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

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2002

( ) 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: 0-19807
----------------

SYNOPSYS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 56-1546236
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

700 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(Address of principal executive offices)

TELEPHONE: (650) 584-5000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (l) 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 [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

61,210,596 shares of Common Stock as of March 8, 2002

Page 1

SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
January 31, 2002

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS...................................................3
CONDENSED CONSOLIDATED BALANCE SHEETS..................................3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME..................4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS...........................................................5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.........6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.............27

PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS....................27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................27
SIGNATURES....................................................................28

Page 2

PART I

ITEM 1. FINANCIAL STATEMENTS

SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

JANUARY 31, OCTOBER 31,
2002 2001
---------------- -----------------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents $ 231,969 $ 271,696
Short-term investments 206,790 204,740
---------------- -----------------
Total cash and short-term investments 438,759 476,436
Accounts receivable, net of allowances of $11,748
and $11,027, respectively 146,331 146,294
Deferred taxes 152,134 149,239
Prepaid expenses and other 30,943 19,413
---------------- -----------------
Total current assets 768,167 791,382

Property and equipment, net 198,091 192,304
Long-term investments 65,405 61,699
Intangible assets, net 30,922 35,077
Other assets 52,232 48,445
---------------- -----------------
Total assets $ 1,114,817 $ 1,128,907
================ =================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 105,608 $ 134,966
Current portion of long-term debt 536 535
Accrued income taxes 55,772 110,867
Deferred revenue 295,828 290,052
---------------- -----------------
Total current liabilities 457,744 536,420
---------------- -----------------

Deferred compensation and other liabilities 22,689 17,124
Long-term deferred revenue 78,554 89,707

Stockholders' equity:
Preferred stock, $.01 par value; 2,000 shares
authorized; no shares outstanding -- --
Common stock, $.01 par value; 400,000 shares
authorized; 60,661 and 59,428 shares outstanding,
respectively 607 595
Additional paid-in capital 583,915 575,403
Retained earnings 439,748 436,662
Treasury stock, at cost (477,823) (531,117)
Accumulated other comprehensive income 9,383 4,113
---------------- -----------------
Total stockholders' equity 555,830 485,656
---------------- -----------------
Total liabilities and stockholders' equity $ 1,114,817 $ 1,128,907
================ =================

The accompanying notes are an integral part of these financial statements.

Page 3

SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)

THREE MONTHS ENDED
JANUARY 31,
-----------------------------
2002 2001
------------- ---------------
Revenue:
Ratable license $ 66,897 $ 30,993
Product 39,555 39,192
Service 69,093 86,969
------------- ---------------
Total revenue 175,545 157,154
------------- ---------------

Cost of revenue:
Ratable license 10,440 7,097
Product 4,066 4,590
Service 20,684 20,368
------------- ---------------
Total cost of revenue 35,190 32,055
------------- ---------------

Gross margin 140,355 125,099
------------- ---------------

Operating expenses:
Research and development 48,706 46,221
Sales and marketing 59,799 69,579
General and administrative 18,708 16,689
Amortization of intangible assets 4,044 4,172
------------- ---------------
Total operating expenses 131,257 136,661
------------- ---------------

Operating income (loss) 9,098 (11,562)
Other income, net 11,081 25,481
------------- ---------------

Income before provision for income taxes 20,179 13,919
Provision for income taxes 6,127 4,454
------------- ---------------
Net income $ 14,052 $ 9,465
============= ===============

Basic earnings per share $ 0.23 $ 0.15
============== ===============
Weighted average common shares outstanding 60,136 61,901
============== ===============

Diluted earnings per share $ 0.22 $ 0.15
============== ===============
Weighted average common shares and dilutive
stock options outstanding 65,011 65,243
============== ===============

The accompanying notes are an integral part of these financial statements.

Page 4

SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

THREE MONTHS ENDED
JANUARY 31,
--------------------------------
2002 2001
-------------- -------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,052 $ 9,465
Adjustments to reconcile net income to net cash flows
(used in) provided by operating activities:
Depreciation and amortization 16,674 15,715
Tax benefit associated with stock options 8,061 2,985
Provision for doubtful accounts and sales returns 1,231 1,202
Interest accretion on notes payable -- 188
Deferred taxes (2,903) --
Gain on sale of long-term investments (5,865) (10,411)
Gain on sale of silicon libraries business -- (10,580)
Net changes in operating assets and liabilities:
Accounts receivable (1,268) --
Prepaid expenses and other current assets (11,530) (3,391)
Other assets (5,781) (4,359)
Accounts payable and accrued liabilities (29,407) (47,383)
Accrued income taxes (55,095) (13,272)
Deferred revenue (5,377) 69,774
Deferred compensation 5,250 4,808
-------------- -----------------
Net cash (used in) provided by operating activities (71,958) 14,741
-------------- -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (17,824) (18,254)
Purchases of short-term investments (349,996) (515,295)
Proceeds from sales and maturities of short-term investments 346,627 668,460
Purchases of long-term investments (2,733) (6,000)
Proceeds from sale of long-term investments 11,057 22,814
Proceeds from the sale of silicon libraries business -- 4,122
Capitalization of software development costs (398) (250)
-------------- -----------------
Net cash (used in) provided by investing activities (13,267) 155,597
-------------- -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt obligations -- (3,083)
Issuances of common stock 42,791 28,234
Purchases of treasury stock -- (144,544)
-------------- -----------------
Net cash provided by (used in) financing activities 42,791 (119,393)
Effect of exchange rate changes on cash 2,707 (4,497)
-------------- -----------------
Net (decrease) increase in cash and cash equivalents (39,727) 46,448
Cash and cash equivalents, beginning of period 271,696 153,120
-------------- -----------------
Cash and cash equivalents, end of period $ 231,969 $ 199,568
============== =================

The accompanying notes are an integral part of these financial statements.

Page 5

SYNOPSYS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF COMPANY AND BASIS OF PRESENTATION

Synopsys, Inc. (Synopsys or the Company) is a leading supplier of electronic
design automation (EDA) software to the global electronics industry. The Company
develops, markets, and supports a wide range of integrated circuit (IC) design
products that are used by designers of advanced ICs, including system-on-a-chip
ICs, and the electronic systems (such as computers, cell phones, and internet
routers) that use such ICs, to automate significant portions of their design
process. ICs are distinguished by the speed at which they run, their area, the
amount of power they consume and their cost of production. Synopsys' products
offer its customers the opportunity to design ICs that are optimized for speed,
area, power consumption and production cost, while reducing overall design time.
The Company also provides consulting services to help its customers improve
their IC design processes and, where requested, to assist them with their IC
designs, as well as training and support services.

The Company's fiscal year ends on the Saturday nearest October 31. Fiscal
year 2001 was a 53-week year with the extra week added to the first quarter and
fiscal year 2002 will be a 52-week year. For presentation purposes, the
unaudited condensed consolidated financial statements and notes refer to the
calendar month end.

The unaudited condensed consolidated financial statements include the
accounts of Synopsys and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations of the Company have been made. Operating results for the interim
periods are not necessarily indicative of the results that may be expected for
any future period or the full fiscal year. The unaudited condensed consolidated
financial statements and notes included herein should be read in conjunction
with the consolidated financial statements and notes thereto for the fiscal year
ended October 31, 2001, included in the Company's 2001 Annual Report on Form
10-K.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the unaudited condensed
consolidated financial statements and accompanying notes. A change in the facts
and circumstances surrounding these estimates and assumptions could result in a
change to the estimates and assumptions and impact future operating results.

2. SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION AND COST OF REVENUE

Revenue consists of fees for perpetual and time-based licenses for the
Company's software products, sales of hardware system products, post-contract
customer support (PCS), customer training and consulting. The Company classifies
its revenues as product, service or ratable license. Product revenue consists
primarily of perpetual revenue. Service revenue consists of PCS under perpetual
and non-ratable time-based licenses and fees for consulting services. Ratable
license revenue is all fees related to time-based licenses bundled with
post-contract customer support (PCS) and sold as a single package (commonly
referred to by the Company as a Technology Subscription License or TSL) and
time-based licenses that include extended payment terms or unspecified
additional products.

Cost of product revenue includes cost of production personnel, product
packaging, documentation, amortization of capitalized software development
costs, and costs of the Company's systems products. Cost of service revenue
includes personnel and the related costs associated with providing training,
consulting and PCS. Cost of ratable license revenue includes the cost of
products and services related to time-based licenses bundled with PCS and sold
as a single package and to time-based licenses that include extended payment
terms or unspecified additional products.

Page 6

The Company recognizes revenue in accordance with SOP 97-2, Software Revenue
Recognition, as amended by SOP 98-9 and SOP 98-4, and generally recognizes
revenue when all of the following criteria are met as set forth in paragraph 8
of SOP 97-2:

o Persuasive evidence of an arrangement exists, o Delivery has occurred, o
The vendor's fee is fixed or determinable, and o Collectibility is
probable.

The Company defines each of the four criteria above as follows:

Persuasive Evidence of an Arrangement Exists. It is the Company's
customary practice to have a written contract, which is signed by both the
customer and Synopsys, or a purchase order from those customers that have
previously negotiated a standard end-user license arrangement or volume
purchase agreement, prior to recognizing revenue on an arrangement.

Delivery Has Occurred. The Company's software may be either physically or
electronically delivered to its customers. For those products that are
delivered physically, the Company's standard transfer terms are FOB
shipping point. For an electronic delivery of software, delivery is
considered to have occurred when the customer has been provided with the
access codes that allow the customer to take immediate possession of the
software on its hardware.

If undelivered products or services exist in an arrangement that are
essential to the functionality of the delivered product, delivery is not
considered to have occurred.

The Vendor's Fee is Fixed or Determinable. The fee the Company's customers
pay for its products is negotiated at the outset of an arrangement, and is
generally based on the specific volume of products to be delivered. The
Company's license fees are not a function of variable-pricing mechanisms
such as the number of units distributed or copied by the customer, or the
expected number of users in an arrangement. Therefore, except in cases
where the Company grants extended payment terms to a specific customer, the
Company's fees are considered to be fixed or determinable at the inception
of its arrangements.

The Company's customary payment terms are such that a minimum of 75% of the
arrangement fee is due within one year or less. Arrangements with payment
terms extending beyond the customary payment terms are considered not to be
fixed or determinable. Revenue from such arrangements is recognized at the
lesser of the aggregate of amounts due and payable or the amount of the
arrangement fee that would have been recognized if the fees had been fixed
or determinable.

Collectibility is Probable. Collectibility is assessed on a
customer-by-customer basis. The Company typically sells to customers for
which there is a history of successful collection. New customers are
subjected to a credit review process, which evaluates the customers'
financial positions and ultimately their ability to pay. New customers are
typically assigned a credit limit based on a formulated review of their
financial position. Such credit limits are only increased after a
successful collection history with the customer has been established. If it
is determined from the outset of an arrangement that collectibility is not
probable based upon the Company's credit review process, revenue is
recognized on a cash-collected basis.

Multiple-Element Arrangements. The Company allocates revenue on software
arrangements involving multiple elements to each element based on the relative
fair values of the elements. The Company's determination of fair value of each
element in multiple-element arrangements is based on vendor-specific objective
evidence (VSOE). The Company limits its assessment of VSOE for each element to
the price charged when the same element is sold separately.

Page 7

The Company has analyzed all of the elements included in its
multiple-element arrangements and determined that it has sufficient VSOE to
allocate revenue to the PCS components of its perpetual license products and
consulting. Accordingly, assuming all other revenue recognition criteria are
met, revenue from perpetual licenses is recognized upon delivery using the
residual method in accordance with SOP 98-9, and revenue from PCS is recognized
ratably over the PCS term. The Company recognizes revenue from TSLs over the
term of the ratable license period, as the license and PCS portions of a TSL are
bundled and not sold separately. Revenue from contracts with extended payment
terms is recognized as the lesser of amounts due and payable or the amount of
the arrangement fee that would have been recognized if the fee were fixed or
determinable.

Certain of the Company's time-based licenses include unspecified additional
products. The Company recognizes revenue from time-based licenses that include
both unspecified additional software products and extended payment terms that
are not considered to be fixed or determinable in an amount that is the lesser
of amounts due and payable or the ratable portion of the entire fee. Revenue
from contracts with unspecified additional software products is recognized
ratably over the contract term.

Consulting Services. The Company provides design methodology assistance,
specialized services relating to telecommunication systems design and turnkey
design services. The Company's consulting services generally are not essential
to the functionality of the software. The Company's software products are fully
functional upon delivery and implementation does not require any significant
modification or alteration. The Company's services to its customers often
include assistance with product adoption and integration and specialized design
methodology assistance. Customers typically purchase these professional services
to facilitate the adoption of the Company's technology and dedicate personnel to
participate in the services being performed, but they may also decide to use
their own resources or appoint other professional service organizations to
provide these services. Software products are billed separately and
independently from consulting services, which are generally billed on a
time-and-materials or milestone-achieved basis. The Company generally recognizes
revenue from consulting services as the services are performed.

Exceptions to the general rule above involve arrangements where the Company
has committed to significantly alter the features and functionality of its
software or build complex interfaces necessary for the Company's software to
function in the customer's environment. These types of services are considered
to be essential to the functionality of the software. Accordingly, contract
accounting is applied to both the software and service elements included in
these arrangements.

ADOPTION OF SFAS 141 and 142

In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and
No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and specifies criteria intangible assets acquired
in a purchase method business combination must meet to be recognized apart from
goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS 142.

The Company adopted the provisions of SFAS 141 on July 1, 2001. Under SFAS
141, goodwill and intangible assets with indefinite useful lives acquired in a
purchase business combination completed after June 30, 2001, but before SFAS 142
is adopted, will not be amortized but will continue to be evaluated for
impairment in accordance with SFAS 121. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized and tested for impairment in accordance with current accounting
guidance until the date of adoption of SFAS 142.

Upon adoption of SFAS 142, the Company must evaluate its existing intangible
assets and goodwill acquired in purchase business combinations prior to July 1,
2001, and make any necessary reclassifications in order to conform with the new
criteria in SFAS 141 for recognition apart from goodwill. Upon adoption of SFAS
142, the Company will be required to reassess the useful lives and residual
values of all intangible assets acquired, and make any necessary amortization
period adjustments. The Company will also be required to test goodwill for
impairment in accordance with the provisions of SFAS 142 within the six-month
period following adoption. Any impairment loss will be measured as of the date
of adoption and recognized immediately as the cumulative effect of a change in
accounting principle. Any subsequent impairment losses will be included in
operating activities.

The Company expects to adopt SFAS 142 on November 1, 2002. As of January 31,
2002, unamortized goodwill is $30.9 million which, in accordance with the
Statements, will continue to be amortized until the date of adoption of SFAS
142. Amortization of goodwill and other intangible assets for the three-month
period ended January 31, 2002 is $4.0 million. The Company does not have any
intangible assets with an indefinite useful life. Because of the extensive
effort needed to comply with adopting SFAS 142, it is not practicable to
reasonably estimate the impact of adopting this Statement on the Company's
financial statements at the date of this report, including whether the Company
will be required to recognize any transitional impairment losses.

RECLASSIFICATION

Certain prior year amounts have been reclassified to conform to current year
presentation.

Page 8

3. STOCK REPURCHASE PROGRAM

In July 2001, the Company's Board of Directors authorized a stock repurchase
program under which Synopsys common stock with a market value up to $500 million
may be acquired in the open market. This authorized stock repurchase program
replaced all prior repurchase programs authorized by the Board. Common shares
repurchased are intended to be used for ongoing stock issuances under the
Company's employee stock plans and for other corporate purposes. The July 2001
stock repurchase program expires on October 31, 2002. During the three months
ended January 31, 2001, the Company purchased 3.0 million shares of Synopsys
common stock in the open market under a prior stock repurchase program, at an
average price of $48 per share. The Company did not repurchase any shares during
the three months ended January 31, 2002. At January 31, 2002, approximately
$481.9 million remained available for repurchases under the July 2001 program.

4. COMPREHENSIVE INCOME

The following table sets forth the components of comprehensive income, net
of income tax expense:

THREE MONTHS ENDED
JANUARY 31,
--------------------------------
(in thousands) 2002 2001
--------------- ----------------

Net income $ 14,052 $ 9,465
Foreign currency translation
adjustment 2,595 (4,087)
Unrealized gain (loss) on
investments 5,644 (15,077)
Reclassification adjustment
for realized gains on
investments (2,969) 9,211
--------------- ----------------
Total comprehensive income (loss) $ 19,322 $ (488)
=============== ================

5. EARNINGS 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 and dilutive
employee stock options outstanding during the period. The weighted-average
dilutive stock options outstanding is computed using the treasury stock method.

The following is a reconciliation of the weighted-average common shares used
to calculate basic net earnings per share to the weighted-average common shares
used to calculate diluted net income per share:

THREE MONTHS ENDED
JANUARY 31,
----------------------------------
(in thousands, except per share 2002 2001
amounts)
---------------- -----------------

NUMERATOR:
Net income $ 14,052 $ 9,465
================ =================

DENOMINATOR:
Weighted-average common
shares outstanding 60,136 61,901
Effect of dilutive employee
stock options 4,875 3,342
---------------- -----------------
Diluted common shares 65,011 65,243
================ =================

Basic earnings per share $ 0.23 $ 0.15
================ =================

Diluted earnings per share $ 0.22 $ 0.15
================ =================

The effect of dilutive employee stock options excludes approximately
3,332,000 and 4,025,000 stock options for the three-month periods ended January
31, 2002 and 2001, respectively, which were anti-dilutive for earnings per share
calculations.

Page 9

6. SEGMENT DISCLOSURE

Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131), requires
disclosures of certain information regarding operating segments, products and
services, geographic areas of operation and major customers. The method for
determining what information to report under SFAS 131 is based upon the
"management approach," or the way that management organizes the operating
segments within a Company for which separate financial information is available
that is evaluated regularly by the Chief Operating Decision Maker (CODM) in
deciding how to allocate resources and in assessing performance. Synopsys' CODM
is the Chief Executive Officer and Chief Operating Officer.

The Company provides comprehensive design technology products and consulting
services in the EDA software industry. The CODM evaluates the performance of the
Company based on profit or loss from operations before income taxes not
including merger-related costs, in-process research and development and
amortization of intangible assets. For the purpose of making operating
decisions, the CODM primarily considers financial information presented on a
consolidated basis accompanied by disaggregated information about revenues by
geographic region. There are no differences between the accounting policies used
to measure profit and loss for the Company segment and those used on a
consolidated basis. Revenue is defined as revenues from external customers.

The disaggregated financial information reviewed by the CODM is as follows:

THREE MONTHS ENDED
JANUARY 31,
---------------------------------
(in thousands) 2002 2001
---------------- ----------------

Revenue:
Product $ 39,555 $ 39,192
Service 69,093 86,969
Ratable license 66,897 30,993
---------------- ----------------
Total revenue $ 175,545 $ 157,154
================ ================

Gross margin $ 140,355 $ 125,099

Operating income (loss) before
amortization of intangible assets $ 13,142 $ (7,390)

There were no merger related or in-process research and development costs in
the periods presented.

Reconciliation of the Company's segment profit and loss to the Company's
operating income (loss) before provision for income taxes is as follows:

THREE MONTHS ENDED
JANUARY 31,
-------------------------------
(in thousands) 2002 2001
------------- ----------------

Operating income (loss) before
amortization of intangible assets, and
in-process research and development
$ 13,142 $ (7,390)
Amortization of intangible assets (4,044) (4,172)
------------- -----------------
Operating income (loss) $ 9,098 $ (11,562)
============= =================

Page 10

Revenue and long-lived assets related to operations in the United States and
other geographic areas are as follows:

THREE MONTHS ENDED
JANUARY 31,
----------------------------------
(in thousands) 2002 2001
---------------- -----------------

Revenue:
United States $ 108,709 $ 94,804
Europe 34,068 27,450
Japan 17,018 16,876
Other 15,750 18,024
---------------- -----------------
Consolidated $ 175,545 $ 157,154
================ =================

JANUARY 31, OCTOBER 31,
(in thousands) 2002 2001
---------------- -----------------

Long-lived assets:
United States $ 182,525 $ 176,330
Other 15,566 15,974
---------------- -----------------
Consolidated $ 198,091 $ 192,304
================ =================

Geographic revenue data for multi-region, multi-product transactions reflect
internal allocations and is therefore subject to certain assumptions and to the
Company's methodology. Revenue is not reallocated among geographic regions to
reflect any re-mixing of licenses between different regions following the
initial product shipment. No one customer accounted for more than ten percent of
the Company's consolidated revenue in the periods presented.

The Company segregates revenue into five categories for purposes of internal
management reporting: IC Implementation, including both the Design Compiler (DC)
Family and Physical Synthesis; Verification and Test; Intellectual Property (IP)
and System Level Design; Transistor Level Design; and Professional Services.
Revenue for each of the categories is as follows:

THREE MONTHS ENDED
JANUARY 31,
----------------------------------
(in thousands) 2002 2001
----------------- ----------------

Revenue:
IC Implementation
DC Family $ 55,488 $ 53,845
Physical Synthesis 15,037 6,160
Verification and Test 56,946 44,222
IP and System Level Design 19,801 18,441
Transistor Level Design 14,760 13,465
Professional Services 13,513 21,021
----------------- ----------------
Consolidated $ 175,545 $ 157,154
================= ================

7. DERIVATIVE FINANCIAL INSTRUMENTS

Available-for-sale equity investments accounted for under Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, (SFAS 115) are subject to market price risk. From
time to time, the Company enters into and designates forward contracts to hedge
variable cash flows from anticipated sales of these investments. The Company
recorded a net realized gain on the sale of the available-for-sale investments
of $5.6 million and $13.5 million, respectively, during the three-month periods
ended January 31, 2002 and 2001 (net of premium amortization). As of January 31,
2002, the Company has recorded a liability of $0.7 million due to unrealized
losses on forward contracts. As of January 31, 2002, the Company has recorded
$12.3 million in long-term investments due to locked-in unrealized gains on the
available-for-sale investments. As of January 31, 2002, the maximum length of
time over which the Company is hedging its exposure to the variability in future
cash flows associated with the forward sale contracts is 7 months.

Page 11

8. TERMINATION OF AGREEMENT TO ACQUIRE IKOS SYSTEMS, INC.

On July 2, 2001, the Company entered into an Agreement and Plan of Merger
with IKOS Systems, Inc. (IKOS). The Agreement provided for the acquisition of
all outstanding shares of IKOS common stock by Synopsys.

On December 7, 2001, Mentor Graphics Corporation commenced a cash tender
offer to acquire all of the outstanding shares of IKOS common stock at $11.00
per share, subject to certain conditions. On March 4, 2002, IKOS delivered to
Synopsys a notification stating that the offer from Mentor constituted a
superior proposal under the terms of the Synopsys-IKOS merger agreement, which
gave IKOS the right to terminate the merger agreement if Synopsys did not
make a proposal that was at least as favorable as the Mentor bid within five
business days of notice from IKOS. IKOS gave such notice to Synopsys on March 4,
2002 and the five business day period expired on March 11, 2002 without Synopsys
making an alternative proposal. On March 12, 2002, Synopsys and IKOS executed a
termination agreement by which the parties terminated the Synopsys-IKOS merger
agreement and pursuant to which IKOS paid Synopsys the $5.5 million termination
fee required under the Synopsys-IKOS merger agreement.

9. PROPOSED ACQUISITION OF AVANT! CORPORATION.

On December 3, 2001, Synopsys entered into an Agreement and Plan of Merger
with Avant! Corporation (Avant!) by which Avant! will merge with and into a
wholly owned subsidiary of Synopsys. Synopsys will account for the merger under
the purchase method of accounting.

Upon completion of the merger, holders of Avant! common stock will be
entitled to receive 0.371 of a share of Synopsys common stock (including the
associated preferred stock rights) in exchange for each share of Avant! common
stock (the exchange ratio) owned at the time of completion of the merger. The
exchange ratio will be proportionately adjusted for any stock split, stock
dividend, reorganization or similar change in Avant! common stock or Synopsys
common stock. Avant! stockholders will receive cash based on the market price of
Synopsys common stock in lieu of any fractional shares to which they might
otherwise be entitled. The merger is subject to certain conditions, including
approval by the Avant! stockholders of the merger and the Agreement and Plan of
Merger, approval by Synopsys stockholders of the issuance of Synopsys common
stock in the merger, compliance with regulatory requirements and customary
closing conditions.

The actual number of shares of Synopsys common stock to be issued in the
proposed merger and the dollar value at the effective time of the merger cannot
be determined until the closing date of the merger.

10. SUBSEQUENT EVENTS

In March 2002, the Company implemented a workforce reduction. The purpose
was to reduce expenses by decreasing the number of employees in all departments,
both domestically and internationally. As a result, the Company expects to
record a charge of between $3.7 million and $4.2 million during the second
quarter of fiscal 2002. The charge consists of severance and other special
termination benefits.

In March 2002, one of the Company's portfolio investments began negotiations
to be acquired by a third party. As a result of these negotiations, Synopsys
does not expect to recover the carrying value of its investment in the portfolio
company of $3.0 million.

As discussed above, on March 12, 2002, Synopsys and IKOS Systems, Inc.
executed a termination agreement by which the parties terminated the merger
agreement between Synopsys and IKOS dated July 2, 2001 and pursuant to which
IKOS paid Synopsys the $5.5 million termination fee required by such merger
agreement. Total costs incurred by the Company in connection with the IKOS
merger of approximately $2.0 million will be expensed in second quarter of
fiscal 2002.

Page 12

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

The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. Such
forward-looking statements include the statements concerning the effect of
Technology Subscription Licenses on our revenue, expectations for revenue and
costs of revenue, expectations about gains from the sale of investments, effects
of foreign currency hedging, adequacy of our cash as well as statements
including the words "projects," "expects," "believes," "anticipates", "will" or
similar expressions. Actual results could differ materially from those
anticipated in such forward-looking statements as a result of certain factors,
including those set forth under "Factors That May Affect Future Results."

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition, bad debts, investments, intangible assets
and income taxes. Our estimates are based on historical experience and on
various other assumptions we believe are reasonable under the circumstances.
Actual results may differ from these estimates.

The accounting policies described below are the ones that most frequently
require us to make estimates and judgements, and therefore are critical to
understanding our results of operations.

Revenue Recognition and Cost of Revenue. Our revenue recognition policy is
detailed in Note 2 of the Notes to Unaudited Condensed Consolidated Financial
Statements. Management has made significant judgments related to revenue
recognition; specifically, evaluating whether our fee relating to an arrangement
is fixed or determinable and assessing whether collectibility is probable. These
judgments are discussed below.

The Vendor's Fee is Fixed or Determinable. In order to recognize revenue, we
must make a judgment as to whether the arrangement fee is fixed or determinable.
Except in cases where we grant extended payment terms to a specific customer, we
have determined that our fees are fixed or determinable at the inception of our
arrangements based on the following:

o The fee our customers pay for our products is negotiated at the outset
of an arrangement, and is generally based on the specific volume of
products to be delivered.
o Our license fees are not a function of variable-pricing mechanisms such
as the number of units distributed or copied by the customer, or the
expected number of users of the product delivered.

Our customary payment terms are such that a minimum of 75% of the
arrangement fee is due within one year or less. These customary payment terms
are supported by historical practice and concessions have not been granted to
customers under this policy. Arrangements with payment terms extending beyond
the customary payment terms are considered not to be fixed or determinable.
Revenue from such arrangements is recognized at the lesser of the aggregate of
amounts due and payable or the amount of the arrangement fee that would have
been recognized if the fees had been fixed or determinable.

Collectibility is Probable. In order to recognize revenue, we must make a
judgment of the collectibility of the arrangement fee. Our judgment of the
collectibility is applied on a customer-by-customer basis pursuant to our credit
review policy. We typically sell to customers for which there is a history of
successful collection. New customers are subjected to a credit review process,
which evaluates the customers' financial positions and ability to pay. New
customers are typically assigned a credit limit based on a formulated review of
their financial position. Such credit limits are only increased after a
successful collection history with the customer has been established. If it is
determined from the outset of an arrangement that collectibility is not probable
based upon our credit review process, revenue is recognized on a cash-collected
basis.

Page 13

Valuation of Strategic Investments. As of January 31, 2002, the adjusted
cost of our strategic investments totaled $36.1 million. We review our
investments in non-public companies and estimate the amount of any impairment
incurred during the current period based on specific analysis of each
investment, considering the activities of and events occurring at each of the
underlying portfolio companies during the quarter. Our portfolio companies
operate in industries that are rapidly evolving and extremely competitive. For
equity investments in non-public companies for which there is not a market in
which their value is readily determinable, we assess each investment for
indicators of impairment at each quarter end based primarily on achievement of
business plan objectives and current market conditions, among other factors, and
information available to us at the time of this quarterly assessment. The
primary business plan objectives we consider include, among others, those
related to financial performance such as achievement of planned financial
results or completion of capital raising activities, and those that are not
primarily financial in nature such as the launching of technology or the hiring
of key employees. If it is determined that an impairment has occurred with
respect to an investment in a portfolio company, in the absence of quantitative
valuation metrics, management estimates the impairment and/or the net realizable
value of the portfolio investment based on public- and private-company market
comparable information and valuations completed for companies similar to our
portfolio companies. Future adverse changes in market conditions, poor operating
results of underlying investments and other information obtained after our
quartely assessment could result in losses or an inability to recover the
current carrying value of the investments thereby possibly requiring an
impairment charge in the future. Based on these measurements, no impairment
losses were recorded during the current quarter. See "Subsequent Events" for
further discussion of a write-off which will occur during the second quarter of
fiscal 2002.

Valuation of Intangible Assets. Intangible assets, net of accumulated
amortization, totaled $30.9 million as of January 31, 2002. We periodically
evaluate our intangible assets for indications of impairment whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Intangible assets include goodwill, purchased technology and
capitalized software. Factors we consider important which could trigger an
impairment review include significant under-performance relative to expected
historical or projected future operating results, significant changes in the
manner of our use of the acquired assets or the strategy for our overall
business or significant negative industry or economic trends. If this evaluation
indicates that the value of the intangible asset may be impaired, an evaluation
of the recoverability of the net carrying value of the asset over its remaining
useful life is made. If this evaluation indicates that the intangible asset is
not recoverable, based on the estimated undiscounted future cash flows of the
entity or technology acquired over the remaining amortization period, the net
carrying value of the related intangible asset will be reduced to fair value and
the remaining amortization period may be adjusted. Any such impairment charge
could be significant and could have a material adverse effect on our reported
financial statements if and when an impairment charge is recorded. If an
impairment charge is recognized, the amortization related to goodwill and other
intangible assets would decrease during the remainder of the fiscal year. No
impairment losses were recorded during the current quarter based on these
measurements.

Allowance For Doubtful Accounts. As of January 31, 2002, the allowance for
doubtful accounts totaled $11.7 million. Management estimates the collectibility
of our accounts receivable on an account-by-account basis. We record an increase
in the allowance for doubtful accounts when the prospect of collecting a
specific account receivable becomes doubtful. In addition, we provide for a
general reserve on all accounts receivable aged greater than 60 days, using a
specified percentage of the outstanding balance of all such accounts. Management
specifically analyzes accounts receivable and historical bad debt experience,
customer creditworthiness, current economic trends, international exposures
(such as currency devaluation), and changes in our customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.

Income Taxes. Our effective tax rate is directly affected by the relative
proportions of domestic and international revenue and income before taxes. We
are also subject to changing tax laws in the multiple jurisdictions in which we
operate. As of January 31, 2002, net deferred tax assets totaled $172.5 million.
We believe that it is more likely than not that the results of future operations
will generate sufficient taxable income to utilize these net deferred tax
assets. While we have considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for any valuation
allowance, should we determine that we would not be able to realize all or part
of our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made.

Page 14

RESULTS OF OPERATIONS

Revenue. Revenue consists of fees for perpetual and ratable licenses of our
software products, sales of hardware system products, post-contract customer
support (PCS), customer training and consulting. We classify revenues as
product, service or ratable license. Product revenue consists primarily of
perpetual license revenue. Service revenue consists of PCS under perpetual
licenses and fees for consulting services and training. Ratable license revenue
consists of all revenue from our technology subscription licenses (TSLs) and
from time-based licenses that include extended payment terms or unspecified
additional products.

TSLs are time-limited rights to use our software. Since TSLs include bundled
product and services, both product and service revenue is generally recognized
ratably over the term of the license, or, if later, as payments become due. The
terms of TSLs, and the payments due thereon, may be structured flexibly to meet
the needs of the customer. With minor exceptions, under TSLs, customers cannot
obtain major new products developed or acquired during the term of their license
without making an additional purchase.

We introduced TSLs in the fourth quarter of fiscal 2000. The replacement of
the prior form of time-based licenses by TSLs has impacted and will continue to
impact our reported revenue. Under these ratable licenses, relatively little
revenue is recognized during the quarter the product is initially delivered. The
remaining amount is recorded as deferred revenue, to the extent that the license
fee has been paid or invoiced, to be recognized over the term of the license or
is considered backlog by the Company. This backlog is not recorded on our
balance sheet. Under the prior form of time-based licenses, a high proportion of
all license revenue was recognized in the quarter that the product was
delivered, with relatively little recorded as deferred revenue or as backlog.
Therefore, an order for a TSL will result in significantly lower current-period
revenue than an equal-sized order under the prior form of time-based licenses.

We set revenue targets for any given quarter based, in part, upon an
assumption that we will achieve a certain license mix of perpetual licenses and
TSLs. The actual mix of licenses sold affects the revenue we recognize in the
period. If we are unable to achieve our target license mix, we may not meet our
revenue targets. Our target license mix for total new software license orders is
15% to 25% perpetual licenses and 75% to 85% ratable licenses. In the first
quarter of fiscal 2002, the license mix was approximately 28% perpetual licenses
and 72% TSLs, in comparison to 21% perpetual licenses and 79% TSLs in the first
quarter of fiscal 2001. Orders as a whole were lower than expected in the first
quarter of fiscal 2002.

As expected, revenue for the first quarter of fiscal 2002 increased 12% to
$175.5 million as compared to $157.2 million for the first quarter of fiscal
2001. The increase in revenue in 2002 compared to 2001 is due primarily to the
additional four quarters that the TSL license model has been used and the
related increase in revenue due to the timing of revenue recognition under this
license model.

Product revenue remained relatively flat at $39.6 million for the first
quarter of fiscal 2002, compared to $39.2 million for the first quarter of
fiscal 2001 due primarily to the mix of licenses sold during each of these
periods.

Service revenue was $69.1 million and $87.0 million for the first quarters
of 2002 and 2001, respectively. The decrease in service revenue is due, in part,
to economic factors and to a decrease in maintenance renewals. Cost-cutting
efforts by customers led to rescheduling of delivery dates on certain consulting
projects and cancellation of others, and to the failure to renew maintenance
support, which we believe is temporary in most cases. As a result, certain
projects anticipated to produce revenue in the first quarter of 2002 were not
completed. Further, many customers are curtailing training and travel expenses,
resulting in fewer training contracts during the quarter. Assuming no
improvement in the current economic climate, we anticipate that customers will
continue to review their engagements with outside consultants, and may eliminate
or defer those determined to be non-critical. In addition, service revenue is
also impacted by three trends. First, new licenses structured as TSLs include
bundled PCS. Second, customers with existing perpetual licenses are entering
into new TSLs rather than renewing the PCS on the existing perpetual licenses.
Third, customers with existing perpetual licenses are converting their existing
perpetual licenses to TSLs.

Page 15

Revenue Expectations. For the second quarter and full fiscal year 2002, we
expect revenue to consist of 25% to 30% product revenue, 35% to 40% TSLs and 32%
to 37% services revenue, excluding the impact of the proposed mergers with
Avant!. Due to uncertainties in the current economic global environment, we are
unable to predict revenue with reasonable certainty for the full fiscal year
2002.

International Revenue. The following table summarizes the performance of
the various regions as a percent of total Company revenue:

THREE MONTHS ENDED
JANUARY 31,
----------------------------------
2002 2001
----------------- ----------------
North America 62% 60%
Europe 19% 18%
Japan 10% 11%
Other 9% 11%
----------------- ----------------
Total 100% 100%
================= ================

International revenue as a percentage of total revenue for the quarter ended
January 31, 2002 decreased to 38% from 40% for the quarter ended January 31,
2001. In any given period, the geographic mix of revenue is influenced by the
particular contracts closed during the quarter. The majority of our
international sales are denominated in the U.S. dollar. There were no foreign
exchange gains or losses that were material to our financial results during the
three-month periods ended January 31, 2002 and 2001.

Revenue - Product Groups. For management reporting purposes, our products
have been organized into four distinct product groups -- IC Implementation,
Verification and Test, Intellectual Property and System Level Design, Transistor
Level Design -- and a services group -- Professional Services. The following
table summarizes the revenue attributable to the various groups as a percentage
of total company revenue for the last six quarters:

Q1-2002 Q4-2001 Q3-2001 Q2-2001 Q1-2001 Q4-2000
---------- --------- --------- --------- --------- ---------

Revenue
IC Implementation
DC Family 32% 32% 32% 33% 34% 33%
Physical Synthesis 9 9 7 6 4 6
---------- --------- --------- --------- --------- ---------
41 41 39 39 38 39
Verification and Test 32 30 30 28 28 26
IP and System Level Design 11 12 13 12 12 14
Transistor Level Design 8 6 8 7 9 7
Professional Services 8 11 10 14 13 14
---------- --------- --------- ---------- ---------- --------
Total Company 100% 100% 100% 100% 100% 100%
========== ========= ========= ========== ========== ========

IC Implementation. IC implementation includes two product categories, the
Design Compiler (DC) Family and Physical Synthesis. The DC Family includes
Design Compiler and all ancillary and related logic design products. As a
percentage of total revenue, the DC Family has remained relatively flat over the
last six quarters, ranging from 32% to 34%.

Included in the Physical Synthesis family are Physical Compiler, a product
that unifies synthesis, placement and global routing, Chip Architect, a chip
floor-planning product, Flex Route, a top level router and our recently
introduced products - ClockTree Compiler, a clock tree synthesis product, and
Route Compiler, a standard cell router integrated into Physical Compiler that
completes detailed routing. As a percent of revenue, quarterly revenue from this
product family has increased sequentially over the last six quarters with the
exception of the first quarter of 2001 fiscal. The decrease in revenue as a
percent of total revenue in the first quarter of 2001 compared to the fourth
quarter of 2000 is due to the mix of license types sold in the quarter;
specifically, fewer perpetual licenses were sold in the first quarter of 2001
compared to the preceding and following quarters.

Verification and Test. Verification and Test includes our simulation, timing
analysis, formal verification and test products. Revenue has increased in each
quarter since the introduction of our ratable license model. This increase in
revenue as a percent of total revenue is primarily due to increased subscription
revenue for VCS and Prime Time as a result of the quarterly amortization of
deferred revenue which is an inherent result of the use of the ratable license
model.

Intellectual Property and System Level Design (IP&S). Our IP&S products
include the DesignWare library of design components and verification models, and
system design products. Revenue as a percent of total revenue decreased from the
fourth quarter of fiscal 2000 to the first quarter of fiscal 2001. Revenue has
remained relatively flat over the last five quarters, ranging from 11% to 13%
due in part to the fact that the term of many these licenses has been extended
from one to three years.

Transistor Level Design. Our transistor level design product group includes
tools that are used in transistor-level simulation and analysis. Revenue from
this product group as a percentage of total revenues have fluctuated since the
introduction of TSLs as a result of the mix of license types of orders received.
Because this is a relatively small product group, the revenue fluctuations have
resulted in a trend in revenue as a percent of total revenue that is relatively
flat over the last six quarters.

Professional Services. The Professional Services group includes consulting
and training activities. This group provides consulting services, including
design methodology assistance, specialized telecommunications systems design
services and turnkey design. Revenue from professional services as a percentage
of total revenues has declined from 14% in the fourth quarter of fiscal 2000 to
8% in the first quarter of fiscal 2002, reflecting, as described above under
"Revenue" the impact of the economic environment.

Page 16

Cost of Revenue. Cost of revenue consists of cost of ratable license
revenue, cost of product revenue and cost of service revenue. Cost of ratable
license revenue includes the costs of product and services related to our TSLs
since TSLs include bundled product and services. Cost of product revenue
includes personnel and related costs, production costs, product packaging,
documentation, amortization of capitalized software development costs and
purchased technology, and costs of the components of our hardware system
products. The cost of internally developed capitalized software is amortized
based on the greater of the ratio of current product revenue to the total of
current and anticipated product revenue or the straight-line method over the
software's estimated economic life of approximately two years. Cost of service
revenue includes consulting services, personnel and related costs associated
with providing training and PCS on perpetual licenses. The cost of each of
ratable license, product and service revenue is heavily dependent on an absolute
basis on the mix of software orders received during the period because the cost
of the product and service bundled in TSLs is included in the cost of ratable
license revenue.

Cost of ratable license revenue was 16% in the first quarter of fiscal 2002
and 23% for the first quarter of 2001. The decrease in the cost of ratable
license revenue as a percent of the related revenue is due to the increased
ratable license revenue base.

Cost of product revenue decreased slightly to 10% of total product revenue
for the three months ended January 31, 2002, as compared to 12% for the same
period during 2001. This decrease in cost of product revenue as a percentage of
total product revenue is due in part to the wind-down of our internet business
unit during the third quarter of fiscal 2001.

Cost of service revenue as a percentage of total service revenue was 30% and
23% for the first quarters of fiscal 2002 and 2001, respectively. The increase
in cost of service revenue as a percentage of total service revenue is due
primarily to the decline in total service revenue and to decreased utilization
of our professional services personnel, both as a result of the economic
environment.

Cost of Revenue Targets - Fiscal 2002. During fiscal 2002, we expect that
the cost of product revenue as a percent of total product revenue and the cost
of TSL revenue as a percent of total TSL revenue will each remain flat or
decrease slightly. For the remainder of fiscal 2002, assuming no improvement in
the current economic climate, we expect the cost of service revenue as a percent
of the related revenue to remain relatively flat or increase slightly in
comparison to the first quarter of fiscal 2002.

Research and Development. Research and development expenses increased by 5%
to $48.7 million in the first quarter of fiscal 2002, from $46.2 million in the
same quarter of last year, both net of capitalized software development costs.
Research and development expenses represented 28% and 29% of total revenue in
the first fiscal quarter of 2002 and 2001, respectively. The increase in terms
of dollars is due to the increase in compensation and compensation-related costs
of $4.8 million related to higher levels of research and development staffing
and annual merit and cost of living increases, which were implemented in the
second quarter of 2001. These increases are offset by lower employee benefit
costs related to a change in our health and welfare benefit programs. Expenses
related to consultants and other expenses, including travel, communications,
supplies and recruiting, decreased $1.5 million and $0.7 million, respectively,
as a result of our cost reduction programs.

Sales and Marketing. Sales and marketing expenses decreased by 14% to $59.8
million in the first quarter of fiscal 2002 from $69.6 million in the same
quarter last year. Sales and marketing expenses represented 34% and 44% of total
revenue in the first fiscal quarter of 2002 and 2001, respectively. The decrease
in the three-month period in fiscal 2002 in comparison to fiscal 2001 in terms
of dollars and as a percent of revenue resulted in part from a decrease in
compensation and compensation-related costs of $6.3 million due to a decline in
sales commissions as well as a decrease in the cost of benefits related to a
change in our health and welfare benefit programs. These decreases were offset
by annual merit and cost of living increases, which were implemented in the
second quarter of 2001. Employee functions also decreased $1.3 million as a
result of the Company's cost reduction efforts and the postponing of the annual
sales conference, normally held in November, in response to the events of
September 11, 2001. Finally, consulting expense decreased $1.2 million, also due
to the Company's cost reduction efforts.

General and Administrative. General and administrative expenses increased
12% to $18.7 million in the first quarter of fiscal 2002, compared to $16.7
million in the same quarter last year. General and administrative expenses
represented 11% of total revenue for the three-month periods ended January 31,
2002 and 2001. The increase in spending in fiscal 2002 in comparison to fiscal
2001 is due in part to an increase in litigation expenses relating to certain
legal actions initiated by Synopsys. Compensation and compensation-related costs
also increased $0.9 million over the prior year quarter as a result of annual
merit and cost of living increases which were implemented in the second quarter
of 2001 and to costs associated with the reorganization of certain human
resource functions, including severance pay. These increases are offset by lower
employee benefit costs related to a change in our health and welfare benefit
programs. Maintenance expense also decreased $0.3 million in comparison to the
prior year due to a decrease in rates for various maintenance contracts.

Page 17

Operating Expense Targets - Fiscal 2002. As a result of our cost-cutting
measures implemented in the fourth quarter of fiscal 2001 and the first quarter
of 2002, including the workforce reduction implemented in the first quarter of
2002, we expect that total operating expenses for the remainder of fiscal year
2002 and for the full fiscal year 2002 will decrease in comparison to fiscal
2001 levels and, on a quarterly basis, in comparison to expense levels in the
first quarter of 2002.

Amortization of Intangible Assets. Goodwill represents the excess of the
aggregate purchase price over the fair value of the tangible and identifiable
intangible assets we have acquired. Intangible assets and goodwill are amortized
over their estimated useful life of three to five years. We assess the
recoverability of goodwill by estimating whether the unamortized cost will be
recovered through estimated future undiscounted cash flows. Amortization of
intangible assets charged to operations in the first quarter of fiscal 2002 was
$4.0 million compared to $4.2 million for the same period last year. The
Financial Accounting Standards Board recently issued new guidance with respect
to the amortization and evaluation of goodwill. This new guidance is discussed
below under Effect of New Accounting Standards.

Other Income, Net. Other income, net was $11.1 million in the first quarter
of fiscal 2002, as compared to $25.5 million in the same quarter in the prior
year. This decrease was due in part to the fact that the first quarter of fiscal
2001 includes a gain of $10.6 million on the sale of our silicon libraries
business to Artisan Components, Inc. Further, the gains recognized on the sale
of securities during the first quarter of fiscal 2002 were $5.6 million,
compared to $13.8 million for the same period during 2001. Interest income for
the first quarter of 2002 was $2.2 million compared to $4.2 million for the
first quarter of 2001. Although cash balances were higher as of January 31, 2002
than a year ago, a significantly lower interest rate environment resulted in a
decrease in interest income. These decreases are offset by an increase in rental
income, which was $2.5 million for the first quarter of fiscal 2002, compared to
$1.3 million for the same period during 2001. The first quarter of 2001 includes
investment impairment charges of approximately $3.4 million to write down the
carrying value of certain assets held in our venture fund valued at $6.8 million
to the best estimate of net realizable value. There were no impairments during
the three months ended January 31, 2002. The remaining changes to other income,
net relate to the amortization of premium forwards and foreign exchange gains
and losses recognized during the quarter.

Impairment charges relate to certain investments in non-public companies
and represent management's estimate of the impairment incurred during the period
as a result of specific analysis of each investment, considering the activities
of and events occurring at each of the underlying portfolio companies during the
quarter. Our portfolio companies operate in industries that are rapidly evolving
and extremely competitive. For equity investments in non-public companies for
which there is not a market in which their value is readily determinable, we
assess each investment for indicators of impairment at each quarter end based
primarily on achievement of business plan objectives and current market
conditions, among other factors, and information available to us at the time of
this quarterly assessment. The primary business plan objectives we consider
include, among others, those related to financial performance such as
achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
launching of technology or the hiring of key employees. If it is determined that
an impairment has occurred with respect to an investment in a portfolio company,
in the absence of quantitative valuation metrics, management estimates the
impairment and/or the net realizable value of the portfolio investment based on
public- and private-company market comparable information and valuations
completed for companies similar to our portfolio companies.

Subsequent Events. In March 2002, we implemented a workforce reduction. The
purpose was to reduce expenses by decreasing the number of employees in all
departments both domestically and internationally. As a result of the program
implementation, we expect to record a pre-tax charge of between $3.7 million and
$4.2 million during the second quarter of fiscal 2002. The charge consists of
severance and other special termination benefits.

In March 2002, one of the Company's portfolio investments began
negotiations to be acquired by a third party. As a result of these negotiations,
Synopsys does not expect to recover the carrying value of its investment in the
portfolio company of $3.0.million.

As discussed below, on March 12, 2002, Synopsys and IKOS Systems, Inc.
executed a termination agreement by which the parties terminated the merger
agreement between Synopsys and IKOS dated July 2, 2001 and pursuant to which
IKOS paid Synopsys the $5.5 million termination fee required by such merger
agreement. Total costs incurred by the Company in connection with the IKOS
merger of approximately $2.0 million will be expensed in second quarter of
fiscal 2002.

Interest Rate Risk. Our exposure to market risk for a change in interest
rates relates to our investment portfolio. We place our investments in a mix of
short-term tax exempt and taxable instruments that meet high credit quality
standards, as specified in our investment policy. This policy also limits the
amount of credit exposure to any one issue, issuer and type of instrument. We do
not anticipate any material losses with respect to our investment portfolio.

Page 18

The following table presents the carrying value and related weighted-average
interest return for our investment portfolio. The carrying value approximates
fair value at January 31, 2002. In accordance with our investment policy, the
weighted-average duration of our invested funds portfolio does not exceed one
year.

Principal (Notional) Amounts in U.S. Dollars:

WEIGHTED AVERAGE
CARRYING AFTER TAX
(in thousands, except interest rates) AMOUNT INTEREST RETURN
---------------- ----------------
Short-term investments - fixed rate 206,790 1.36%
Money market funds - variable rate 185,642 1.48%
----------------
Total interest bearing instruments $ 392,432 1.42%
================

Foreign Currency Risk. At the present time, we do not generally hedge
anticipated foreign currency cash flows but hedge only those currency exposures
associated with certain assets and liabilities denominated in nonfunctional
currencies. Hedging activities undertaken are intended to offset the impact of
currency fluctuations on these balances. The success of this activity depends
upon the accuracy of our estimates of balances denominated in various
currencies, primarily the Euro, Japanese yen, Taiwan dollar, British pound
sterling, Canadian dollar, and Singapore dollar. We had contracts for the sale
and purchase of foreign currencies with a notional value expressed in U.S.
dollars of $75.6 million as of January 31, 2002. Looking forward, we do not
anticipate any material adverse effect on our consolidated financial position,
results of operations, or cash flows resulting from the use of these
instruments. There can be no assurance that these hedging transactions will be
effective in the future.

The following table provides information about our foreign exchange forward
contracts at January 31, 2002. Due to the short-term nature of these contracts,
the contract rate approximates the weighted-average contractual foreign currency
exchange rate at January 31, 2002. These forward contracts mature in
approximately thirty days.

Short-Term Forward Contracts to Sell and Buy Foreign Currencies in U.S. Dollars:

USD AMOUNT CONTRACT RATE
---------------- ---------------
(in thousands, except for contract rates)
Forward Net Contract Values:
Euro $ 53,985 1.1578
Japanese yen 9,726 133.71
Taiwan Dollar 2,719 35.03
British pound sterling 845 0.7089
Canadian dollar 4,149 1.5928
Singapore dollar 2,630 1.8334
Euro/Taiwan Dollar 1,591 30.452
----------------
$ 75,645
================

The unrealized gains/losses on the outstanding forward contracts at January
31, 2002 were immaterial to our consolidated financial statements. The realized
gain/losses on these contracts as they matured were not material to our
consolidated financial position, results of operations or cash flows for the
periods presented.

We apply Statement of Financial Accounting Standards No. 133 (SFAS 133),
Accounting for Derivative Instruments and Hedging Activities, as amended, in
accounting for its derivative financial instruments. SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized as either
assets or liabilities at fair value. Derivatives that are not designated as
hedging instruments are adjusted to fair value through earnings. If the
derivative is designated as a hedging instrument, depending on the nature of the
exposure being hedged, changes in fair value will either be offset against the
change in fair value of the hedged asset, liability, or firm commitment through
earnings, or recognized in other comprehensive income until the hedged
anticipated transaction affects earnings. The ineffective portion of the hedge
is recognized in earnings immediately. We do not believe that ongoing
application of SFAS 133 will significantly alter our hedging strategies.
However, its application may increase the volatility of other income and expense
and other comprehensive income. Apart from our foreign currency hedging and
forward sales of certain equity investments, we do not use derivative financial
instruments. In particular, we do not use derivative financial instruments for
speculative or trading purposes.

Termination of Agreement to Acquire IKOS Systems, Inc. On July 2, 2001, we
entered into an Agreement and Plan of Merger and Reorganization (the "Merger
Agreement") with IKOS Systems, Inc. (IKOS). The Merger Agreement provided for
the acquisition of all outstanding shares of IKOS common stock by Synopsys..

On December 7, 2001, Mentor Graphics Corporation commenced a cash tender
offer to acquire all of the outstanding shares of IKOS common stock at $11.00
per share, subject to certain conditions. On March 4, 2002, IKOS delivered to
Synopsys a notification stating that the offer from Mentor constituted a
superior proposal under the terms of the Synopsys-IKOS merger agreement, which
gave IKOS the right to terminate the merger agreement if Synopsys did not make a
proposal that was at least as favorable as the Mentor bid within five business
days of notice from IKOS. IKOS gave such notice to Synopsys on March 4, 2002 and
the five business day period expired on March 11, 2002 without Synopsys making
an alternative proposal. As a result, on March 12, 2002, Synopsys and IKOS
executed a termination agreement by which the parties terminated the
Synopsys-IKOS merger agreement and pursuant to which IKOS paid Synopsys the
$5.5 million termination fee required by the Synopsys-IKOS merger agreement.

Page 19

Proposed Acquisition of Avant! Corporation. On December 3, 2001, we entered
into an Agreement and Plan of Merger with Avant! Corporation (Avant!) by which
Avant! will merge with and into a wholly owned subsidiary of Synopsys. We will
account for the merger under the purchase method of accounting.

Effect of New Accounting Standards. In July 2001, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 141,
Business Combinations, (SFAS 141) and No. 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 and specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized apart from goodwill. SFAS 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS 142.

We adopted the provisions of SFAS 141 on July 1, 2001. Under SFAS 141,
goodwill and intangible assets with indefinite useful lives acquired in a
purchase business combination completed after June 30, 2001, but before SFAS 142
is adopted, will not be amortized but will continue to be evaluated for
impairment in accordance with SFAS 121. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized and tested for impairment in accordance with current accounting
guidance until the date of adoption of SFAS 142.

Upon adoption of SFAS 142, we must evaluate its existing intangible assets
and goodwill acquired in purchase business combinations prior to July 1, 2001,
and make any necessary reclassifications in order to conform with the new
criteria in SFAS 141 for recognition apart from goodwill. Upon adoption of SFAS
142, we will be required to reassess the useful lives and residual values of all
intangible assets acquired, and make any necessary amortization period
adjustments. We will also be required to test goodwill for impairment in
accordance with the provisions of SFAS 142 within the six-month period following
adoption. Any impairment loss will be measured as of the date of adoption and
recognized immediately as the cumulative effect of a change in accounting
principle. Any subsequent impairment losses will be included in operating
activities.

We expect to adopt SFAS 142 on November 1, 2002. As of January 31, 2002,
unamortized goodwill is $30.9 million, which, in accordance with the Statements,
will continue to be amortized until the date of adoption of SFAS 142.
Amortization of goodwill and other intangible assets for the three-month period
ended January 31, 2002 was $4.0 million. The Company does not have any
intangible assets with an indefinite useful life. Because of the extensive
effort needed to comply with adopting SFAS 142, it is not practicable to
reasonably estimate the impact of adopting this Statement on our financial
statements at the date of this report, including whether we will be required to
recognize any transitional impairment losses.

Page 20

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments were $438.8 million at
January 31, 2002, a decrease of $37.5 million, or 8%, from October 31, 2001.
Cash used in operating activities was $72.0 million for the three months ended
January 31, 2002 compared to $14.7 million provided by operating activities for
the same period in the prior year. The decrease in cash flows from operating
activities is due primarily to payments for income taxes and other liabilities
made during the quarter as well as a decrease in the deferred revenue liability.

Cash used in investing activities was $13.3 million in the first three
months of 2002 compared to $155.6 million provided by investing activities
during same period in 2001. The decrease in cash provided by investing
activities of $168.9 million is primarily due to net proceeds from the sale of
short- and long-term investments totaling $5.0 million for the three months
ended January 31, 2002 as compared to net proceeds of investments totaling
$170.0 million for the same period during 2001. Capital expenditures totaled
$17.8 million in the first three months of fiscal 2002 as we continue to invest
in fixed assets, primarily related to construction of our Oregon facilities and
computing equipment to upgrade our infrastructure systems. In addition, cash
proceeds from the sale of our silicon libraries business were $4.1 million in
the first quarter of fiscal 2001.

Cash provided by financing activities was $42.8 million for the three months
ended January 31, 2002 compared to $119.4 million used in financing activities
during the same period during fiscal 2001. Financing proceeds from the exercise
of stock options during the three months ended January 31, 2002 were $42.8
million compared to $28.2 for the three months ended January 31, 2001. The
primary financing uses of cash during the first quarter of 2001 were for the
purchase of treasury stock and payment of obligations totaling $144.5 million
and $3.1 million, respectively. We did not purchase any treasury stock during
the first quarter of fiscal 2002. However, we may resume the program in the
second quarter of fiscal 2002, depending on the timing of cash collections and
the closing of the Avant! transaction.

Accounts receivable remained flat at $146.3 million at January 31, 2002
compared to October 31, 2001. Days sales outstanding, which is calculated based
on revenues for the most recent quarter and accounts receivable as of the
balance sheet date, increased to 76 days as of January 31, 2002 from 73 days at
October 31, 2001 as a result of a decrease in revenues in the quarter ended
January 31, 2002 compared to the quarter ended October 31, 2001.

Our principle sources of cash are collections of accounts receivable and the
issuance of common stock. We believe that our current cash, cash equivalents,
short-term investments, lines of credit, and cash generated from operations will
satisfy our business requirements for at least the next twelve months.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Weakness in the semiconductor and electronics businesses may negatively
impact Synopsys' business. Synopsys' business depends on the semiconductor and
electronics businesses. In 2001, these businesses experienced their sharpest
decline in orders and revenue in over 20 years and this weakness has continued
in 2002.

Purchases of our products are largely dependent upon the commencement of new
design projects by semiconductor manufacturers and their customers, the number
of design engineers and the increasing complexity of designs. During 2001 many
semi-conductor and electronic companies cancelled or deferred design projects
and reduced their design engineering staffs, which respectively impacted our
orders and revenues and particularly our professional services business. Demand
for our products and services may also be affected by mergers in the
semiconductor and systems industries, which may reduce the aggregate level of
purchases of our products and services by the combined company. Continuation or
worsening of the current conditions in the semiconductor industry, and continued
consolidation among our customers, all could have a material adverse effect on
our business, financial condition and results of operations.

Page 21

Synopsys' revenue and earnings may fluctuate. Many factors affect our
revenue and earnings, which makes it difficult to achieve predictable revenue
and earnings growth. Among these factors are customer product and service
demand, product license terms, and the timing of revenue recognition on products
and services sold. The following specific factors could affect our revenue and
earnings in a particular quarter or over several quarterly or annual periods:

o Our products are complex, and before buying them customers spend a great
deal of time reviewing and testing them. Our customers' evaluation and
purchase cycles do not necessarily match our quarterly periods. We
received a disproportionate volume of orders in the last week of a
quarter. In addition, a large proportion of our business is attributable
to our largest customers. As a result, if any order, and especially a
large order, is delayed beyond the end of a fiscal period, our orders for
that period could be below our plan and our revenue for that period or
future periods could be below any targets we may have published.

o Accounting rules determine when revenue is recognized on our orders, and
therefore impact how much revenue we will report in any given fiscal
period. The authoritative literature under which Synopsys recognizes
revenue has been, and is expected to continue to be, the subject of much
interpretative guidance. In general, after the adoption of TSLs in the
fourth quarter of fiscal 2000, most orders for our products and services
yield revenue over multiple quarters or years or upon completion of
performance rather than at the time the product is shipped. For any given
order, however, the specific terms agreed to with a customer may have the
effect of requiring deferral or acceleration of revenue in whole or in
part. Therefore, for any given fiscal period it is possible for us to fall
short in our revenue and/or earnings plan even while orders and backlog
remain on plan or, conversely, to meet or exceed our revenue and/or
earnings plan because of backlog and deferred revenue, while aggregate
orders are under plan.

o Our revenue and earnings targets are based, in part, upon an assumption
that we will achieve a license mix of perpetual licenses (on which
revenue is generally recognized in the quarter shipped) and TSLs (on
which revenue is recognized over the term of license) that includes 15%
to 25% perpetual licenses. If we are unable to achieve a mix in this
range our ability to achieve short-term or long-term revenue and/or
earnings targets may be impaired.

Synopsys may not be able to successfully compete in the EDA industry, which
would have a material adverse effect on Synopsys' results of operations. The EDA
industry is highly competitive. We compete against other EDA vendors, and with
customers' internally developed design tools and internal design capabilities
for a share of the overall EDA budgets of our potential customers. In general,
competition is based on product quality and features, post-sale support, price
and, as discussed below, the ability to offer a complete design flow. Our
competitors include companies that offer a broad range of products and services,
such as Cadence Design Systems, Inc., Avant! and Mentor Graphics Corporation, as
well as companies, including numerous recently public and start-up companies,
that offer products focused on a discrete phase of the integrated circuit design
process. In certain situations, Synopsys' competitors have been offering
aggressive discounts on certain of their products, in particular simulation and
synthesis products. As a result, average prices for these products may fall.

Technology advances and customer requirements continue to fuel a change in
the nature of competition among EDA vendors, which could hurt Synopsys' ability
to compete. Increasingly, EDA companies compete on the basis of design flows
involving integrated logic and physical design products (referred to as physical
synthesis products) rather than on the basis of individual point tools
performing a discrete phase of the design process. The need to offer physical
synthesis products will become increasingly important as ICs grow more complex.
Our physical synthesis products compete principally with products from Cadence
and Magma Design Automation, both of which include more complete physical design
capabilities. We are working on completing our design flow. In June 2001, we
announced two physical design products, and in December 2001 we announced the
Avant! merger. However, there can be no guarantee that we will be able to offer
a competitive complete design flow to customers as a result of these efforts or
the proposed Avant! merger. If we are unsuccessful in developing a complete
design flow on a timely basis, if the Avant! merger is not completed or if we
are unsuccessful in convincing customers to adopt our integrated design flow,
our competitive position could be significantly weakened.

Synopsys' revenue growth depends on new and non-synthesis products, which
may not be accepted in the marketplace. Historically, much of our growth has
been attributable to the strength of our logic synthesis products. Our DC Family
of products accounted for 32% of revenue in the first quarter of fiscal 2002. We
believe that orders and revenue for our flagship logic synthesis product, Design
Compiler, and the DC Family, have peaked. Over the long term, we expect the
contribution from the DC Family to decline as our customers transition from DC
Family products to Physical Synthesis products. In order to meet our revenue
plan, aggregate revenues products other than the DC family and from professional
services must grow faster than our overall revenue growth target. If such
revenue growth fails to meet our goals, it will be difficult for us to meet our
overall revenue or earnings targets.

Page 22

In order to sustain revenue growth over the long term, we will have to
enhance our existing products and introduce new products that are accepted by a
broad range of customers and to continue the growth in our consulting services
business. Product success is difficult to predict. The introduction of new
products and growth of a market for such products cannot be assured. In the past
we, like all companies, have introduced new products that have failed to meet
our revenue expectations. Expanding revenue from consulting services may be
difficult in the current economic environment. It will require us to continue to
develop effective management controls on bidding and executing on consulting
engagements. Increasing consulting orders and revenue while maintaining an
adequate level of profit can be difficult. There can be no assurance that we
will be successful in expanding revenue from existing or new products at the
desired rate or in expanding our services business, and the failure to do so
would have a material adverse effect on our business, financial condition and
results of operations.

Businesses that Synopsys has acquired or that Synopsys may acquire in the
future may not perform as projected. We have acquired or merged with a number of
companies in recent years, and as part of our efforts to increase revenue and
expand our product and services offerings we may acquire additional companies.
For example, in December 2001, Synopsys announced the Avant! merger. In addition
to direct costs, acquisitions pose a number of risks, including potential
dilution of earnings per share, problems in integrating the acquired products
and employees into our business, the failure to realize expected synergies or
cost savings, the failure of acquired products to achieve projected sales, the
drain on management time for acquisition-related activities, adverse effects on
customer buying patterns and assumption of unknown liabilities. While we attempt
to review proposed acquisitions carefully and negotiate terms that are favorable
to us, there is no assurance that any acquisition will have a positive effect on
our performance.

Stagnation of international economies would adversely affect our
performance. During the three months ended January 31, 2002, 38% of our revenue
was derived from outside North America, as compared to 40% during the same
period in fiscal 2001. International sales are vulnerable to regional or
worldwide economic or political conditions and to changes in foreign currency
exchange rates. Economic conditions in Europe, Japan and the rest of Asia have
deteriorated in recent quarters, and the longer this weakness persists the more
likely it is to have a negative impact on our business. In particular, a number
of our largest European customers are in the telecommunications equipment
business, which has weakened considerably. The Japanese economy has been
stagnant for several years, and may now be entering a recession. If the Japanese
economy remains weak, revenue and orders from Japan, and perhaps the rest of
Asia, could be adversely affected. In addition, the yen-dollar and Euro-dollar
exchange rates remain subject to unpredictable fluctuations. Weakness of the yen
could adversely affect revenue and orders from Japan during future quarters.
Asian countries other than Japan also have experienced economic and currency
problems in recent years, and in most cases they have not fully recovered. If
such conditions persist or worsen, orders and revenues from the Asia Pacific
region would be adversely affected.

A failure to recruit and retain key employees would have a material adverse
effect on our ability to compete. Our success is dependent on technical and
other contributions of key employees. We participate in a dynamic industry, and
our headquarters is in Silicon Valley, where, despite recent economic
conditions, skilled technical, sales and management employees are in high
demand. There are a limited number of qualified EDA and IC design engineers, and
the competition for such individuals is intense. Despite economic conditions,
start-up activity in EDA remains significant, and a number of EDA companies have
gone public in the past year. Experience at Synopsys is highly valued in the EDA
industry and the general electronics industry, and our employees are recruited
aggressively by our competitors and by start-up companies in many industries. In
the past, we have experienced, and may continue to experience, significant
employee turnover. There can be no assurance that we can continue to recruit and
retain the technical and managerial personnel we need to run our business.
Failure to do so could have a material adverse effect on our business, financial
condition and results of operations.

A failure to protect our proprietary technology would have a material
adverse effect on Synopsys' financial condition and results of operations. Our
success is dependent, in part, upon our proprietary technology and other
intellectual property rights. We rely on agreements with customers, employees
and others, and intellectual property laws, to protect our proprietary
technology. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any breach or that our trade
secrets will not otherwise become known or be independently developed by
competitors. Moreover, effective intellectual property protection may be
unavailable or limited in certain foreign countries. Failure to obtain or
maintain appropriate patent, copyright or trade secret protection, for any
reason, could have a material adverse effect on our business, financial
condition and results of operations. In addition, there can be no assurance that
infringement claims will not be asserted against us and any such claims could
require us to enter into royalty arrangements or result in costly and
time-consuming litigation or could subject us to damages or injunctions
restricting our sale of products or could require us to redesign products.

Our operating expenses do not fluctuate proportionately with fluctuations in
revenues, which could materially adversely affect our results of operations in
the event of a shortfall in revenue. Our operating expenses are based in part on
our expectations of future revenue, and expense levels are generally committed
in advance of revenue. Since only a small portion of our expenses varies with
revenue, a shortfall in revenue translates directly into a reduction in net
income. If we are unsuccessful in generating anticipated revenue or maintaining
expenses within this range, however, our business, financial condition and
results of operations could be materially adversely affected.

Page 23

Synopsys has adopted anti-takeover provisions, which may have the effect of
delaying or preventing changes of control or management. We have adopted a
number of provisions that could have anti-takeover effects. Our board of
directors has adopted a Preferred Shares Rights Plan, commonly referred to as a
poison pill. In addition, our board of directors has the authority, without
further action by its stockholders, to issue additional shares of Common Stock
and to fix the rights and preferences of, and to issue authorized but
undesignated shares of Preferred Stock. These and other provisions of Synopsys'
Restated Certificate of Incorporation and Bylaws and the Delaware General
Corporation Law may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of Synopsys, including
transactions in which the stockholders of Synopsys might otherwise receive a
premium for their shares over then current market prices.

Synopsys is subject to changes in financial accounting standards, which may
affect our reported revenue, or the way we conduct business. We prepare our
financial statements in conformity with accounting principles generally accepted
in the United States of America (GAAP). GAAP are subject to interpretation by
the Financial Accounting Standards Board, the American Institute of Certified
Public Accountants (AICPA), the SEC and various bodies appointed by these
organizations to interpret existing rules and create new accounting policies. In
particular, a task force of the Accounting Standards Executive Committee, a
subgroup of the AICPA, meets on a quarterly basis to review various issues
arising under the existing software revenue recognition rules, and
interpretations of these rules. Additional interpretations issued by the task
force may have an adverse effect on how we report revenue or on the way we
conduct our business in the future.

Synopsys is subject to a number of special risks as a result of its planned
acquisition of Avant!

As a result of entering into an agreement to acquire Avant!, Synopsys is
subject to additional risks and uncertainties, including the following:

o Synopsys May Fail To Integrate Successfully Synopsys' and Avant!'s
Operations. As a Result, Synopsys and Avant! May Not Achieve the
Anticipated Benefits of the Merger and the Price of Synopsys Common
Shares Might Be Adversely Affected. Synopsys and Avant! entered into
the merger agreement with the expectation that the merger will result
in benefits to Synopsys and Avant!, including the offering of a
complete and, over time, integrated set of software products for the
design and verification of complex integrated circuits to its
customers. However, the expected benefits may not be fully realized.
Achieving the benefits of the merger will depend on many factors,
including the successful and timely integration of the products,
technology and sales operations of the two companies following the
completion of the merger. These integration efforts may be difficult
and time consuming, especially considering the highly technical and
complex nature of each company's products. Failure to achieve a
successful and timely integration of their respective products and
sales operations could result in the loss of existing or potential
customers of Synopsys and Avant! and could have a material adverse
effect on the business, financial condition and results of operations
of Synopsys and its subsidiaries, including Avant!, and on the price
of Synopsys common shares. Integration efforts between the two
companies will also divert significant management attention and
resources. This diversion of attention and resources could have an
adverse effect on Synopsys during such transition period.

o Following the Avant! merger, Synopsys Currently Expects to Change the Mix
of License Types under which Avant! Products Are Sold which Will Lower
Avant!'s Revenue in the Short Term. Synopsys expects to change the mix of
license types under which Avant! products are sold to include a greater
proportion of licenses under which revenue is recognized ratably over the
license term rather than in the quarter of shipment. This change will
result in a reduction in reported revenue in the near term attributable
to licenses of Avant! products as compared to the revenue that would have
been recognized had the license mix not been changed. Conversely, the
change in license mix will result in an increase in backlog to be
recognized as revenue in subsequent periods attributable to licenses of
Avant! products.

o Avant! Has Been Required To Pay Substantial Amounts in the Recent
Resolution of Criminal Litigation, and Might Be Required To Pay
Substantial Additional Amounts under Pending Lawsuits. Avant! and its
subsidiaries are engaged in a number of material civil litigation
matters, including a civil litigation matter brought by Cadence, which
in this document we refer to as the Avant!/Cadence litigation. The
Avant!/Cadence litigation generally arises out of the same set of
facts that were the subject of a criminal action brought against
Avant! and several individuals by the District Attorney of Santa Clara
County, California, which action we refer to as the Santa Clara
criminal action. Avant!, Gerald C. Hsu, Chairman of Avant! and five
former Avant! employees pled no contest to certain of the charges in
the Santa Clara criminal action. As part of that plea, Avant! paid
approximately $35.3 million in fines and $195.4 million in
restitution.

Cadence seeks compensatory damages and treble or other exemplary damages
from Avant! in the Avant!/Cadence litigation under theories of copyright
infringement, misappropriation of trade secrets, inducing breach of
contract and false advertising. Avant! believes it has defenses to all of
Cadence's claims in the Avant!/Cadence litigation and intends to defend
itself vigorously. Should Cadence ultimately succeed in the prosecution
of its claims, however, Avant! could be required to pay substantial
monetary damages to Cadence. Some or all of these damages may be offset
by the $195.4 million restitution paid to Cadence in the Santa Clara
criminal action. Cadence has not fully quantified the amount of damages
it seeks in the Avant!/Cadence litigation. However, in the Santa Clara
criminal action, Cadence claimed losses of $683.3 million. Ultimately,
the court in the Santa Clara criminal action required Avant! to pay
Cadence restitution in the amount of $195.4 million.

Page 24

Injunctions entered in 1997 and 1998 enjoined Avant! from marketing its
early place and route products, ArcCell and Aquarius, based on a judicial
determination that they incorporated portions of Cadence's Design
Framework II source code, which in this document we refer to as DFII. The
injunctions also prohibit Avant! from possessing, using, selling or
licensing any product or work copied or derived from DFII and directly or
indirectly marketing, selling leasing, licensing, copying or transferring
any of the ArcCell or Aquarius products. Avant! ceased marketing,
selling, leasing, licensing or supporting all of the ArcCell or Aquarius
products in 1996 and 1999, respectively. The DFII code is not
incorporated in any current Avant! product. Although Cadence has not made
a claim in the Avant!/Cadence litigation against any current Avant!
product, including its Apollo and Astro place and route products, and has
not introduced any evidence that any such product infringes Cadence's
intellectual property rights, Cadence has publicly implied that it
intends to assert such claims. Avant! believes it would have defenses to
any such claims, and Avant! would defend itself vigorously. Nonetheless,
should Cadence be successful at proving that any past or then-current
Avant! product incorporated intellectual property misappropriated from
Cadence, Avant! could be permanently enjoined from further use of such
intellectual property, which might require modification to existing
products and/or suspension of the sale of such products until such
Cadence intellectual property was removed.

Avant! is also engaged in other material litigation matters. Silvaco
International and Silvaco Data Systems maintain an action against
Avant! in which they were awarded damages of over $26 million by the
trial court on claims for defamation and intentional interference with
economic advantage, based on statements made between November 1995 and
June 1996 to Silvaco customers and prospective customers by Meta
Software, Inc., which Avant! acquired in 1996. Additionally, Avant!
may have obligations to indemnify some or all of the defendants in
three shareholder derivative complaints, purportedly brought on behalf
of and for the benefit of Avant!, against the Avant! board of
directors seeking unspecified damages related to compensation, the
Avant!/Cadence litigation and the Santa Clara criminal action.
Sequence Design, Inc. filed an action against Avant! alleging that
Star-RC and Star-RCXT, Avant!'s key parasitic extraction products,
infringe a patent owned by Sequence and seeking unspecified damages.
Silicon Valley Research, Inc. filed an action against Avant! alleging
that Avant!'s use of Cadence trade secrets damaged it by allowing
Avant! to develop and market products more quickly and cheaply and
that were more attractive to customers. Renco Investment Company filed
an action against Avant! seeking over $43 million in rental payments
and related damages associated with Avant!'s lease of a property that
it assigned to Comdisco, Inc., which subsequently filed Chapter 11
bankruptcy and rejected the lease. In addition, Avant! paid $47.5
million in April 2001 to settle two class actions that alleged
securities law violations related to the Avant!/Cadence litigation and
in February agreed to pay $5.4 million to settle claims between it and
Dynasty Capital Services LLC and Randolph L. Tom. The Avant!/Cadence
litigation, other existing litigation and other potential litigation,
regardless of the outcome, may continue to result in substantial costs
and expenses and significant diversion of effort by management, and
may negatively impact relationships with customers. An adverse result
in any of these pending litigation matters could seriously harm
Avant!'s and, after the merger, Synopsys' business, financial
condition and results of operations.

o The Insurer Under the Litigation Protection Insurance relating to the
Avant!/Cadence Litigation May Be Prevented from Paying for Certain
Losses on the Grounds that such Payment Violates Public Policy.
Synopsys has agreed to enter into a policy with a subsidiary of
American International Group, Inc., an insurance company rated AAA by
Standard & Poors. Under the policy, insurance will be provided to pay
Synopsys an amount equaling amounts paid in a settlement or final
adjudication of the Avant!/Cadence litigation, including compensatory,
exemplary and punitive damages, penalties, fines, attorneys' fees and
certain indemnification costs arising out of the Avant!/Cadence
litigation (covered loss). The policy does not provide coverage for
litigation other than the Avant!/Cadence litigation. In exchange for a
binding fee of $10 million paid by Synopsys, the insurer has issued a
legally binding commitment to provide the coverage, effective
following the closing of the Avant! merger. Such fee is refundable in
part to Synopsys in the event the Avant! merger is not completed.
Otherwise, the fee will be credited against the premium to make the
insurance effective, which must be paid by Synopsys to the insurer on
or about the closing of the Avant! merger. In return for a premium of
$335 million, including the $10 million binding fee, the insurer will
be obligated to pay covered loss up to a limit of liability equaling
(a) $500 million plus (b) interest accruing at the fixed rate of 2%,
compounded semi- annually, on $250 million, less previous losses. The
policy will expire upon a final judgment or settlement of the
Avant!/Cadence litigation or any earlier date upon Synopsys' election.
Upon such expiration, Synopsys will be entitled to a payment equal to
$250 million plus interest calculated as set forth above less any loss
paid under the policy.

Page 25

In some jurisdictions, it is against public policy to provide insurance
for willful acts, punitive damages or similar claims. This could
potentially affect the validity and enforceability of certain elements of
the litigation protection policy. The legal agreement governing the
litigation protection insurance will expressly provide that the agreement
will be governed by the laws of the State of Delaware and that any
disputes arising out of or relating to the agreement will be resolved in
the courts of the State of Delaware. Synopsys believes, based upon advice
it has received from Delaware counsel, that a Delaware court would
enforce both of these provisions, and moreover would enforce the
arrangement under Delaware law, including to the extent it provides for
insurance for Avant!'s willful acts and punitive damages. Nonetheless,
there can be no assurance in this regard. In other cases, courts,
including courts in California, have applied local law to insurance
contracts irrespective of the parties' choice of law. Thus a court in a
state other than Delaware could assert jurisdiction over the
enforceability of this agreement and rule pursuant to the law of a state
other than Delaware that the litigation protection insurance is not
enforceable in whole or in part on grounds of public policy. For example,
if there were to be litigation before a California court regarding the
enforceability of the insurance policy, despite the parties' agreement
that all disputes arising out of or relating to the agreement be resolved
in the courts of the State of Delaware, it is possible that a California
court night rule that, based upon the relationship of Synopsys, Avant!,
Cadence and/or the Avant!/Cadence litigation to California, the
enforceability of the litigation protection insurance should be governed
by California law and that Section 533 of the California Insurance Code
or another aspect of California law prevents the insurer form paying
certain losses in whole or in part. A Delaware court might abide by such
a ruling of a California court. To the extent the insurer is prevented
from paying certain losses on grounds of public policy that would
otherwise be covered by the insurance, Avant! will be required to pay
that portion of the losses and the insurer may be obligated to refund a
portion of the premium to Synopsys.

o Whether or Not the Avant! Merger is Completed, the Announcement of the
Proposed Avant! Merger May Cause Disruptions in the Business of Synopsys,
Which Could Have Material Adverse Effects on the Business and Operations
of Synopsys. Whether or not the proposed Avant! merger is completed,
Synopsys' customers, in response to the announcement of the proposed
merger, may delay or defer decisions, which could have a material adverse
effect on the business of Synopsys. Similarly, current and prospective
Synopsys employees may experience uncertainty about their future roles
with Synopsys. This may adversely affect Synopsys' ability to attract and
retain key management, sales, marketing and technical personnel. The
extent of this adverse effect could depend on the length of time prior to
completion of the proposed merger or termination of the merger agreement.

Page 26

o Failure to Complete the Avant! Merger Could Negatively Impact Synopsys
Stock Price, Future Business and Operations. If the merger is not
completed for any reason, Synopsys may be subject to a number of material
risks, including the following: Synopsys may face difficulties in
attracting strategic customers and partners who were expecting to use the
integrated product suite proposed to be offered by the merged company, to
assist in the development of new products by the separate companies; and
certain costs relating to the proposed merger, such as legal, accounting,
financial advisor and printing fees, must be paid even if the proposed
Avant! merger is not completed.

o Following the Avant! Merger, Synopsys Will Not Have Control Over the
Avant!/Cadence Litigation or the Authority to Settle the
Avant!/Cadence Litigation except in Limited Circumstances. Under the
terms of the litigation protection insurance obtained by Synopsys to
protect itself with respect to the Avant!/Cadence litigation described
above, which will become effective immediately following the merger,
the insurer will have the right to exercise full control over the
defense of the Avant!/Cadence litigation, including both the strategy
and tactics to be employed. Further, the insurer will have the right
to exclusively control the negotiation, discussion and terms of any
proposed settlement, except that Synopsys will retain the right to
settle the Avant!/Cadence litigation, with the consent of the insurer,
for up to $250 million plus accrued interest less certain costs, and
Synopsys and the defendants in the Avant!/Cadence litigation each will
retain the right to consent or reasonably withhold consent to any
settlement terms proposed by the insurer which are non-monetary and
can be satisfied only by future performance or non-performance by
Synopsys or such defendants, as the case may be. Therefore, following
the merger, Synopsys will have a severely limited ability to control
any risks associated with, and the timing related to, any liabilities
resulting from the Avant!/Cadence litigation.

Page 27

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Information relating to quantitative and qualitative disclosure about market
risk is set forth under the captions "Interest Rate Risk" and "Foreign Currency
Risk" in Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations. Such information is incorporated herein by reference.

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

On January 11, 2002, a Special Meeting of Stockholders of Synopsys, Inc. as
held in Mountain View, California. One matter was submitted to the stockholders
for approval.

1. The stockholders approved an amendment to the 1992 Stock Option Plan to
extend the term of the Plan from January 13, 2002 to January 13, 2007,
without requesting approval to issue additional shares under such Plan.
The results of the voting are set forth below:

For Against Abstain Non-Votes
---------- ---------- --------- ---------
33,486,348 15,766,460 124,692 0

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a.) Exhibits

99.1 Termination Agreement by and among Synopsys, Inc., IKOS Systems,
Inc. and Oak Merger Corporation, dated March 12, 2002.

(b.) Reports on Form 8-k

None.

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.

SYNOPSYS, INC.

By: /s/ ROBERT B. HENSKE
---------------------
Robert B. Henske
Senior Vice President, Finance and Operations, and Chief Financial Officer
(Principal Financial Officer)

Date: March 19, 2002