

CADENCE LITIGATION

On December 6, 1995, Cadence filed an action against Avant! 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 Avant!'s
employees who were formerly Cadence employees allegedly misappropriated and
improperly copied source code for certain important functions of Avant!'s place
and route products from Cadence, including Cadence's Design Framework II
("DFII") product, and that Avant! has allegedly competed unfairly by making
false statements concerning Cadence and its products. The action also alleges
that Avant! induced certain individual defendants to breach their agreements of
employment and confidentiality with Cadence. Trial on Cadence's allegations
regarding its DFII product has been scheduled for October 12, 1999. Trial on the
remaining allegations has not yet been scheduled.

In addition to actual and punitive damages, which have not been quantified by
Cadence, Cadence is seeking to enjoin the sale of Avant!'s place and route
products pending trial of the action. 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, Avant!'s ArcCell products. The injunction also
barred Avant! 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 DFII. (Avant! had stopped selling or
licensing ArcCell products or code in mid 1996.) On December 7, 1998, the
District Court entered an injunction against Avant! prohibiting Avant! from
directly or indirectly marketing, selling, leasing, licensing, copywriting or
transferring the Aquarius, Aquarius XO and Aquarius BV products. The injunction
also prohibits Avant! from marketing, selling, leasing, licensing, copying or
transferring any translation code for an Aquarius product that infringes any
protected right of Cadence. With certain exceptions related to the pending
litigation, the injunction prohibits Avant! from possessing or using any copies
of any portion of the source code or object code for the Aquarius products to
the extent that such

13
<PAGE>

portion is copied or derived from the DFII product of Cadence. The
preliminary injunction against Avant!'s Aquarius products could seriously
harm Avant!'s business, financial condition and results of operations.

Avant! believes it has defenses to Cadence's claims and intends to defend itself
vigorously. In April 1999, Avant! and Cadence filed motions for summary
adjudication as to whether a 1994 release between Avant! and Cadence applies to
Avant!'s continued use of alleged Cadence intellectual property that was in
Avant!'s place and route product at the time of the release. Prior to the May
14, 1999 hearing on these motions, the court provided a tentative ruling that
the court was inclined to deny Avant!'s motion and to grant Cadence's motion.
The tentative ruling also identified certain issues for the parties to address
at the hearing. The court took both motions under submission following the May
14, 1999 hearing, and the court has not yet issued a ruling on either motion. A
ruling granting Avant!'s motion would serve as a total or partial defense
regarding Avant!'s alleged use of Cadence DF II code in Avant!'s ArcCell and
Aquarius products. A ruling granting Cadence's motion would make it likely that
Cadence will prevail on its claims regarding Avant!'s use of DF II code in
ArcCell. While such a ruling would also increase the risk that Cadence may
prevail on its DF II claims regarding Aquarius, Avant! believes it has
additional meritorious defenses with respect to Aquarius that it does not have
with respect to ArcCell. The court could also deny both Avant!'s and Cadence's
motions for summary adjudication and rule that Avant!'s release defense must be
resolved at trial. Such a ruling would mean that Avant! will be able to raise
the release as a defense at the trial regarding the use of Cadence DF II code in
Avant!'s ArcCell and Aquarius products. The court had previously enjoined
ArcCell and Aquarius, based in part on finding that the release defense was not
available to Avant! and that Cadence was likely to prevail on its DF II claims.

If Avant!'s defenses are unsuccessful, Avant! may ultimately be permanently
enjoined from selling certain place and route products, and may be required to
pay monetary damages to Cadence. In addition, upon further consideration by the
District Court, Avant! could be preliminarily enjoined from selling its Apollo
place and route products. In addition, it is likely that an adverse judgment
against Avant! would result in a steep decline in the market price of Avant!'s
common stock. Accordingly, an adverse judgement, if granted on any claim, would
seriously harm Avant!'s business, financial position and results of operations.
Furthermore, it is possible that Avant!'s relationships with its customers
and/or partners will be seriously harmed in the future as a result of the
Cadence litigation.

CRIMINAL INDICTMENT

On December 16, 1998, after a grand jury investigation, the Santa Clara County
District Attorney's office filed a criminal indictment alleging felony level
offenses related to the allegations of misappropriation of trade secrets set
forth in Cadence's lawsuit against, among others, Avant! and the following
current or former employees and/or directors of Avant!:

- Gerald C. Hsu, President, Chief Executive Officer and Chairman of the
board of directors;

- Y. Eric Cho, consultant for Avant!, former officer and former member
of Avant! board of directors;

- Y. Z. Liao, Corporate Fellow;

- Stephen Wuu, Executive Operating Officer, Sales;

- Leigh Huang, consultant for Avant!;

- Eric Cheng, Research and Development Manager; and

- Mike Tsai, former officer and former member of Avant! board of
directors.

The indictment charges the defendants listed above with conspiring to commit
trade secret theft, trade secret theft, inducing the theft of a trade secret,
conspiracy to commit fraudulent practices in connection with the offer or sale
of a security and fraudulent practices in connection with the offer or sale of a
security. The criminal indictment could result in additional defense costs and
criminal fines against Avant!, as well as the potential incarceration of certain
members of its management team and its chairman of the board of directors. Such
outcomes would seriously harm Avant!'s business, financial condition and results
of operations and may also result in canceled or postponed orders, increased
future expenditures, the loss of management and other key personnel, additional
stockholder litigation and loss of reputation and goodwill. Trial has currently
been set for September 27, 1999.

SILVACO LITIGATION

14
<PAGE>

owed 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. In November 1997, a judgment in the
aggregate amount of $31.4 million was entered against Avant!. Avant! filed
appeals on its own behalf and on behalf of Mr. Hailey. If Avant!'s and Mr.
Hailey's appeals are unsuccessful, Avant! will be required to pay substantial
monetary damages to Silvaco. Payment of the damages previously awarded, and
damages which may be awarded in the future, would seriously harm Avant!'s
business, financial condition and results of operations.

On March 31, 1998, Silvaco filed an additional lawsuit, against Avant! and Roy
Jewell, a former member of Avant!'s Executive Staff, in the Superior Court of
California for Santa Clara County. The lawsuit alleges causes of action for
defamation, negligent and intentional interference with economic advantage,
unfair competition, Lanham Act violations and consumer fraud. Silvaco is seeking
$20 million in compensatory damages, punitive damages and an injunction. Avant!
believes it has defenses to these claims and intends to defend itself
vigorously. In the event Avant!'s defenses are unsuccessful, Avant! may be
required to pay damages to Silvaco, and such a judgment would seriously harm
Avant!'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
Avant! (as successor in interest to Meta), Shawn Hailey, Meta's former President
and Chief Executive Officer, and Thomas N. White, Jr. and George S. Cole, both
of whom were Meta's former counsel in the Meta v. Silvaco matter discussed
above. The action asserts claims for invasion of privacy under California common
law and the California Constitution and seeks compensatory and punitive damages.
Trial has been scheduled for October 18, 1999. Avant! believes it has defenses
to these claims and intends to defend itself vigorously. In the event that
Avant!'s defenses are unsuccessful, Avant! may be required to pay damages to the
plaintiffs, and such a judgment could seriously harm Avant!'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 Avant!. This lawsuit alleges 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 Cadence's civil lawsuit, described above. In addition, on May
30, 1997, Joanne Hoffman filed in the United States District Court for the
Northern District of California a class action lawsuit alleging securities
claims on behalf of purchasers of Avant!'s stock between March 29, 1996 and
April 11, 1997, the date of the filing of a criminal complaint against Avant!
and six of its employees and/or directors. Plaintiff alleges that Avant! and its
officers misled the market as to the likelihood of criminal charges being filed
and as to the validity of the Cadence allegations. The District Court has
granted Avant!'s motion to coordinate the Hoffman action for pretrial purposes
with the earlier-filed Margetis action. Avant! believes it has defenses to these
securities class action claims, and intends to defend itself vigorously. In the
event Avant!'s defenses are unsuccessful, Avant! may be required to pay damages
to the securities class action plaintiffs, and such a judgment would seriously
harm Avant!'s business, financial condition and results of operations.

NEQUIST LITIGATION

On July 15, 1998, Eric Nequist, a Cadence employee, filed in the Santa Clara
County Superior Court a complaint against Avant!. The complaint alleges causes
of action for defamation, intentional infliction of emotional distress,
negligent and intentional interference with economic advantage, abuse of process
and violations of California Business and Profession Code section 17200. No
trial date has been set, and the parties have been ordered to mediation. Avant!
has moved that this litigation be stayed pending resolution of the criminal case
against Avant!, and Avant!'s motion is currently pending before the Sixth
District Court of Appeal. The Sixth District has stayed certain discovery
pending resolution of that motion. Avant! believes it has defenses to Mr.
Nequist's claims and intends to defend itself vigorously. In the event Avant!'s
defenses are unsuccessful, Avant! may be required to pay damages to Mr. Nequist,
and such a judgment could seriously harm Avant!'s business, financial condition
and results of operation.

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 has charged to
expenses approximately $4,433,000 and $7,347,000 in litigation expenses during
the three and six months ended June 30, 1999, respectively, related to the
various litigation issues. The Company currently expects legal costs to
substantially increase in the future as a result of its current litigation
issues. Accordingly, any such litigation could seriously harm Avant!'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 over $31.4 million in damages, which would seriously harm
Avant!'s business, financial condition and results of operations.

15
<PAGE>

WE NEED TO SUCCESSFULLY MANAGE OUR EXPANDING OPERATIONS

Avant! has experienced periods of rapid growth and significant expansion of its
operations that have placed a significant strain upon its management systems and
resources. In addition, Avant! has recently hired a significant number of
employees, and plans to further increase its total headcount. Avant! also plans
to expand the geographic scope of its customer base and operations. This
expansion has resulted and will continue to result in substantial demands on
Avant!'s management resources. Avant!'s ability to compete effectively and to
manage future expansion of its operations, if any, will require Avant! to
continue to improve its financial and management controls, reporting systems and
procedures on a timely basis and expand, train and manage its employee work
force. Avant! may not be successful in addressing such risks, and the failure to
do so would seriously harm Avant!'s business, financial condition and results of
operations.

WE MAY BE UNABLE TO ATTRACT AND RETAIN THE KEY MANAGEMENT AND TECHNICAL
PERSONNEL THAT WE NEED TO SUCCEED

Avant!'s future operating results depend in significant part upon the continued
service of key management and technical personnel. Several of Avant!'s key
personnel, including Gerald C. Hsu, have been criminally indicted on charges
relating to the matters underlying the pending litigation between Avant! and
Cadence. If any of the individuals criminally indicted are found guilty and
incarcerated or are otherwise unable to continue to provide services to Avant!,
its business, financial condition and results of operations could be seriously
harmed. In addition, few of Avant!'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
businesses and pending litigation, it is possible that Avant! will fail to
retain such key technical and managerial personnel. Moreover, there are only a
limited number of qualified integrated circuit design automation engineers, and
competition for these individuals is intense. If Avant! is unable to attract,
hire and retain qualified personnel in the future, the development of new
products and the management of Avant!'s increasingly complex business would be
impaired. This would seriously harm Avant!'s business, operating results and
financial condition. See "--We are involved in several litigation matters that
could seriously harm our business."

WE MAY BE UNABLE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE INTEGRATED
CIRCUIT DESIGN AUTOMATION SOFTWARE MARKET

The integrated circuit design automation software market in which Avant!
competes is intensely competitive and subject to rapid change. Avant! currently
faces competition from major integrated circuit design automation vendors,
including Cadence Design Systems, Inc., which currently holds a dominant share
of the market for integrated circuit physical design software, Synopsys, Inc.
and Mentor Graphics Corporation. Avant! may not be able to maintain a
competitive position against these competitors. This is particularly true
because each of these companies has a longer operating history, significantly
greater financial, technical and marketing resources, greater name recognition
and a larger installed customer base than Avant!. 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 Avant!.
These competitors also have established relationships with current and potential
customers of Avant!, and they can devote substantial resources aimed at
preventing Avant! from enhancing relationships with existing customers or
establishing relationships with potential customers.

Moreover, the integrated circuit design automation software industry is
undergoing a trend toward consolidation that is expected to result in large,
more financially flexible competitors with a broad range of product offerings.
Alliances among competitors could present particularly formidable competition to
Avant!. Furthermore, because there are relatively low barriers to entry in the
software industry, Avant! expects additional competition from other established
and emerging companies. Avant! also competes with the internal integrated
circuit design automation 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 Avant!. Avant!'s current or potential competitors
may develop products comparable or superior to those developed by Avant! or
adapt more quickly than Avant! 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
seriously harm Avant!'s business, operating results or financial condition.
Avant! may be unable to compete successfully against current and future
competitors, and competitive pressures faced by Avant! could seriously harm
Avant!'s business, operating results and financial condition.

OUR QUARTERLY OPERATING RESULTS ARE DIFFICULT TO PREDICT

We are unable to accurately forecast our future revenues primarily because of
the emerging nature of the market in which we compete and because of the
unpredictability of the various litigation matters to which we are a party. Our
revenues and operating results generally depend on the size, timing and
structure of significant licenses. These factors have historically been, and are
likely to continue to be, difficult to forecast. In particular, we have adopted
a flexible pricing strategy pursuant to which we offer 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 cancellation, future revenue received under
these licenses is unpredictable. In addition, our current and future expense
levels are based largely on our operating plans and estimates of future revenues
and are, to a extent, fixed. We may be unable to adjust spending sufficiently
quickly to compensate for any unexpected revenue shortfall.

16
<PAGE>

Accordingly, any significant shortfall in revenues in relation to our planned
expenditures would seriously harm our business, financial condition and
results of operations. Such shortfalls in our revenue or operating results
from levels expected by public market analysts and investors could seriously
harm the trading price of our common stock. Additionally, we may not learn of
such revenue shortfalls, earnings shortfalls or other failure to meet market
expectations until late in a fiscal quarter, which could result in an even
more immediate and serious harm to the trading price of our common stock.

Our quarterly operating results have varied, and it is anticipated that our
quarterly operating results will vary, substantially from period to period
depending on various factors, many of which are outside our control. In addition
to the factors discussed in the previous paragraph, other factors that could
affect our quarterly operating results include:

- Increased competition;

- The length of our sales cycle;

- The timing of new or enhanced product announcements, introductions, or
delays in the introductions of new or enhanced versions of products by
us or our competitors;

- Market acceptance of new and enhanced versions of our products;

- Changes in pricing policies by us or our competitors;

- Conditions in the semiconductor and electronics industries;

- Cancellation of time-based licenses or maintenance agreements;

- The unavailability of technology of third parties;

- The mix of direct and indirect sales;

- Changes in operating expenses;

- Economic conditions in the Asian and other markets;

- Our ability to continue to market our products in Asian and other
markets;

- Foreign currency exchange rates; and

- General economic factors.

Due to the foregoing factors, we cannot predict with any significant degree of
certainty our quarterly revenue and operating results. Further, we believe that
period-to-period comparisons of our operating results are not necessarily a
meaningful indication of future performance.

OUR STOCK PRICE IS EXTREMELY VOLATILE

The trading price of our common stock has fluctuated significantly in the past,
and the trading price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in price in response to such factors as:

- The outcome of the various litigation matters to which we are a party;

- Actual or anticipated fluctuations in our operating results;

- Announcements of technological innovations and new products by us or
our competitors;

- New contractual relationships with strategic partners by us or our
competitors;

- Proposed acquisitions by us or our competitors; and

- Financial results that fail to meet public market analyst expectations
of performance.

In addition, the stock market in general, and The Nasdaq National Market and the
market for technology companies in particular has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. These broad market and industry factors
may seriously harm the market price of our common stock in future periods.

WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF PRODUCTS
FOR SUBSTANTIALLY ALL OF OUR REVENUE

Historically, we have derived substantially all of our total revenue from the
licensing and support of the following products:

- Apollo (our successor product to Aquarius);

- Hercules (our hierarchical physical verification software product);

17
<PAGE>

- Star-Hspice (our circuit simulator);

- Star-Sim (our high-capacity circuit simulation and high-accuracy
timing analysis software); and

- Polaris (our Verilog simulation product).

Absent any adverse results from existing litigation, we currently expect that
these products will continue to account for a significant portion of our revenue
for the foreseeable future. As a result, our business, operating results and
financial condition are significantly dependent upon the continued market
acceptance of these products and upon our ability to continue to sell, license
and support each of these products.

WE DEPEND ON INTERNATIONAL SALES FOR A SIGNIFICANT PERCENTAGE OF OUR REVENUE

International revenue, principally from Asian customers, accounted for
approximately 31%, 42% and 36% of our total revenue in 1998, 1997, and 1996,
respectively. For the six months ended June 30, 1999, international revenue
accounted for approximately 33% of total revenue. We expect that international
license and service revenue, particularly in Asia, will continue to account for
a significant portion of our total revenue for the foreseeable future. Our
international business activities are subject to a variety of potential risks,
including:

- The impact of recessionary environments in foreign economies;

- 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 of intellectual property rights in some countries;
and

- Tariffs and other trade barriers.

Currency exchange fluctuations in countries in which we license our products
could also seriously harm our business, financial condition and results of
operations by resulting in pricing that is not competitive with products priced
in local currencies. Furthermore, we may not be able to continue to generally
price our 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 our products and intellectual property rights
to the same extent, as do the laws of the United States. Moreover, it is
possible that we may fail to sustain or increase revenue derived from
international licensing and service or that the foregoing factors will seriously
harm our future international license and service revenue, and, consequently,
seriously harm our business, financial condition and results of operations.

WE DEPEND UPON THIRD PARTY DISTRIBUTORS AND MANUFACTURER'S REPRESENTATIVES TO
LICENSE AND SUPPORT OUR PRODUCTS IN ASIA

We rely on distributors and manufacturer's representatives for the licensing and
support of our products in Asia. A substantial portion of our international
license and service revenue is generated from a limited number of these
representatives, although we had no individual customer representing over 10% of
revenue in any of the years 1994-1998. In 1996, we consolidated our Korean sales
channel by forming DavanTech Co., Ltd., a distributor owned by Avant!, Gerald C.
Hsu (Avant!'s Chairman of the Board, President and CEO) and other parties. In
1997, we consolidated our Japanese sales channel by forming MainGate, a
distributor owned by Avant!, Gerald C. Hsu (Avant!'s Chairman of the Board,
President and CEO), and other parties (including other Avant! employees and
former employees of Avant!'s third party distributors). Our reliance on
distributors and manufacturer's representatives subjects us to a number of
risks. For example, our current distributors, manufacturer's representatives
DavanTech or MainGate may not choose to or be able to market, service or support
our products effectively. Economic conditions or industry demand may seriously
harm these or other distributors and manufacturer's representatives or these
distributors, manufacturer's representatives DavanTech or MainGate may devote
greater resources to marketing and supporting products of our competitors.
Additionally, because our products are used by highly skilled professional
engineers, a distributor or manufacturer's representative 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 distributors or
manufacturer's representatives possess such resources. Accordingly, the loss of,
or a significant reduction in revenue from, one of our distributors,
manufacturer's representatives DavanTech or MainGate or any other distributor or
manufacturer's representative on which our revenues may, in the future, become
dependent, could seriously harm our business, financial condition and results of
operations.

18
<PAGE>

OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO KEEP PACE WITH THE RAPIDLY
EVOLVING TECHNOLOGY STANDARDS OF OUR INDUSTRY

Because the semiconductor industry has made significant technological advances
recently, integrated circuit design automation companies, such as Avant!, that
license software to semiconductor companies have been required to continuously
develop new products and enhancements for existing products to keep pace with
the evolving industry standards and rapidly changing customer requirements. The
evolving nature of the integrated circuit design automation industry could
render our existing products and services obsolete. Our success will depend, in
part, on our ability to:

- Enhance our existing products and services;

- Develop and introduce new products and services on a timely and
cost-effective basis that will keep pace with technological
developments and evolving industry standards; and

- Address the increasingly sophisticated needs of our customers.

If we are unable, for technical, legal, financial or other reasons, to respond
in a timely manner to changing market conditions or customer requirements, our
business, financial condition and results of operations could be seriously
harmed.

WE DEPEND ON THE GROWTH OF THE SEMICONDUCTOR AND ELECTRONICS INDUSTRIES

Avant! is dependent upon the semiconductor industry and, more generally, the
electronics industry. Both of these industries are 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. While these industries have experienced an extended
period of significant economic growth over the past few years, such economic
growth may not continue, and if it does not, any downturn could be especially
severe on Avant!. During such downturns, the number of new integrated circuit
design projects often decreases. Because acquisitions of new licenses from
Avant! are largely dependent upon the commencement of new design projects, any
slowdown in these industries could seriously harm Avant!'s business, financial
condition and results of operations.

WE MAY BEAR INCREASED EXPENSES TO PROTECT OUR PROPRIETARY RIGHTS OR DEFEND
AGAINST CLAIMS OF INFRINGEMENT, AND WE MAY LOSE COMPETITIVE ADVANTAGES IF OUR
PROPRIETARY RIGHTS ARE INADEQUATELY PROTECTED

We rely on a combination of patents, trade secrets, copyrights, trademarks and
contractual commitments to protect our proprietary rights in our software
products. We generally enter into confidentiality or license agreements with our
employees, distributors and customers, and limit access to and distribution of
our software, documentation and other proprietary information. Despite these
precautions, a third party may still copy or otherwise obtain and use our
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. We expect
that software companies will increasingly be subject to infringement claims as
the number of products and competitors in the integrated circuit design
automation industry grows and the functionality of products in different
industry segments overlaps. In particular, our current litigation with Cadence
involves such infringement claims. Responding to such claims, regardless of
merit, could consume valuable time, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if available, may not be available on
terms acceptable to us. A forced license could seriously harm our business,
financial condition and results of operations.

ERRORS IN OUR SOFTWARE PRODUCTS COULD RESULT IN LOSS OF MARKET SHARE OR FAILURE
TO ACHIEVE MARKET ACCEPTANCE

Software products as complex as those offered by Avant! may contain defects or
failures when introduced or when new versions are released. Avant! 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. Despite testing by
Avant!, errors may still 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 seriously harm Avant!'s business,
financial condition and results of operations.

OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES

STATE OF READINESS

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
such "Year 2000" requirements. During

19
<PAGE>

1998, Avant! undertook an evaluation of its currently supported products to
determine if they are Year 2000 compliant. The results of this evaluation
revealed that most currently supported products are Year 2000 compliant. Avant!
has also provided for those supported products not Year 2000 compliant with fix
patch or upgrade, as part of the Company's standard maintenance programs.
Although to the best of Avant!'s knowledge, the Company has offered Year 2000
solutions for those products, unpredicted Year 2000 problems might occur. Any
unpredicted Year 2000 problem occurring in Avant!'s products could result in:

- A decrease in sales of our products;

- An increase in the allocation of resources to address the Year 2000
problems of our customers without additional revenue commensurate with
such dedication of resources; and

- An increase in litigation costs relating to losses suffered by our
customers due to such Year 2000 problems.

During 1998, Avant! conducted a preliminary review of our internal computer
systems to identify the systems that could be affected by the Year 2000 issue
and to develop a plan to resolve the issue. Avant! has adopted SAP R/3 software
as an enterprise system managing its financial and logistical operations in the
United States and Europe. SAP R/3 software has been certified by SAP as Year
2000 compliant. Some other third party software systems and applications
currently used by Avant!, however, are not Year 2000 compliant. Avant! intends
to stop using these software products or upgrade or replace them as part of
Avant!'s growth plans. Avant! only performs Year 2000 compliance testing on its
most critical internal support systems. Inoperability related to Year 2000
problems of internal systems that are certified Year 2000 compliant by the
vendor and not tested by Avant! could seriously harm Avant!'s operational
efficiency. Furthermore, the purchasing patterns of customers or potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct their current systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase products and
services such as those offered by Avant!, which could seriously harm Avant!'s
business, operating results and financial condition.

RISKS

Avant! requests its vendors to provide Year 2000 compliance certificates for all
its internal support systems. However, the Company only intends to perform
testing on its most critical internal support systems. Inoperability related to
Year 2000 problems of internal systems that are certified Year 2000 ready by the
vendor and not tested by Avant! could have an adverse impact to the Company's
operational efficiency.

The migration paths provided by Avant! as the remedies to make its products Year
2000 ready may not be accepted by the customer, which could have an adverse
impact on Avant!'s business.

COSTS

Avant! does not have a project tracking system that tracks the cost and time
that its own internal employees spend on the Year 2000 project. Based on
Avant!'s assessment, the costs incurred to date have had no material impact on
Avant!'s results of operations. Avant! expects that costs directly related to
Year 2000 compliance in excess of normal upgrade and maintenance costs will not
exceed approximately $250,000 for both costs incurred to date and future costs.

CONTINGENCY PLANS

Avant! has started to assess the areas that need a contingency plans. Some
contingency plans have been established. Any failure of Avant! to address any
unforeseen Year 2000 problems would seriously harm Avant!'s business, financial
condition and results of operations.

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

20
<PAGE>

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

On May 14, 1999, the Annual Meeting of Stockholders of the Company was
held at which the following matters were submitted to and voted on by
the stockholders. 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 25,777,159 - 3,629,737 3,864,468

Charles L. St. Clair 23,096,980 - 6,309,916 3,864,468

Eric A. Brill 23,121,530 - 6,285,366 3,864,468

Moriyuki Chimura 23,102,450 - 6,304,446 3,864,468

Dan Taylor 23,118,143 - 6,288,753 3,864,468
</TABLE>

2. Stockholders approved the ratification of KPMG LLP as the Company's
independent certified public accountant for the fiscal year ending
December 31, 1999. 26,278,401 votes were for the election, 3,127,083
votes were against, and 1,412 votes were withheld and 0 votes were
broker non-vote.

Item 5. OTHER INFORMATION

Not applicable.

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 no reports on form 8-K during the quarter for which
this report is required to be is filed.

21
<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)

JULY 14, 1999 /S/ GERALD C. HSU
- ------------- -----------------------
Gerald C. Hsu
President, Chief Executive Officer
and Chairman of the Board of Directors

JULY 14, 1999 /S/ SAM CHANG
- ------------- --------------
Sam Chang
Head of Finance
(principal accounting officer
and principal financial officer)

22
<PAGE>

INDEX TO EXHIBITS

(a)3. Exhibits

<TABLE>
<CAPTION>
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)
2.6 Agreement and Plan of Reorganization dated as of November 4, 1998, as
amended on November 12, 1998 among the Registrant, Artemis Corporation
and interHDL, Inc. (7)
3.1 Restated Certificate of Incorporation (1)
3.2 Amended and Restated Bylaws (9)
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)
4.4 Registration Rights Agreement dated November 13, 1998 (8)
4.5 Registration Rights Agreement dated September 4, 1998 between the
Registrant and Harris Trust Company of California (9) 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)
13.1 Portions of the Annual Report (10)
23.1 Report on Financial Statement Schedule and Consent of KPMG LLP,
Independent Auditors (10)
23.2 Consent of Arthur Anderson LLP, Independent Auditors (10)
27.1 Financial Data Schedule
99.1 Preliminary Injunction, Cadence Design Systems, Inc. v. Avant! Inc.
(10)
99.2 Modification of Preliminary Injunction, Cadence Design Systems, Inc.
v. Avant! Inc. (10)
</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.
(7) Incorporated by reference from the Company Current Report on Form 8-K filed
with the SEC on November 19, 1998
(8) Incorporated by reference from the Company's Registration Statement on Form
S-3 (File No. 333-67629) as declared effective on March 9, 1999
(9) Incorporated by reference from the Company's Current Report on Form 8-K
filed with the SEC on September 18, 1998
(10) Incorporated by reference from the Company's Current Report on Form 10-K
filed with the SEC on March 29,1999

23
<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)

JULY 14, 1999 /S/ GERALD C. HSU
- ------------- -----------------------
Gerald C. Hsu
President, Chief Executive Officer
and Chairman of the Board of Directors

JULY 14, 1999 /S/ SAM CHANG
- ------------- --------------
Sam Chang
Head of Finance
(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 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 44,133
<SECURITIES> 147,933
<RECEIVABLES> 53,462
<ALLOWANCES> 10,077
<INVENTORY> 0
<CURRENT-ASSETS> 273,949
<PP&E> 45,639
<DEPRECIATION> 19,113
<TOTAL-ASSETS> 370,290
<CURRENT-LIABILITIES> 100,327
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 268,068
<TOTAL-LIABILITY-AND-EQUITY> 370,290
<SALES> 0
<TOTAL-REVENUES> 136,006
<CGS> 2,460
<TOTAL-COSTS> 10,700
<OTHER-EXPENSES> 82,260
<LOSS-PROVISION> 1,915
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 46,782
<INCOME-TAX> 17,543
<INCOME-CONTINUING> 29,239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,239
<EPS-BASIC> 0.88
<EPS-DILUTED> 0.84

</TABLE>