CADENCE DESIGN SYSTEMS INC (Form: 10-K, Received: 03/12/2002 16:53:12)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


(Mark One)
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 29, 2001

OR

o		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 1-10606

CADENCE DESIGN SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		77-0148231 (I.R.S. Employer Identification No.)

2655 Seely Avenue, Building 5, San Jose, California 95134

(Address of Principal Executive Offices, including Zip Code)

(408) 943-1234

(Registrant’s Telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Common Stock, $.01 par value per share (Title of Each Class)		New York Stock Exchange (Names of Each Exchange on which Registered)

Securities registered pursuant to Section 12(g) of the Act:

None

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

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

Aggregate market value of the voting stock held on March 2, 2002 by non-affiliates of the registrant: $5,390,060,679

Number of shares of common stock outstanding at March 2, 2002: 250,528,980

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the 2002 Annual Meeting are incorporated by reference into Part III hereof.

TABLE OF CONTENTS


PART I.
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote Of Security Holders
PART II.
	Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Cost of Revenue as a Percent of Related Revenue
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
PART III.
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
PART IV.
	Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
Exhibit 2.19
Exhibit 10.08
Exhibit 10.09
Exhibit 10.10
Exhibit 10.65
Exhibit 10.66
Exhibit 21.01
Exhibit 23.01

CADENCE DESIGN SYSTEMS, INC.

2001 FORM 10-K ANNUAL REPORT

Table of Contents


		Page

PART I
Item 1.	Business		3
Item 2.	Properties		16
Item 3.	Legal Proceedings		16
Item 4.	Submission of Matters to a Vote of Security Holders		19
PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters		20
Item 6.	Selected Financial Data		21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		44
Item 8.	Financial Statements and Supplementary Data		44
Item 9.	Changes and Disagreements with Accountants on Accounting and Financial Disclosure		45
PART III
Item 10.	Directors and Executive Officers of the Registrant		46
Item 11.	Executive Compensation		46
Item 12.	Security Ownership of Certain Beneficial Owners and Management		46
Item 13.	Certain Relationships and Related Transactions		46
PART IV
Item 14.	Exhibits, Financial Statements, Schedules and Reports on Form 8-K		47
	Signatures		94

PART I.

Item 1. Business

Certain statements contained in this Annual Report on Form 10-K, including, without limitation, statements containing the words “believes,” “anticipate,” “estimates,” “expects,” “intends,” and words of similar import, constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are predictions based upon Cadence’s current expectations about future events and speak only as of the date of this annual report. Actual results could vary materially from those expressed in these statements. Readers are referred to “Marketing and Sales,” “Research and Development,” “Competition,” “Proprietary Technology,” “Manufacturing and Distribution,” and “Factors That May Affect Future Results” sections contained in this Annual Report on Form 10-K, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements.

Overview

Cadence Design Systems, Inc. provides comprehensive software and other technology and offers design and methodology services for the product development requirements of the world’s leading electronics companies. Cadence® licenses its leading-edge electronic design automation, or EDA, software and hardware technology and provides a range of services to companies throughout the world to help accelerate and manage their product development processes. Cadence’s products and services are used by companies to design and develop complex integrated circuits, or ICs, and electronic systems, including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products and other advanced electronics. These industries are experiencing a general economic slowdown. This slowdown led Cadence to record in 2001 worldwide restructuring and asset impairment charges totaling $61.6 million, inventory write downs of $18.9 million and acquired intangibles write-offs of $25.8 million.

Cadence’s headquarters are located at 2655 Seely Avenue, San Jose, California 95134. Its telephone number at that location is (408) 943-1234 and its web-site can be accessed at www.cadence.com.

Factors Driving The Electronic Design Automation Industry

During the last decade, the worldwide electronics industry has experienced expansion, driven largely by the communications, business productivity and consumer electronics markets. Ever-decreasing silicon manufacturing process geometries coupled with the move to 300mm wafer production is driving integrated circuit cost decreases, volume increases and increasingly higher complexity for providers of electronics devices. At the same time, the development of more comprehensive integrated circuits complicates effective integration of components into complete electronic systems. From a design perspective, today’s complex ICs are system-on-a-chip, or SoC, devices. These SoC devices, as described in more detail below, contain one or more processors, memory and application-specific logic. Designing these SoC devices requires the convergence of what have previously been distinct domains for embedded software, digital logic, analog circuitry and printed circuit board, or PCB, design. This design convergence is changing the way companies create designs for these devices. These market and technology forces pose major challenges for the global electronics design community, and consequently create significant opportunities and challenges for EDA tools and services providers.

The electronics industry is faced with increasing complexity of electronic devices. Design teams face major challenges in the migration to deep submicron design and SoC design.

Deep submicron design refers to the design of integrated circuits that will have feature sizes smaller than 0.25 micron. IC feature sizes for wires, transistors and contacts decrease with each advance in the semiconductor manufacturing process. Each successive move to a smaller feature size (e.g., decreasing from 0.25 microns to 0.13 microns and smaller) requires introducing new capabilities throughout the entire design

and manufacturing flow to account for new physical effects. For example, at 0.13 microns signal integrity issues such as crosstalk, IR (voltage) drop, and substrate noise have become critical.

SoC design refers to implementing an entire electronics sub-system on a single integrated circuit. Smaller feature sizes make it more economical to put additional circuitry on a single die. The ICs fabricated on these dies include one or more processors (microprocessors and digital signal processors), a high-performance bus, numerous memory devices and peripherals, custom digital logic, custom analog logic and millions of lines of software code. Such devices offer benefits in terms of price, performance, power and size. However, they are extremely difficult to design.

These trends pose significant new challenges for electronics design teams. Specifically, deep submicron design requires designers to take into account many physical effects they previously ignored. SoC design requires new approaches to managing complexity and its related risks. The electronics industry addresses these challenges in a number of ways, including the use of new EDA tools, the upgrade of design methodologies, and offering integrated front-to-back design solutions.

Cadence Electronic Design Automation Tools

Cadence offers the most comprehensive set of EDA tools in its industry. Cadence tools improve designer productivity and design quality throughout the electronic design process.

System-level Design Tools

Cadence system-level design tools help design teams optimize their designs and provide a smooth path to detailed hardware design. The Cadence Virtual Component Co-design, or VCC, solution lets designers capture and verify system behavior independent of hardware and software implementation. Designers can then map the behavior to a variety of architectural implementations and analyze the results of each. Using this rapid exploration tool, teams can optimize their overall system-level design including critical hardware/software partitioning. VCC is also an ideal environment for platform-based design. For those portions of the behavior that are algorithmic in nature, the Cadence Signal Processing Worksystem solution provides a specialized environment for capturing and analyzing floating-point and fixed-point algorithms. It also serves as a system-level testbench environment, especially for communications and multimedia applications.

Functional and System-level Verification Tools

Design teams need a range of simulation and hardware-based acceleration tools to verify the functionality of their designs. Cadence offers a comprehensive set of simulators and emulators for behavioral, register-transfer-level and gate-level functional verification. Cadence’s digital simulators include the NC-Verilog® simulator for the Verilog® language, NC-VHDL for the VHDL® language and NC-Sim, which simultaneously supports both languages. These simulators provide designers with the simulation performance and capacity they need to verify the functionality of complex designs. The Cadence Verification Cockpit provides an environment for creating testbenches, analyzing results and debugging designs at a transaction level. Cadence also provides standards-based transaction verification models for use in this environment.

For design teams that need to accelerate simulations and/or verify designs at the system-level, the Cadence Quickturn® division offers acceleration and emulation solutions. Palladium ^TM and CoBALT Ultra Design Verification Systems are built with 0.12 micron, custom silicon technology and are used for both simulation acceleration and in-circuit emulation. Mercury ^TM Plus utilizes custom field programmable gate arrays, or FPGAs, and is used specifically for in-circuit emulation. Cadence also offers application-specific solutions that provide a complete verification environment for key applications such as 3G wireless communication, Packet over SONET networking, and other popular applications. The use of Quickturn solutions enables design teams to identify hardware and software problems that they would otherwise not find until the design is implemented in silicon.

Automated Digital IC Design Tools

Cadence’s unified synthesis/place-and-route system, or SP&R, provides a complete implementation path from register-transfer level, or RTL, through final layout for the most advanced designs. The SP&R system consists of Physically Knowledgeable Synthesis, or PKS, physical synthesis for front-end logic design and Silicon Ensemble® PKS, or SE-PKS optimization-place-and-route for back-end physical design. PKS provides simultaneous logic synthesis, placement and global routing. Silicon Ensemble-PKS provides a complete place-and-route environment, including the ability to re-optimize a design’s logic to meet new physical constraints. These tools have common timing, optimization, placement and routing engines to ensure single-pass accuracy as the design progresses from RTL to final layout. The SP&R flow supports power optimization, test synthesis and datapath compilation capabilities for automated digital design. With the CadMOS ^TM suite of tools, Cadence now also offers an enhanced solution for signal integrity problems — such as crosstalk — that become more prevalent and critical at 0.13 micron and below designs. For leading-edge physical verification, Cadence offers the Assura ^TM physical verification toolset created specifically for deep submicron designs.

In December 2001, Cadence acquired Silicon Perspective Corporation, which produces the First Encounter® full-chip virtual prototyping solution. Design teams use the First Encounter solution to plan the physical implementation of large, hierarchical designs.

Custom and Analog Design Tools

Cadence offers a comprehensive line of analog and mixed-signal design tools. Cadence Analog Design Environment is a front-to-back analog design automation solution for full-custom analog, digital mixed-signal and radio frequency, or RF, integrated circuit design. Within that environment, designers can use the Cadence Spectre® Circuit Simulator. RF designers can use the Cadence Spectre RF simulator on desktop workstations to perform full-chip, transistor-level circuit simulation of RF designs with 5,000+ devices.

The Cadence Virtuoso® suite of custom IC layout tools provides a comprehensive set of layout capabilities including layout editing, placement, routing and physical verification for analog, custom digital mixed signal and RF ICs. Virtuoso Custom IC Layout includes correct-by-construction, connectivity-driven automation that dramatically boosts designer productivity over manual custom-layout techniques. Virtuoso Custom IC Layout is integrated with the Cadence Assura physical verification toolset, which offers automated, interactive physical and batch IC layout verification, extraction and layout enhancements for manufacturing. The Assura tool utilizes hierarchical processing techniques to significantly reduce verification cycle times and provide effective debugging capabilities.

For years, analog/mixed-signal design teams have been seeking to move to a top-down approach. Cadence AMS Designer enables them to do so. It is a mixed-signal environment and analog/mixed-signal simulator, the latter of which is based on the Cadence NC-Sim and Spectre simulators.

Printed Circuit Board Design Tools

Cadence offers a range of integrated PCB design solutions for both individual and team-based environments. For teams creating leading edge designs, Cadence provides a full front-to-back flow. Products include Allegro®, PCB layout, Concept® HDL schematic capture, PCB librarian expert, SPECCTRA® autorouter and SPECCTRAQuest ^TM for design and analysis of high-speed digital systems. Recent product introductions focus on the challenges of integrating high-speed ICs into a board system. A new constraint management system targets the problem of escalating electrical constraints by allowing engineers to capture, manage and validate high-speed design rules at all stages of the design cycle. Advances in signal integrity and power delivery technologies enable engineers to analyze the interconnect from silicon to package to board.

For individual productivity in the Windows-based PCB design market, Cadence offers the OrCAD® product line of integrated tools. Products include OrCAD Capture® schematic entry, PSpice® analog and mixed signal simulator and OrCAD Layout®.

For IC packaging design, the Cadence Advanced Package Designer and Advanced Package Engineer environments integrate electrical analysis and physical design through all phases of development, bridging the gaps between IC design, package design and package analysis.

Third-Party Tool and Partner Support

Cadence supports the integration of third-party design tools through its Connections® Program. The Connections Program provides other EDA companies with access to Cadence products to ensure that Cadence tools work well in any design environment. To date, more than 130 companies have integrated their tools with Cadence software. Additionally, Cadence manages relationships with foundry and library provider partners to support customer-owned tooling, or COT, solutions for its customers. Cadence also assists and supports library providers in the integration of Cadence design and verification tools and model formats into COT library solutions.

Electronic Design Automation Services

To complement its tools, Cadence provides a range of electronic design services that help optimize design team productivity. These include educational, support, design, verification, application service provider, or ASP, and methodology services. Cadence’s educational services include Internet, classroom and custom courses, the content of which ranges from how to use the most recent tool features to the latest design techniques. Support services include product maintenance and updates, and telephone and Internet-based technical support. Cadence also offers custom support services, which may include one or more of its standard support services plus account technical management, application and educational services and metrics reporting. Maintenance and support agreements are offered to customers either as part of Cadence product license agreement or under a separate maintenance agreement.

Design Services (Tality)

In 2000, Cadence separated its electronics design services group into a new company named Tality Corporation. Tality filed a registration statement with the Securities and Exchange Commission for Tality’s initial public offering, or IPO. Tality’s separation from Cadence was substantially completed on October 4, 2000, and the electronic design services business operated as a subsidiary of Cadence. In April 2001, Cadence announced the withdrawal of the Tality IPO registration statement. Tality was reorganized during the second, third and fourth quarters of 2001, and is currently a wholly-owned subsidiary of Cadence.

Tality’s engineering services and intellectual property are used for the design of complex electronic systems and integrated circuits. Tality focuses its offerings primarily on the communications market. Targeted segments of this market include wireline and wireless communications infrastructure and consumer communications products. The engineering services extend from product concept through manufacturing to help communications companies implement their product plans. Tality’s business has been adversely affected by the general slowdown in the economy and the electronics industry specifically. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”

Verification and ASP Services

Cadence’s Quickturn division offers verification and ASP services through TtME® (Time-to-Market Engineering) services and the QuickCycles ^TM programs. The TtME staff provides customers with consulting services, project services and/or complete turnkey services. QuickCycles ^TM allows customers to access Quickturn verification systems on a pay-as-you-go basis, either on the customer site or remotely over a high-speed, secure network connection.

Methodology Services

Cadence’s Methodology Services group offers a variety of services to help customers address electronic design challenges. It leverages Cadence’s cumulative experience and knowledge of design practices to improve productivity. Cadence has begun offering virtual computer aided design, known as VCAD, through which

engineering teams at one or more Cadence locations provide technical support through a virtual private network to customer design groups located at the customers’ design sites.

Marketing and Sales

Cadence generally uses a direct sales force consisting of sales people and applications engineers to license its products and market its consulting and design services to prospective customers. Applications engineers provide technical pre-sales as well as post-sales support for software products. The Cadence Methodology Services group provides on-site capabilities to help customers improve productivity with Cadence and other EDA products. Due to the complexity of EDA products and the electronic design process in general, the sales cycle is generally long (three to six months or more). During the sales cycle, the Cadence direct sales force generally provides technical presentations, product demonstrations and on-site customer evaluations of Cadence software. Cadence also uses traditional marketing approaches to promote its products and services, including advertising, direct mail, telemarketing, trade shows, public relations and the Internet.

Cadence markets and supports its products and services internationally through its subsidiaries and various distributors. Cadence markets its emulation hardware and consulting and design services in Japan through a wholly-owned subsidiary. Since the reorganization of Cadence’s distribution channel in Japan in 1997, Cadence has licensed its software products through Innotech Corporation, in which Cadence is an approximately 15% stockholder as of December 29, 2001.

Research and Development

Cadence’s investment in research and development was $327.5 million in 2001, $292.4 million in 2000, and $244.9 million in 1999, prior to capitalizing software development costs of $30.2 million, $28.4 million, and $25.7 million, respectively. See “Notes to Consolidated Financial Statements” for a more complete description of Cadence’s capitalization of certain software development costs.

The primary areas of Cadence’s research include SoC design, the design of silicon devices in the deep submicron range, high-speed board design, architectural-level design, high-performance logic verification technology and hardware/ software co-design.

Cadence’s advanced research and development group, Cadence Laboratories, is focused on new technology. This group is chartered with identifying and developing prototype technologies in emerging design areas that will offer substantially improved alternatives to current EDA solutions.

Competition

In the EDA products industry, Cadence currently competes with three large companies: Avant! Corporation, Mentor Graphics Corporation and Synopsys, Inc. In December 2001, Avant! and Synopsys announced their intention to merge, and if this merger is completed, the combined company could improve its competitive position with respect to Cadence. Cadence also competes with numerous smaller companies, a number of which have become publicly-traded companies or have combined with other EDA companies. Cadence also competes with manufacturers of electronic devices that have developed or have the capability to internally develop their own EDA products. Many manufacturers of electronic devices may be reluctant to purchase services from independent vendors such as Cadence because they wish to promote their own internal design departments. In the electronics design and methodology services industries, Cadence competes with numerous electronic design and consulting companies as well as with the internal design capabilities of electronics manufacturers. Other electronics companies and management consulting firms continue to enter the electronics design and methodology services industries.

The EDA product market and the commercial electronic design and methodology services industries are highly competitive. If Cadence were unable to compete successfully in these industries, it could seriously harm Cadence’s business, operating results and financial condition. To compete in these industries, Cadence must identify and develop innovative and cost-competitive EDA products and market them in a timely manner. It must also gain industry acceptance for its design and methodology services and offer better strategic concepts,

technical solutions, prices and response time, or a combination of these benefits, than those of other design companies and the internal design departments of electronics manufacturers. Cadence cannot assure you that it will be able to compete successfully in these industries.

Proprietary Technology

Cadence’s success depends, in part, upon its proprietary technology. Cadence generally relies on patents, copyrights, trademarks, trade secret laws, licenses and restrictive agreements to establish and protect its proprietary rights in technology and products. Despite precautions Cadence may take to protect its intellectual property, Cadence cannot assure you that third parties will not try to challenge, invalidate or circumvent these safeguards. Cadence also cannot assure you that the rights granted under its patents will provide it with any competitive advantages, patents will be issued on any of its pending applications, or future patents will be sufficiently broad to protect Cadence’s technology. Furthermore, the laws of foreign countries may not protect Cadence’s proprietary rights in those countries to the same extent as U.S. law protects these rights in the United States. Many Cadence products include software or other intellectual property licensed from third parties. Cadence may have to seek new or renew existing licenses for such software and other intellectual property in the future. The Cadence design services business also requires it to license the software or other intellectual property of third parties, including that of competitors. Cadence’s failure to obtain for its use software or other intellectual property licenses or other intellectual property rights on favorable terms, or the need to engage in litigation over these licenses or rights, could seriously harm Cadence’s business, operating results and financial condition.

Manufacturing and Distribution

Cadence software production operations consist of configuring the proper version of a product, outsourcing the recording of the product on magnetic tape or CD-ROM, and producing customer-unique access keys allowing customers to use licensed products. Software and documentation are generally made available to customers electronically by secured electronic delivery, and to selected customers by electronic distribution over the Internet. User manuals and other documentation are generally available on CD-ROM, but are occasionally supplied in hard copy format.

Cadence performs final assembly and test of its hardware emulation products in San Jose, California. Subcontractors manufacture all major subassemblies, including all individual printed circuit boards and custom integrated circuits, and supply them to Cadence for qualification and testing prior to their incorporation into the assembled product.

Employees

As of March 2, 2002, Cadence employed approximately 5,600 persons, with approximately 2,975 in sales, services, marketing, support and manufacturing activities, 1,800 in product development and 825 in management, administration and finance. None of Cadence’s employees is represented by a labor union, and Cadence has experienced no work stoppages. Cadence believes that its employee relations are good.

Factors That May Affect Future Results

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones Cadence faces. Additional risks and uncertainties not currently known to Cadence or that Cadence currently deems immaterial also may impair Cadence’s business operations. If any of the following risks actually occurs, Cadence’s business, operating results and financial condition could be materially harmed. Unless specifically noted, references to Cadence in the discussion below are references to Cadence and its subsidiaries.

Cadence is subject to the cyclical nature of the integrated circuit and electronics systems industries, and

the current downturn or any future downturns may reduce Cadence revenue

Purchases of Cadence’s products and services are highly dependent upon the commencement of new design projects by integrated circuit manufacturers and electronics systems companies. The integrated circuit industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The integrated circuit and electronics systems industries have experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both these companies’ and their customers’ products and a decline in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. During these downturns, the number of new design projects may decrease. Certain integrated circuit manufacturers and electronics systems companies announced a slowdown of demand and production in 2001 which has continued in 2002. Services and hardware revenue is expected to continue to be adversely affected by the general slowdown in the economy and in the electronics industry specifically. The current slowdown and any future downturns may reduce Cadence’s software and maintenance revenue and further reduce its services and hardware revenue and harm its results of operations.

Fluctuations in quarterly results of operations could hurt Cadence’s business and the market price of its

stock

Cadence has experienced, and may continue to experience, varied quarterly operating results. Various factors affect Cadence’s quarterly operating results and some of them are not entirely within Cadence’s control, including the timing of significant orders and the mix of licenses used to sell products. See “Management Discussion and Analysis of Financial Condition and Results of Operation — Critical Accounting Policies.” Cadence’s quarterly operating results are affected by the timing of significant orders for its software products because a significant number of contracts for software products are in excess of $5.0 million. The failure to close a contract for the sale of one or more orders of Cadence’s software products could seriously harm its quarterly operating results.

Cadence’s quarterly operating results are affected by the mix of license types entered into in connection with the sale of software products. Cadence has three basic licensing models: term, subscription and perpetual. Term and perpetual licenses generally recognize the revenue for such licenses at the beginning of the license period, while subscription licenses recognize revenue ratably over the term of the license. In the fourth quarter of 2001, Cadence’s mix of software license types based on total contract value was approximately 50% term licenses, 40% subscription licenses and 10% perpetual licenses. Should different conditions prevail so that the mix of Cadence’s license types were to change to a higher proportion of subscription licenses, Cadence’s software license revenue in that period would decline because a greater portion of revenue would be recognized over time. That decline could have a material impact on the results of operations in the quarter of the change in mix.

Sales of Cadence’s hardware products depend, in significant part, upon the decision of the prospective customer to commence a project for the design and development of complex integrated circuits and systems. These projects often require significant commitments of time and capital. Cadence’s hardware sales may be delayed if customers delay commencement of projects. Lengthy hardware sales cycles subject Cadence to a number of significant risks over which Cadence has little or no control, including insufficient, excess or obsolete inventory, variations in inventory valuation and fluctuations in quarterly operating results.

In addition, Cadence bases its expense budgets partially on its expectations of future revenue. However, it is difficult to predict revenue levels or growth. Revenue levels that are below Cadence’s expectations could seriously hurt Cadence’s business, operating results and financial condition. Also, because of the timing of large orders and its customers’ buying patterns, Cadence may not learn of revenue shortfalls, earnings shortfalls or other failures to meet market expectations until late in a fiscal quarter, which could cause even more immediate and serious harm to the trading price of Cadence common stock. Many of Cadence’s services engagements are terminable with little or no advance notice and without penalty. Since a significant portion of

the costs of services is labor-related, Cadence may not be able to reduce its costs in a timely manner to respond to an unanticipated revenue loss when one or more projects are terminated.

Cadence believes that quarter-to-quarter comparisons of its results of operations may not be meaningful. Therefore, stockholders should not view Cadence’s historical results of operations as reliable indicators of its future performance. If revenue or operating results fall short of the levels expected by public market analysts and investors, the trading price of Cadence common stock could decline dramatically.

The lengthy sales cycle of Cadence’s products and services makes the timing of its revenue difficult to

predict and may cause its operating results to fluctuate unexpectedly

Cadence has a lengthy sales cycle that generally extends at least three to six months. The length of the sales cycle may cause Cadence’s revenue and operating results to vary unexpectedly from quarter to quarter. The complexity and expense associated with Cadence’s business generally requires a lengthy customer education and approval process. Consequently, Cadence may incur substantial expenses and devote significant management effort and expense to develop potential relationships that do not result in agreements or revenue and may prevent Cadence from pursuing other opportunities.

In addition, sales of Cadence products and services may be delayed if customers delay approval or commencement of projects because of:

• Customers’ budgetary constraints and internal acceptance review procedures;

• The timing of customers’ budget cycles; or

• The timing of customers’ competitive evaluation processes.

If customers experience delays in their approval or project commencement activities, Cadence may not learn of, and therefore be able to communicate to the public, revenue or earnings shortfalls until late in a fiscal quarter.

Cadence’s failure to respond quickly to technological developments could make its products uncompetitive

and obsolete

The industries in which Cadence competes experience rapid technology developments, changes in industry standards, changes in customer requirements and frequent new product introductions and improvements. Currently, the electronic IC design industry is experiencing several revolutionary trends:

• Migration to Deep SubMicron: The size of features such as wires, transistors and contacts on ICs is shrinking due to advances in semiconductor manufacturing processes. Process feature sizes refer to the width of the transistors and the width and spacing of the interconnect on the IC. Feature size is normally identified by the headline transistor length, which is shrinking from 0.25 microns to 0.13 microns and smaller. This is commonly referred to in the semiconductor industry as the migration to deep submicron. It represents a major challenge for all levels of the semiconductor industry, from IC design and design automation to design of manufacturing equipment and the manufacturing process itself. Shrinkage of transistor length to such infinitesimal proportions (for reference, the diameter of the period at the end of this sentence is approximately 400 microns) is challenging fundamental laws of physics and chemistry.

• The ability to design very large ICs, in particular integration of entire electronic systems onto a single chip instead of a circuit board (a process that is referred to in the industry as “SoC”), increases the complexity of managing a design that at the lowest level is represented by billions of shapes on the fabrication mask. In addition, systems typically incorporate microprocessors and digital signal processors that are programmed with software, requiring simultaneous design of the silicon chip and the related embedded software on the chip.

If Cadence is unable to respond quickly and successfully to these developments and the evolution of these changes, Cadence may lose its competitive position and its products or technologies may become uncompetitive or obsolete. To compete successfully, Cadence must develop or acquire new products and improve its existing products and processes on a schedule that keeps pace with technological developments in its

industries. Cadence must also be able to support a range of changing computer software, hardware platforms and customer preferences. There is no guarantee that Cadence will be successful in this respect.

Cadence has historically suffered losses in its electronics design services business

The market for electronics design services is relatively new, rapidly evolving and sensitive to customer budgetary constraints and engineering capacity. Tality has historically suffered losses, and it incurred significant expenses in connection with its separation. If Tality fails to increase its revenue to offset its expenses, Tality will continue to experience losses. Tality’s failure to succeed in the design services business may seriously harm Cadence’s business, operating results and financial condition.

The success of Cadence’s services businesses depend on factors that are difficult to control

In order to be successful with its services, Cadence must overcome several factors that are difficult to control, including the following:

• Cadence’s cost of services personnel is high and reduces gross margin. Gross margin represents the difference between the amount of revenue from the sale of services and Cadence’s cost of providing those services. Cadence must pay high salaries to attract and retain professional services personnel. This results in a lower gross margin than the gross margin in Cadence’s software business. In addition, the high cost of training new services personnel or not fully utilizing these personnel can significantly lower gross margin, and it is difficult to adjust staffing levels quickly to reflect customer demand for services.

• A substantial portion of these services contracts is fixed-price contracts. This means that the customer pays a fixed price that has been agreed upon ahead of time, no matter how much time or how many resources Cadence must devote to perform the contract. If Cadence’s cost in performing the services consistently and significantly exceeds the amount the customer has agreed to pay, it could seriously harm Cadence’s business, operating results and financial condition.

Cadence’s inability to compete in its industries could seriously harm its business

The EDA market and the commercial electronics design and methodology services industries are highly competitive. If Cadence were unable to compete successfully in these industries, it could seriously harm Cadence’s business, operating results and financial condition. To compete in these industries, Cadence must identify and develop innovative and cost competitive EDA software products and market them in a timely manner. It must also gain industry acceptance for its design and methodology services and offer better strategic concepts, technical solutions, prices and response time, or a combination of these factors, than those of other design companies and the internal design departments of electronics manufacturers. Cadence cannot assure you that it will be able to compete successfully in these industries. Factors that could affect Cadence’s ability to succeed include:

• The development of competitive EDA products and design and methodology services could result in a shift of customer preferences away from Cadence’s products and services and significantly decrease revenue;

• The electronics design and methodology services industries are relatively new and electronics design companies and manufacturers are only beginning to purchase these services from outside vendors;

• Due to budgeting constraints or excess engineering capacity, electronics manufacturers often choose to perform design and methodology services internally, rather than purchase these services from outside vendors;

• The pace of technology change demands continuous technological development to meet the requirements of next-generation design challenges; and

• There are a significant number of current and potential competitors in the EDA industry and the cost of entry is low.

In the EDA products industry, Cadence currently competes with three large companies: Avant! Corporation, Mentor Graphics Corporation, and Synopsys, Inc. In December 2001, Synopsys and Avant! announced their intention to merge, and if this merger is completed, the combined company could improve its competitive position with respect to Cadence. Cadence also competes with numerous smaller companies, a number of which have become publicly-traded companies or have combined with other EDA companies. Cadence also competes with manufacturers of electronic devices that have developed or have the capability to develop their own EDA products. Many manufacturers of electronic devices may be reluctant to purchase services from independent vendors such as Cadence because they wish to promote their own internal design departments. In the electronics design and methodology services industries, Cadence competes with numerous electronic design and consulting companies as well as with the internal design capabilities of electronics manufacturers. Other electronics companies and management consulting firms continue to enter the electronic design and methodology services industries.


	*Cadence’s failure to obtain software or other intellectual property licenses or adequately protect its*

proprietary rights could seriously harm its business

Cadence’s success depends, in part, upon its proprietary technology. Many of Cadence’s products include software or other intellectual property licensed from third parties, and Cadence may have to seek new or renew existing licenses for software and other intellectual property in the future. Cadence’s design services business also requires it to license software or other intellectual property of third parties, including that of competitors. Cadence’s failure to obtain for its use software or other intellectual property licenses or other intellectual property rights on favorable terms, or the need to engage in litigation over these licenses or rights, could seriously harm Cadence’s business, operating results and financial condition.

Also, Cadence generally relies on patents, copyrights, trademarks, trade secret laws, licenses and restrictive agreements to establish and protect its proprietary rights in technology and products. Despite precautions Cadence may take to protect its intellectual property, Cadence cannot assure you that third parties will not try to challenge, invalidate, or circumvent these safeguards. Cadence also cannot assure you that the rights granted under its patents will provide it with any competitive advantages, patents will be issued on any of its pending applications, or future patents will be sufficiently broad to protect Cadence’s technology. Furthermore, the laws of foreign countries may not protect Cadence’s proprietary rights in those countries to the same extent as U.S. law protects these rights in the United States.

Cadence cannot assure you that its reliance on licenses from or to or restrictive agreements with third parties, or that patent, copyright, trademark and trade secret protections, will be enough to be successful and profitable in the industries in which Cadence competes.


	*Intellectual property infringement by or against Cadence could seriously harm its business*

There are numerous patents in the EDA industry and new patents are being issued at a rapid rate. It is not always economically practicable to determine in advance whether a product or any of its components infringes the patent rights of others. As a result, from time to time, Cadence may be forced to respond to or prosecute intellectual property infringement claims to protect its rights or defend a customer’s rights. These claims, regardless of merit, could consume valuable management time, result in costly litigation, or cause product shipment delays, all of which could seriously harm Cadence’s business, operating results and financial condition. In settling these claims, Cadence may be required to enter into royalty or licensing agreements with the third parties claiming infringement. These royalty or licensing agreements, if available, may not have terms acceptable to Cadence. Being forced to enter into a license agreement with unfavorable terms could seriously harm Cadence’s business, operating results and financial condition. Any potential intellectual property litigation could force Cadence to do one or more of the following:

• Pay damages to the party claiming infringement;

• Stop licensing, or providing services that use, the challenged intellectual property;

• Obtain a license from the owner of the infringed intellectual property to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or

• Redesign the challenged technology, which could be time-consuming and costly.

If Cadence were forced to take any of these actions, Cadence’s business and results of operations may be harmed.


	*Cadence obtains key components for its hardware products from a limited number of suppliers*

Cadence depends on several suppliers for certain key components and board assemblies used in its hardware-based verification products. Cadence’s inability to develop alternative sources or to obtain sufficient quantities of these components or board assemblies could result in delays or reductions in product shipments. In particular, Cadence currently relies on IBM for the hardware components for Cadence’s CoBALT ^TM , Mercury ^TM PLUS and Palladium ^TM products. Other disruptions in supply may also occur. If there were such a reduction or interruption, Cadence’s results of operations would be seriously harmed. Even if Cadence can eventually obtain these components from alternative sources, a significant delay in Cadence’s ability to deliver products would result.


	*Cadence expects to acquire other companies and may not successfully integrate them or the companies it*

has recently acquired

Cadence has acquired numerous other businesses before and is likely to acquire other businesses in the future. While Cadence expects to analyze carefully all potential transactions before committing to them, Cadence cannot assure you that any transaction that is completed will result in long-term benefits to Cadence or its stockholders, or that Cadence’s management will be able to manage the acquired businesses effectively. In addition, growth through acquisition involves a number of risks. If any of the following events occurs after Cadence acquires another business, it could seriously harm Cadence’s business, operating results and financial condition:

• Difficulties in combining previously separate businesses into a single unit;

• The substantial diversion of management’s attention from day-to-day business when evaluating and negotiating these transactions and then integrating an acquired business;

• The discovery after the acquisition has been completed of liabilities assumed from the acquired business;

• The failure to realize anticipated benefits such as cost savings and revenue enhancements;

• The failure to retain key personnel of the acquired business;

• Difficulties related to assimilating the products of an acquired business in, for example, distribution, engineering and customer support areas;

• Unanticipated costs;

• Adverse effects on existing relationships with suppliers and customers; and

• Failure to understand and compete effectively in markets in which Cadence has limited previous experience.


	*Cadence’s international operations may seriously harm its financial condition because of several weak*

foreign economies and the effect of foreign exchange rate fluctuations

Cadence has significant operations outside the United States. Cadence’s revenue from international operations as a percentage of total revenue was approximately 45% for fiscal 2001 and 44% for fiscal 2000. Cadence also transacts business in various foreign currencies. Recent economic and political uncertainty and the volatility of foreign currencies in certain parts of the Asia-Pacific region have had, and may continue to have, a seriously harmful effect on Cadence’s revenue and operating results.

Fluctuations in the rate of exchange between the U.S. dollar and the currencies of other countries in which Cadence conducts business could seriously harm its business, operating results and financial condition. For example, if there is an increase in the rate at which a foreign currency exchanges into U.S. dollars, it will take more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. If Cadence prices its products and services in the foreign currency, it will receive less in U.S. dollars than it did before the rate increase went into effect. If Cadence prices its products and services in U.S. dollars, an increase in the exchange rate will result in an increase in the price for Cadence’s products and services

compared to those products of its competitors that are priced in local currency. This could result in Cadence’s prices being uncompetitive in markets where business is transacted in the local currency. Cadence’s international operations may also be subject to other risks, including:

• The adoption and expansion of government trade restrictions;

• Volatile foreign exchange rates and currency conversion risks;

• Limitations on repatriation of earnings;

• Reduced protection of intellectual property rights in some countries;

• Recessions in foreign economies;

• Longer receivables collection periods and greater difficulty in collecting accounts receivable;

• Difficulties in managing foreign operations;

• Political and economic instability;

• Business interruptions from terrorism, military operations and war;

• Unexpected changes in regulatory requirements;

• Tariffs and other trade barriers; and

• U.S. government licensing requirements for exports which make licenses difficult to obtain.

Cadence expects that revenue from its international operations will continue to account for a significant portion of its total revenue.

Exposure to foreign currency transaction risk can arise when transactions are conducted in a currency different from the functional currency of a Cadence subsidiary. A subsidiary’s functional currency is the currency in which it primarily conducts its operations, including product pricing, expenses and borrowings. Cadence uses foreign currency forward exchange contracts and purchases foreign currency put options to help protect against currency exchange risks. These forward contracts and put options allow Cadence to buy or sell specific foreign currencies at specific prices on specific dates. Increases or decreases in the value of Cadence’s foreign currency transactions are partially offset by gains and losses on these forward contracts and put options. Although Cadence attempts to reduce the impact of foreign currency fluctuations, significant exchange rate movements may hurt Cadence’s results of operations as expressed in U.S. dollars.

Foreign currency exchange risk occurs for some of Cadence’s foreign operations whose functional currency is the local currency. The primary effect of foreign currency translation on Cadence’s results of operations is a reduction in revenue from a strengthening U.S. dollar, offset by a smaller reduction in expenses. Exchange rate gains and losses on the translation into U.S. dollars of amounts denominated in foreign currencies are included as a separate component of stockholders’ equity.


	*Failure to obtain export licenses could harm Cadence’s business*

Cadence must comply with U.S. Department of Commerce regulations in shipping its software products and other technologies outside the United States. Although Cadence has not had any significant difficulty complying with these regulations so far, any significant future difficulty in complying could harm Cadence’s business, operating results and financial condition.


	*Cadence’s failure to attract, train, motivate and retain key employees may harm its business*

Competition for highly skilled employees is very intense. Cadence’s business depends on the efforts and abilities of its senior management, its research and development staff, and a number of other key management, sales, support, technical and services personnel. The high cost of training new personnel, not fully utilizing these personnel, or losing trained personnel to competing employers could reduce Cadence’s gross margins and harm its business and operating results. Competition for these personnel is intense, particularly in geographic areas recognized as high technology centers such as the Silicon Valley area, where Cadence’s principal offices are located, and the other locations where it maintains facilities. To attract and retain individuals with the requisite expertise, Cadence may be required to grant large numbers of stock options or other stock-based incentive awards, which may be dilutive to existing stockholders. Cadence may also be required to pay significant base salaries and cash bonuses, which could harm its operating results. If Cadence does not succeed in hiring and retaining candidates with appropriate qualifications, it will not be able to grow its business and its

operating results will suffer. Cadence’s failure to attract, train, motivate and retain key employees would impair its development of new products, its ability to provide design and methodology services and the management of its businesses. This would seriously harm Cadence’s business, operating results and financial condition.

If Cadence becomes subject to unfair hiring claims, Cadence could be prevented from hiring needed

personnel, incur liability for damages and incur substantial costs in defending itself

Companies in Cadence’s industry whose employees accept positions with competitors frequently claim that these competitors have engaged in unfair hiring practices or that the employment of these persons would involve the disclosure or use of trade secrets. These claims could prevent Cadence from hiring personnel or cause it to incur liability for damages. Cadence could also incur substantial costs in defending itself or its employees against these claims, regardless of their merits. Defending itself from these claims could also divert the attention of Cadence’s management away from its operations.

Errors or defects in Cadence’s products and services could expose it to liability and harm its reputation

Cadence’s customers use its products and services in designing and developing products that involve a high degree of technological complexity, each of which has its own specifications. Because of the complexity of the systems and products with which Cadence works, some of its products and designs can be adequately tested only when put to full use in the marketplace. As a result, its customers or their end users may discover errors or defects in Cadence’s software or the systems Cadence designs, or the products or systems incorporating its design and intellectual property may not operate as expected. Errors or defects could result in:

• Loss of current customers and loss of or delay in revenue and loss of market share;

• Failure to attract new customers or achieve market acceptance;

• Diversion of development resources to resolving the problem;

• Increased service costs; and

• Liability for damages.

Anti-takeover defenses in Cadence’s charter, by-laws, and under Delaware law could prevent an acquisition

of Cadence or limit the price that investors might be willing to pay for Cadence common stock

Provisions of the Delaware General Corporation Law that apply to Cadence and its Certificate of Incorporation could make it difficult for another company to acquire control of Cadence. For example:

• Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from engaging in any business combination with a person owning 15% or more of its voting stock, or who is affiliated with the corporation and owned 15% or more of its voting stock at any time within three years prior to the proposed business combination, for a period of three years from the date the person became a 15% owner, unless specified conditions are met.

• Cadence’s Certificate of Incorporation allows Cadence’s Board of Directors to issue, at any time and without stockholder approval, preferred stock with such terms as it may determine. No shares of preferred stock are currently outstanding. However, the rights of holders of any Cadence preferred stock that may be issued in the future may be superior to the rights of holders of its common stock.

• Cadence has a rights plan, commonly known as a “poison pill,” which would make it difficult for someone to acquire Cadence without the approval of Cadence’s Board of Directors.

All or any one of these factors could limit the price that certain investors would be willing to pay for shares of Cadence common stock and could delay, prevent or allow Cadence’s Board of Directors to resist an acquisition of Cadence, even if the proposed transaction was favored by a majority of Cadence’s independent stockholders.

Item 2. Properties

Cadence’s headquarters are located in San Jose, California, and Cadence owns the related land and buildings. Additionally, Cadence owns buildings in India and land and buildings in Scotland. The total square footage of Cadence’s owned buildings is approximately 984,000 square feet.

Cadence leases additional facilities for its sales offices in the United States and various foreign countries, and its research and development and design services facilities in the United States and in foreign countries including the United Kingdom and India. Cadence subleases certain of these facilities where space is not fully utilized or has been involved in restructuring activities.

Cadence believes that these facilities and the undeveloped land it owns adjacent to its current headquarters are adequate for its current needs and that suitable additional or substitute space will be available as needed to accommodate any expansion of Cadence’s operations.

Item 3. Legal Proceedings

From time to time, Cadence is involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contract law, distribution arrangements and employee relations matters.

Cadence filed a complaint in the U.S. District Court for the Northern District of California on December 6, 1995 against Avant! Corporation and certain of its employees or agents for misappropriation of trade secrets, copyright infringement, conspiracy and other illegal acts involving intellectual property.

On January 16, 1996, Avant! filed various counterclaims against Cadence and Joseph B. Costello, Cadence’s former President and Chief Executive Officer, and with leave of the court, on January 29, 1998, filed a second amended counterclaim. The second amended counterclaim alleges, inter alia, that Cadence and Mr. Costello had cooperated with the Santa Clara County, California, District Attorney and initiated and pursued its complaint against Avant! for anti-competitive reasons, engaged in wrongful activity in an attempt to manipulate Avant!’s stock price, and utilized certain pricing policies and other acts to unfairly compete against Avant! in the marketplace. The second amended counterclaim also alleges that certain Cadence insiders engaged in illegal insider trading with respect to Avant!’s stock. Cadence and Mr. Costello believe that they have meritorious defenses to Avant!’s claims, and each intends to defend such action vigorously. By an order dated July 13, 1996, the court bifurcated Avant!’s counterclaim from Cadence’s complaint and stayed the counterclaim pending resolution of Cadence’s complaint. The counterclaim remains stayed.

In an order issued on December 19, 1997, as modified on January 26, 1998, the District Court entered a preliminary injunction barring Avant! from any further infringement of Cadence’s copyrights in Design Framework II® software, or selling, licensing or copying such product derived from Design Framework II, including, but not limited to, Avant!’s ArcCell products. On December 7, 1998, the District Court issued a further preliminary injunction, which enjoined Avant! from selling its Aquarius product line. Cadence posted a $10.0 million bond in connection with the issuance of the preliminary injunction. On July 30, 1999, the U.S. Court of Appeals for the Ninth Circuit affirmed the preliminary injunction.

On July 25, 2001, Avant! was ordered to pay Cadence $194.6 million in criminal restitution after Avant! entered a plea of no contest and was found guilty by the Superior Court of the State of California of conspiracy to take and use Cadence’s trade secrets. This conspiracy included the theft by Avant! and certain individuals of Cadence intellectual property, including software code, as well as other trade secrets. As of December 29, 2001, approximately $196.0 million, consisting of all of the restitution award plus interest was received. This amount was recorded in restructuring, asset impairment and unusual items in Cadence’s Consolidated Statements of Operations.

trade secret claim based on Avant!’s use, prior to June 1994, of Cadence’s Design Framework II source code is barred by the release. On May 15, 2001, the Ninth Circuit heard oral arguments by both parties on their appeals from the District Court’s order. On June 11, 2001, the Ninth Circuit certified a question of California law to the California Supreme Court and stayed the case. On October 31, 2001, the California Supreme Court agreed to accept such certification.

In February 1998, Aptix Corporation and Meta Systems, Inc. filed a lawsuit against Quickturn Design Systems, Inc. in the U.S. District Court for the Northern District of California alleging that Quickturn infringed a U.S. patent owned by Aptix and licensed to Meta. In June 2000, the District Court entered judgment in favor of Quickturn, dismissing the complaint and declaring the patent unenforceable. The Court also granted summary judgment to Aptix, denying Quickturn’s abuse of process counterclaim. On September 8, 2000 the Court ordered Aptix to pay $4.2 million to Quickturn as reimbursement of attorneys’ fees and costs it incurred in the litigation. Aptix appealed the District’s Court’s judgment and posted a $2.0 million bond to secure the judgment. On June 8, 2001, the U.S. Court of Appeals for the Federal Circuit affirmed the District Court’s dismissal of Quickturn’s abuse of process counterclaim. On November 5, 2001, the Federal Circuit vacated the District Court’s judgment of unenforceability, but affirmed the District Court’s dismissal of Aptix’s and Meta’s complaint and the award of attorneys fees and costs.

On January 7, 1999, in a suit captioned Mentor Graphics Corporation, et al. v. Lobo, et al., Delaware Chancery Court, New Castle County, Civ. Action No. 16843-NC (“Mentor II”), Mentor filed and served an amended complaint asserting claims against Cadence, Quickturn and the Quickturn Board of Directors for declaratory and injunctive relief for various alleged breaches of fiduciary duty purportedly owned by Quickturn and its Board of Directors to Quickturn’s shareholders in connection with the merger between Quickturn and Cadence. Mentor further alleged that Cadence aided and abetted Quickturn and its Board of Directors in those purported breaches. Mentor has not prosecuted the matter since January 1999. In May 2000, Mentor advised the Delaware Chancery Court of its objection to the settlement of a companion action brought on behalf of certain Quickturn shareholders, and sought an award of attorneys’ fees related to its prosecution of Mentor II as well as the prior related action, to which Cadence was not a party. Settlement of the companion action is conditioned upon approval of the Chancery Court and Mentor’s not being awarded attorneys’ fee for Mentor II. In an order dated August 17, 2001, the Chancery Court denied Mentor’s fee application. Mentor has indicated that it will appeal this order.

On July 21, 1999, Mentor filed suit against Quickturn, which action is pending in the U.S. District Court for the Northern District of California, Civil Action No. C 99-5464. Mentor has alleged that Quickturn’s Mercury ^TM and Mercury ^TM Plus hardware emulation systems infringe U.S. Patent Nos. 5,777,489 and 5,790,832, allegedly assigned to Mentor. At Quickturn’s request, Cadence was added as a defendant. Quickturn and Cadence are vigorously defending themselves against Mentor’s claims, and have filed counterclaims for declaratory judgment of non-infringement and invalidity of these patents.

On March 24, 2000, Mentor and Meta and several founders of Meta filed suit against Quickturn and Cadence and a former Quickturn employee in the U.S. District Court for the Northern District of California, Civil Action No. C-00-01030. The suit alleges infringement of U.S. Patent No. 5,574,832 allegedly assigned to Mentor, misappropriation of trade secrets and breach of confidence, and seeks unspecified damages, injunctive relief and the assignment to Mentor of a patent previously issued to Quickturn. Quickturn and Cadence are vigorously defending themselves against these claims, and have filed counterclaims for declaratory judgment of non-infringement and invalidity of U.S. Patent Nos. 5,754,827, 5,999,725 and 6,057,706 allegedly assigned to Mentor.

2000, Mentor filed a motion for preliminary injunction, asking the Court to prohibit the sale of Quickturn’s MercuryPlus emulation systems prior to trial of this action. The Court denied the motion for preliminary injunction on August 30, 2001, stating that Quickturn and Cadence had raised substantial questions regarding the validity of U.S. Patent No. 5,574,388. However, the Court also stated that Mentor had demonstrated likelihood of success in proving that Quickturn’s MercuryPlus emulation systems infringe Claims 1 and 5 of the patent. Mentor subsequently filed a motion for summary judgment that Quickturn’s MercuryPlus ^TM emulation system infringes Claims 1 and 5 of U.S. Patent No. 5,574,388. Mentor’s summary judgment motion will be heard on March 22, 2002. Quickturn and Cadence believe the Court will ultimately conclude that no such infringement exists.

On November 2, 2000, Mentor and Meta filed a complaint for declaratory judgment against Quickturn and Cadence in the U.S. District Court for the District of Oregon (Case No. C-00-1489) seeking a ruling that Mentor’s proposed design verification approach (in which IC designers would use U.S.-based computer terminals to operate SimExpress emulation systems located overseas) will not infringe Quickturn’s patents and will not violate the permanent injunction entered by the Oregon District Court on July 7, 1999 in Civil Action No. C-96-00342. In January 2001, Quickturn and Cadence filed a Motion to Dismiss the action, based on lack of subject matter jurisdiction. On May 1, 2001, the Court provisionally granted Quickturn’s motion to dismiss. Cadence and Quickturn believe that Mentor’s complaint is without merit.

On April 30, 1999, Cadence and several of its officers and directors were named as defendants in a lawsuit filed in the U.S. District Court for the Northern District of California, entitled Spett v. Cadence Design Systems, et al., civil action no. C 99-2082. The action was brought on behalf of a class of stockholders who purchased Cadence common stock between November 4, 1998 and April 20, 1999, and alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On September 18, 2000, the District Court granted Cadence’s Motion to Dismiss Plaintiffs’ Claims with leave to amend. Plantiffs did not amend their complaint, and on November 29, 2001 an order was filed dismissing the claims with prejudice and granting judgment in favor of Cadence and the individual defendants.

On February 25, 2000, Cadence and several of its officers were named as defendants in a lawsuit filed in the U.S. District Court for the Northern District of California, entitled Maxick v. Cadence Design Systems, Inc., File No. C 00-0658PJH. The action was brought on behalf of a class of shareholders of OrCAD, Inc., and alleges violations of Section 14(d)(7) of the Securities Exchange Act of 1934, and Rule 14d-10 thereunder. The lawsuit arose out of Cadence’s acquisition of OrCAD, which was completed in August 1999. The parties have settled the matter for the payment of $1.25 million by Cadence. The settlement is subject to court approval.

In early 1999, Cadence entered into negotiations with Intelect Communications, Inc. (since renamed TeraForce Technology Corporation), and Intelect’s wholly-owned subsidiary, DNA Enterprises, Inc., with respect to a potential purchase of substantially all the assets of DNA. The transaction was not consummated and, in July 1999, Intelect and DNA filed suit against Cadence in a Texas state court alleging breach of contract, fraud, negligent misrepresentation and breach of fiduciary duty, seeking unspecified compensatory and punitive damages. Cadence has answered, denying liability. In January 2002, the court denied Cadence’s Motion for Partial Summary Judgment and set a trial for March 2002.

On November 22, 2000, a former design services customer, Uniden Corporation, filed an action for fraud, negligent misrepresentation and breach of contract in the State Court of Texas against Cadence and other corporate defendants, seeking compensatory and punitive damages in an unspecified amount. The suit was filed after Cadence demanded payment of approximately $1.0 million for design services rendered to Uniden. Cadence since has filed a counterclaim to recover the approximately $1.0 million owed for services rendered. The parties agreed to dismiss voluntarily the actions pending in the State Court of Texas and to re-file in the State Court of California, County of Orange. Uniden refiled its complaint on July 2, 2001 in Orange County, California. Cadence filed its answer and counterclaim on September 12, 2001.

On December 28, 2000, a former design services customer, Scanz Communications, Inc. and Scanz Communications, LLC (“Scanz”) filed an action for various causes of action in the Los Angeles Superior Court of California against Cadence and Tality Corporation and Tality, LP, seeking compensatory and

punitive damages in an unspecified amount. The suit was filed after Cadence demanded payment of $4,657,556.17 for design services rendered to Scanz. Scanz filed a first amended complaint on April 2, 2001. Following demurrers by Cadence that were sustained in part, Scanz filed a second amended complaint on July 10, 2001 to which Cadence and Tality filed their answer on October 10, 2001. Scanz’s remaining causes of action are fraud, breach of contract, intentional interference with contract, unfair business practices and negligent misrepresentation, for which Scanz seeks damages in the “tens of millions of dollars”.

On June 7, 2001, Cadence, Tality Corporation and Tality, LP filed a cross-complaint against Scanz alleging breach of contract and unjust enrichment, and seeking declaratory relief. On July 12, 2001, Scanz filed an answer to Cadence’s cross-complaint denying all allegations. Trial in this matter is scheduled for September 23, 2002. Cadence intends to vigorously defend the claims alleged by Scanz.

Management believes that the ultimate resolution of the disputes and litigation matters discussed above will not have a material adverse effect on Cadence’s business, operating results or financial condition. However, were an unfavorable ruling to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations for such period.

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

None

Executive Officers Of Cadence

The executive officers of Cadence are as follows:


Name	Age		Positions and Offices

H. Raymond Bingham		56	President, Chief Executive Officer, and Director
Kevin Bushby		46	Executive Vice President, Worldwide Field Operations
R.L. Smith McKeithen		58	Senior Vice President, General Counsel, and Secretary
William Porter		47	Senior Vice President and Chief Financial Officer

Executive officers are appointed by the Board of Directors and serve at the discretion of the Board.

H. RAYMOND BINGHAM has served as President and Chief Executive Officer of Cadence since April 1999. Mr. Bingham has been a director on the Cadence Board of Directors since November 1997. From 1993 to April 1999, Mr. Bingham served as Executive Vice President and Chief Financial Officer of Cadence. Prior to joining Cadence, Mr. Bingham was Executive Vice President and Chief Financial Officer of Red Lion Hotels for eight years. Mr. Bingham is a director of Legato Systems, Inc., Onyx Software Corporation and KLA-Tencor Corporation.

KEVIN BUSHBY joined Cadence in 1995 as Vice President and General Manager, European Operations and became Executive Vice President, Worldwide Field Operations in 2001. From 1990 to 1995 Mr. Bushby held several positions with Unisys Corporation, most recently as Vice President Sales and Marketing, Client Server Systems Division. Prior to 1990, Mr. Bushby held positions in Convergent Technologies and Hewlett Packard.

R.L. SMITH MCKEITHEN joined Cadence in 1996 as Vice President, General Counsel, and Secretary and became Senior Vice President, General Counsel, and Secretary in 1998. From 1994 to 1996, he served as Vice President, General Counsel, and Secretary of Strategic Mapping, Inc. From 1988 to 1994, he served as Vice President, General Counsel, and Secretary of Silicon Graphics, Inc.

WILLIAM PORTER joined Cadence in 1994 as Vice President, Corporate Controller, and Assistant Secretary and became Senior Vice President and Chief Financial Officer in May 1999. From 1988 to 1994, Mr. Porter served as Technical Accounting and Reporting Manager and most recently as Controller of Cupertino Operations with Apple Computer, Inc., a personal computer company.

PART II.

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

Cadence common stock is traded on the New York Stock Exchange under the symbol CDN. Cadence has never declared or paid any cash dividends on its common stock in the past, and does not plan to pay cash dividends in the foreseeable future. As of March 4, 2002, Cadence had approximately 1,444 registered stockholders and estimates that it had approximately 32,161 beneficial owners of its common stock.

The following table sets forth the high and low sales price for Cadence common stock for each calendar quarter in the two-year period ended December 29, 2001:


		High		Low

2001:

	First Quarter	$	32.31	$	18.22
	Second Quarter	$	24.07	$	16.69
	Third Quarter	$	23.48	$	15.48
	Fourth Quarter	$	24.65	$	16.12
2000:

	First Quarter	$	24.00	$	18.13
	Second Quarter	$	20.81	$	13.50
	Third Quarter	$	27.13	$	19.50
	Fourth Quarter	$	28.69	$	21.25

Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained herein in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” Historical results are not necessarily indicative of future results.



	Five fiscal years ended December 29, 2001

	2001		2000		1999			1998		1997


	(In thousands, except per share amounts)
Revenue	$	1,430,440	$	1,279,550	$	1,093,303		$	1,320,180	$	1,036,773
Net income (loss)	$	141,287	$	49,977	$	(14,075	)	$	25,124	$	165,122
Net income (loss) per share — assuming dilution	$	0.55	$	0.19	$	(0.06	)	$	0.10	$	0.68
Total assets	$	1,730,030	$	1,477,321	$	1,459,659		$	1,481,916	$	1,153,247
Long-term obligations	$	1,476	$	3,298	$	25,024		$	136,380	$	1,599
Stockholders’ equity	$	1,121,347	$	909,465	$	986,149		$	947,830	$	821,363

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the five-year summary of selected financial data and the Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. All references to years represent fiscal years unless otherwise noted. Except for the historical information contained in this Annual Report on Form 10-K, the following discussion contains forward-looking statements based on current expectations that involve certain risks and uncertainties. Cadence’s actual results could differ materially from those discussed herein. Factors that could cause actual results or performance to differ materially or contribute to such differences include, but are not limited to, those discussed below in “Results of Operations,” “Disclosures About Market Risk,” and “Liquidity and Capital Resources”.

Overview

General

Cadence provides comprehensive software and other technology and offers design and methodology services for the product development requirements of the world’s leading electronics companies. Cadence licenses its leading-edge EDA software and hardware technology and provides a range of services to its customers throughout the world to help them optimize their product development processes. Cadence’s products and services are used by companies to design and develop complex integrated circuits and electronic systems, including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products and other advanced electronics

In late 2000, both the U.S. economy in general and the electronics industry in particular began to experience a slowdown, the severity of which increased during 2001. This economic slowdown adversely affected the electronics industry, and in particular, negatively affected Cadence sales of design services through Tality and sales of hardware emulation products. The electronics industry slowdown, especially in the semiconductor industry, could potentially reduce Cadence’s revenue and harm its results of operations throughout 2002.

Acquisitions

Cadence has acquired numerous businesses and is likely to do so in the future. These acquisitions are described in more detail in “In-Process Technology” and in the notes to Cadence’s Consolidated Financial Statements.

In December 2001, Cadence acquired Silicon Perspective®Corporation, or SPC, a privately-held design technology firm, for approximately 6.8 million shares of Cadence common stock, valued at $132.5 million. SPC provides electronic design tools that bridge the gap between front-end logic designers and the back-end physical design process. The purchase price could increase if certain predetermined performance goals are achieved in fiscal 2002 and 2003.

In February 2001, Cadence acquired CadMOS Design Technology, Inc., a privately-held design tools firm, for approximately 3.6 million shares of Cadence common stock, valued at $92.7 million. The acquisition was accounted for as a purchase. CadMOS provides solutions to the noise problems experienced in ultra-deep submicron processes. The purchase price will increase up to an additional 488,970 shares if certain predetermined performance goals are achieved over the three years following the acquisition.

Tality Separation

postponement of Tality’s IPO due to unfavorable market conditions. As a result of the postponement of the Tality IPO, Cadence wrote off $2.8 million of IPO-related expenses in the first quarter of 2001. In addition to the $2.8 million, Cadence also expensed $2.0 million of Tality separation costs in 2001, related primarily to information systems separation, legal and consulting fees. On April 17, 2001, Cadence announced the withdrawal of the Tality IPO registration statement. Tality was reorganized and restructured during the second, third and fourth quarters of 2001, and is currently a wholly-owned subsidiary of Cadence. See “Unusual Items — Tality IPO-Related Expense and Separation Costs.”

Restructurings and Assets Impairments

In 2001, Cadence announced a worldwide restructuring plan targeted at reducing workforce and consolidating facilities and assets. The restructuring plan was initiated primarily due to the severe downturn in the economic environment in the electronics industry, particularly in the United States. The restructuring was primarily aimed at reducing excess personnel and capacity costs within its Tality subsidiary, dedicating Cadence’s resources to growth areas, and focusing on profit contribution. Cadence recorded $61.6 million of restructuring charges associated with the worldwide restructuring plan. Cadence’s restructuring plan and associated costs consisted of $20.8 million for reduction in personnel, $22.7 million to downsize and close excess facilities and $16.6 million of asset impairment charges related to certain long-lived assets. Management estimates that the restructuring will result in annualized cost reductions of approximately $70.4 million in employee salary and benefit costs and $47.6 million in facility costs.

In February 2002, Cadence announced a further restructuring of its Tality business to increase its focus on communications IC design and intellectual property used in wireline communications equipment and to no longer provides board-level, mechanical and packaging services for data and telecommunications equipment. As a result, Tality will reduce its headcount by approximately 200 people. The reductions will result in the closure of its Ottawa, Canada; Lowell, Massachusetts; and Noida, India design centers. A restructuring charge of approximately $25.0 million will be taken in the first quarter of 2002 for severance, facility closure and related asset impairments.

Avant! Restitution Award

On July 25, 2001, Avant! Corporation was ordered to pay Cadence $194.6 million in criminal restitution after Avant! entered a plea of no contest and was found guilty by the Superior Court of the State of California of conspiracy to take and use Cadence’s trade secrets. This conspiracy included the theft by Avant! and certain individuals of Cadence intellectual property, including software code, as well as other trade secrets. As of December 29, 2001, approximately $196.0 million, consisting of all of the restitution award plus interest was received. This amount is recorded in restructuring, asset impairment and unusual items in Cadence’s Consolidated Statements of Operations.

Critical Accounting Policies

Cadence’s critical accounting policies are as follows:

• revenue recognition for its various business units;

• estimating valuation allowances and accrued liabilities;

• accounting for income taxes; and

• valuation of long-lived and intangible assets and goodwill.


	Revenue recognition.

Cadence derives revenue from three sources: (i) product revenue, which includes software licensing and hardware sales, (ii) maintenance revenue from software and hardware and (iii) services revenue. As described below, significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period. Material differences may result in the amount and timing of Cadence’s revenue for any period if different conditions were to prevail, such as a different mix of license types or a different payment history, each as described below.

Cadence applies the provisions of Statement of Position 97-2, “Software Revenue Recognition,” as amended by Statement of Position 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” to all transactions involving the sale of software products and sales of hardware where the software is not incidental.

Cadence recognizes product revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable, collection of the resulting receivable is probable and vendor specific objective evidence exists to allocate the total fee among all delivered and undelivered elements in the arrangement. Vendor specific objective evidence of fair value is defined as the value of each element of an arrangement if sold separately and is established when a software vendor demonstrates a history of having sold the element separately and of collecting on that element from a representative sample of arrangements on a consistent basis. If vendor-specific objective evidence of fair value does not exist for all elements to support the allocation of the total fee among all delivered and undelivered elements of the arrangement, revenue is deferred until such evidence does exist for the undelivered elements, or until all elements are delivered, whichever is earlier.

Cadence sells software using three license types. These license types are:

• Term licenses — software licensed for a specific time period, generally two to three years, with no rights to return or exchange the licensed software;

• Subscription licenses — software licensed for a specific time period, generally two to three years, with no rights to return and limited rights to exchange the licensed software for unspecified future technology; and

• Perpetual licenses — software licensed on a perpetual basis with no right to return or exchange the licensed software.

For term and subscription licenses, Cadence uses a signed contract as evidence of an arrangement. For perpetual licenses, hardware sales and maintenance renewals, Cadence uses a purchase order as evidence of an arrangement. Sales through its Japanese distributor are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction-by-transaction basis. For services, Cadence uses a signed statement of work to evidence an arrangement.

Software is delivered to customers electronically or on a CD-ROM. With respect to hardware, delivery of an entire system is deemed to occur upon installation.

Cadence assesses whether the fee is fixed and determinable based on the payment terms associated with the transaction. Cadence uses installment contracts for term and subscription licenses for which it has established a history of collecting under the original contract without providing concessions on payments, products or services. The time periods of installment contracts are equal to or less than the time period of the licenses and are generally collected quarterly. If different conditions were to prevail and Cadence no longer had a history of collecting without providing concessions on term licenses, then revenue from term licenses would be required to be recognized ratably over the term of the licenses. This change would have a material impact on Cadence’s reported results. For example, approximately 50% of Cadence’s software license revenues were derived from term licenses in 2001.

assured, Cadence defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment.

Provided all the related conditions discussed above are met, Cadence recognizes revenue for each software license type as follows:

• Term licenses and Perpetual licenses — revenue associated with licensed software is recognized upon the effective date of the license; and

• Subscription licenses — revenue associated with licensed software is recognized ratably over the term of the license commencing upon the effective date of the license.

Maintenance revenue consists of fees for providing technical support and software updates. Cadence recognizes all maintenance revenue ratably over the contract term regardless of the software license agreement type. For term and perpetual licenses, customers renew maintenance agreements annually.

Services revenue consists primarily of revenue received for performing methodology and design services. Fixed-price methodology and design service contracts are accounted for using contract accounting, which is generally the percentage-of-completion method rather than the completed-contract method, and time and materials contracts are accounted for on a monthly basis as work is performed. In addition, for small fixed-price-projects, such as training classes and small, standard methodology service engagements of approximately $10,000 in size or less, revenue is recognized when the work is completed. Cadence has a history of accurately estimating project status and the cost to complete projects. If different conditions were to prevail where accurate estimates could not be made, then the use of the completed contract method would be required and all revenue and costs would be deferred until the project was completed. This change would have a material impact on Cadence’s reported results

Estimating valuation allowances and accrued liabilities.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.

Management specifically analyzes accounts receivable and also analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms, changes in customer demand and sales returns when evaluating the adequacy of the allowance for doubtful accounts and sales returns in any accounting period. Material differences may result in the amount and timing of revenue and or expenses for any period if management made different judgments or utilized different estimates.

Cadence has effected restructurings of its business units in the past and has established reserves at the low end of the range of estimable cost (as required by accounting standards) against outstanding commitments for leased properties that it has vacated. These reserves are based upon management’s estimate of the landlord’s willingness to negotiate a termination fee, the time require to sublet the properties and the amount of sublet income that might be generated between the date the property was vacated and expiration of the lease for each of the vacated properties. These estimates are reviewed and revised quarterly and may result in a substantial increase to restructuring expense should different conditions prevail than were anticipated in original management estimates.

Cadence assesses the need for reserves on inventory based on forward projections of sales of hardware products that are updated monthly. As a result of these projections, all inventory value in excess of 12 months’ sales projections (except for inventory expected to be used in ongoing service and maintenance of the installed base of customer owned systems) is reserved. Once inventory is reserved, the reserve can only be relieved by the subsequent sale or scrapping of the inventory.


	Accounting for income taxes.

In preparing its consolidated financial statements, Cadence is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Cadence then assesses the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent it believes that recovery is not likely, Cadence must establish a valuation allowance. To the extent Cadence establishes a valuation allowance for provision or increases this allowance in a period, Cadence includes an expense within the tax provision in its Consolidated Statement of Operations.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. Cadence recorded a valuation allowance for 2001 due to uncertainties related to its ability to utilize some of the deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which Cadence operates and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or Cadence adjust these estimates in future periods, Cadence may need to establish an additional valuation allowance, which could materially impact financial position and results of operations.


	Valuation of intangible assets and goodwill.

Cadence periodically reviews long-lived assets, certain identifiable intangibles and goodwill related to these assets for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-lived Assets and For Long-lived Assets to be Disposed Of.”

For assets to be held and used, including acquired intangibles, Cadence initiates its review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows (without interest charges) that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in the forecasting of future operating results which are used in the preparation of projected discounted cash flows and should different conditions prevail, material write downs of net intangible assets and/or goodwill could occur.

It is reasonably possible that the estimates of anticipated future gross revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to assess the recoverability of these costs and result in a write-down of the carrying amount or a shortened life of acquired intangibles in the future.

In 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” became effective and as a result, Cadence will cease to amortize approximately $311.0 million of goodwill. In lieu of amortization, Cadence is required to perform an initial impairment review of goodwill in 2002 and an annual impairment review thereafter. Cadence expects to complete its initial review during the first quarter of 2002, but does not expect to record an impairment charge upon completion of the initial impairment review. However, there can be no assurance that at the time the review is completed a material impairment charge will not be recorded.

Results of Operations

Revenue



								% Change

		2001		2000		1999		01/00			00/99


		(In millions)
Product		$	830.5	$	627.4	$	505.4		32	%		24	%
Services			263.3		336.0		294.9		(22	)%		14	%
Maintenance			336.6		316.2		293.0		6	%		8	%

	Total revenue	$	1,430.4	$	1,279.6	$	1,093.3		12	%		17	%

Sources of Revenue as a Percent of Total Revenue


	2001		2000		1999

Product		58%		49%		46%
Services		18%		26%		27%
Maintenance		24%		25%		27%

Product revenue increased $203.1 million in 2001 compared to 2000, primarily due to an overall increase in price and volume of license renewal with major customers, and to a lesser extent an increase in new sales of Cadence’s software products to new customers. The increase in sales volume was primarily due to an increase in sales volume of Cadence’s integrated circuit implementation products, which include synthesis place and route physical design and physical verification products. The increases were partially offset by a decrease in Quickturn product sales. Management expects Quickturn’s revenue to continue to decline due to the slowdown in the economy and the electronics industry in particular. Cadence’s software licenses revenue recognized on a ratable basis comprised 32%, 19% and 11% of software revenue for the years ended 2001, 2000 and 1999, respectively.

Product revenue increased $122.0 million in 2000 compared to 1999, primarily due to an overall increase in price and volume of license renewals with major customers. The increases in sales volume of products was primarily attributable to increased sales of: intellectual property-creation products, which include mixed signal and simulation products; integrated circuit implementation products, which include place and route, physical design and physical verification products; and printed circuit board-related products.

Services revenue decreased $72.6 million in 2001 compared to 2000, primarily due to a reduction in customers’ spending budgets for external services resulting in a decrease in engagements. The decrease was the result of the economic slowdown experienced in the telecommunications, consumer products and a decline in use of outside services by Cadence’s customers. Cadence believes that the slowdown will continue throughout 2002. Tality’s revenue declined $49.9 million in 2001 compared to 2000, primarily due to fewer active engagements and fewer services hours billed. Tality’s revenue is expected to continue to be affected by the slowdown in the economy generally and electronics industry specifically, and reductions of its workforce in connection with its restructurings. Methodology Services revenue declined $22.2 million in 2001 compared to 2000, primarily due to a general weakness in customer demand for short-term consulting services.

Services revenue increased $41.1 million in 2000 compared to 1999, primarily due to an increase in Tality revenue of $69.5 million, partially offset by a decrease of $28.4 million in methodology services revenue. Tality’s revenue increase was primarily due to increases in the total size of active client engagements and total client service hours billed. The decrease in methodology services engagements was primarily due to lower staffing levels, which were insufficient to service additional projects.

Maintenance revenue increased $20.4 million in 2001 compared to 2000, primarily due to the growth of Cadence’s installed customer base and the renewal of maintenance and support contracts. Maintenance revenue increased $23.2 million in 2000 compared to 1999, primarily due to the growth of the installed customer base.

Revenue by Geography



								% Change

		2001		2000		1999		01/00			00/99


		(In millions)
Domestic		$	785.4	$	720.8	$	526.8		9	%		37	%
International			645.0		558.8		566.5		15	%		(1	)%

	Total revenue	$	1,430.4	$	1,279.6	$	1,093.3		12	%		17	%

Revenue by Geography as a Percent of Total Revenue


	2001			2000			1999

Domestic		55	%		56	%		48	%
International		45	%		44	%		52	%

International revenue increased $86.2 million in 2001 compared to 2000, primarily due to increases in product revenue worldwide and maintenance revenue in Europe and Asia, partially offset by a decrease in services revenue worldwide.

International revenue decreased $7.7 million in 2000 compared to 1999, primarily due to decreases in product revenue in Japan and services revenue in Europe and Japan, partially offset by an increase in product and maintenance revenue in Europe.

Differences in the rate of revenue growth over the periods presented and as compared geographically are primarily due to fluctuations in sales volume of integrated circuit implementation and intellectual property creation products and of Cadence’s design and methodology services offerings based upon contractual renewal cycles in Europe and a general economic decline in Japan.

Foreign currency exchange rates negatively affected revenue by $19.9 million in 2001, primarily due to the weakening of the Japanese yen. Foreign currency exchange rates negatively affected revenue by $3.8 million in 2000, primarily due to the weakening of the British pound and German mark in relation to the U.S. dollar, partially offset by the strengthening of the Japanese yen in relation to the U.S. dollar. Additional information about revenue by geographic areas can be found under “Segment Reporting” in the Notes to Consolidated Financial Statements.

Cost of Revenue



							% Change

	2001		2000		1999		01/00			00/99


	(In millions)
Product	$	98.2	$	89.9	$	79.5		9	%		13	%
Services	$	191.4	$	215.6	$	191.8		(11	)%		12	%
Maintenance	$	65.3	$	63.3	$	53.6		3	%		18	%

Cost of Revenue as a Percent of Related Revenue


	2001			2000			1999

Product		12	%		14	%		16	%
Services		73	%		64	%		65	%
Maintenance		19	%		20	%		18	%

Cost of product revenue includes costs of employee salary and benefit costs, packaging and documentation, royalties and amortization of capitalized development costs for software products. Manufacturing costs associated with hardware emulation system products include materials, labor and overhead.

Cost of product revenue increased $8.2 million in 2001 compared to 2000. The increase was primarily due to increases in inventory write-offs, partially offset by decreases in manufacturing expenses associated with the decrease in sales of emulation system products. In the year ended December 29, 2001, Cadence recorded an $18.9 million reserve against inventory in cost of product revenue. Of the $18.9 million, $15.2 million of the reserve was related to excess inventory from decreased sales forecasts and $3.7 million related to two product lines that were discontinued as part of Cadence’s restructuring. The excess inventory charge of $15.2 million was due to a sudden and significant decrease in forecasted revenue for emulation products and was calculated in accordance with Cadence’s policy, which is based on inventory in excess of 12-month demand. Inventory purchases and commitments are based on future sales forecasts. Cadence typically buys and builds inventory levels for certain key components to mitigate component supply constraints. Based on Cadence’s current 12-month demand forecast, Cadence does not anticipate that the excess inventory subject to these reserves will be used at a later date. Cost of product revenue increased $10.4 million in 2000 compared to 1999. The increase was primarily due to increases in manufacturing expenses associated with emulation system products and amortization of capitalized software development costs.

Because the majority of Cadence’s cost of software product revenue does not vary significantly with changes in revenue, product gross margin increased in 2001 compared to 2000, primarily due to an increase in volume of license renewals with major customer.

Cost of services revenue includes costs associated with providing services to customers, primarily employee salary and benefits, costs to recruit, develop and retain personnel and to maintain the infrastructure necessary to manage a services organization as well as provisions for lost contracts, if any. Cost of services revenue decreased $24.3 million in 2001 compared to 2000, primarily due to decreases in employee salary and benefit costs resulting from Cadence’s reduction of services professionals in connection with its restructuring initiated in 2001. Cost of services revenue increased $23.8 million in 2000 compared to 1999, primarily due to an increase in the number of design engineers in Tality.

Services gross margin decreased in 2001 compared to 2000, primarily due to the slowdown in the economy generally and in the electronics systems industry in particular resulting in revenues declining faster than costs. Services gross margins remained relatively flat in 2000 as compared to 1999. Services gross margin has been, and may continue to be reduced by, Cadence’s inability to fully utilize its services resources.

Cost of maintenance revenue includes the cost of customer services, such as hot-line and on-site support, production personnel, packaging and documentation of maintenance updates. Cost of maintenance increased $2.0 million in 2001 compared to 2000, primarily due to an increase in employee salary and benefit costs resulting from an increase in employee headcount. Cost of maintenance revenue increased $9.7 million in 2000 compared to 1999, primarily due to costs associated with the OrCAD acquisition and increases in employee salary and benefit costs and costs to invest in customer service. The OrCAD acquisition was completed in the third quarter of 1999, and therefore, there were no similar costs in the first seven months of 1999.


	*Operating Expenses*



							% Change

	2001		2000		1999		01/00		00/99


	(In millions)
Marketing and sales	$	393.6	$	390.1	$	354.2		1%		10%
Research and development	$	297.3	$	263.9	$	219.2		13%		20%
General and administrative	$	114.6	$	94.5	$	86.7		21%		9%


	*Operating Expenses as a Percent of Total Revenue*


	2001		2000		1999

Marketing and sales		28%		30%		32%
Research and development		21%		21%		20%
General and administrative		8%		7%		8%

Marketing and Sales

Marketing and sales expenses increased $3.5 million in 2001 compared to 2000, primarily due to an increase in employee salary and benefit costs resulting from an increase in employee headcounts, partially offset by a decrease in commissions expense from volume and rate changes. Marketing and sales expenses increased $35.9 million in 2000 compared to 1999, primarily due to an increase in employee salary and benefit costs, the inclusion of OrCAD-related expenses for the full year of fiscal 2000, and marketing program costs, partially offset by lower consulting costs.

Research and Development

Research and development expense, prior to the reduction for capitalization of software development costs was $327.5 million for 2001, $292.4 million for 2000 and $244.9 million for 1999, representing 23% of total revenue for 2001 and 2000 and 22% for 1999. Cadence capitalized software development costs of approximately $30.2 million for 2001, $28.4 million for 2000, and $25.7 million for 1999, which represented approximately 9% of total research and development expenditures for 2001 and 10% of research and development expenditures for 2000 and 1999. The increase in capitalized software development costs in each of these three years resulted primarily from increases in new product development projects that have reached technological feasibility. In any given period, the amount of capitalized software development costs may vary depending on the exact nature of the development performed.

The increase in net research and development expenses of $33.4 million for 2001 compared to 2000, was primarily due to an increase in employee salary and benefit costs resulting from an increase in employee headcount. The increase in net research and development expenses of $44.7 million for 2000, compared to 1999, was primarily attributable to higher employee salary and benefit costs and the inclusion of OrCAD- related costs and expenses for the full year of fiscal 2000.

General and Administrative

General and administrative expenses increased $20.1 million in 2001 compared to 2000, primarily due to an increase of employee salary and benefit costs resulting from an increase in employee headcount, increases in bad debt expenses related to Tality accounts receivable, and increased use of outside consulting services. General and administrative expenses increased $7.7 million in 2000 compared to 1999, primarily due to employee salary and benefit costs, partially offset by decreases in bad debt expense and consulting and outside services costs.

Foreign currency exchange rates positively affected operating expenses by $9.3 million in 2001, compared to 2000, primarily due to the weakening of the Japanese yen and British pound in relation to the U.S. dollar. Foreign currency exchange rates positively affected operating expenses by $3.8 million in 2000, compared to 1999, primarily due to the weakening of the British pound, the German mark and the French franc in relation to the U.S. dollar, partially offset by the strengthening of the Japanese yen in relation to the U.S. dollar.

Amortization of Acquired Intangibles


	2001		2000		1999

Amortization of acquired intangibles	$	92.3	$	80.5	$	61.8

Amortization of Acquired Intangibles as a Percent of Total Revenue


	2001			2000			1999

Amortization of acquired intangibles		6	%		6	%		6	%

Amortization of acquired intangibles increased $11.8 million in 2001 compared to 2000, primarily due to the 2001 acquisition of CadMOS, partially offset by a reduction attributable to the write-off of Diablo goodwill in the second quarter of 2001. Amortization of acquired intangibles increased $18.7 million in 2000 compared to 1999, primarily due to a full year’s amortization related to Cadence’s 1999 acquisitions of OrCAD and Diablo, partially offset by the decrease in amortization related to the $13.3 million asset impairment charge of Excellent Design Inc. in the fourth quarter of 1999. For additional information regarding these acquisitions see “In-Process Technology.”

Amortization of Deferred Stock Compensation


	2001		2000		1999

Amortization of deferred stock compensation	$	17.9	$	11.4	$	—

Amortization of Deferred Stock Compensation as a Percent of Total Revenue


	2001			2000			1999

Amortization of deferred stock compensation		1	%		1	%		0	%

Cadence records deferred stock compensation resulting from option grants for Tality stock, sales of Tality restricted stock and Cadence’s acquisitions of CadMOS and SPC. Deferred stock compensation from Tality option grants and restricted stock sales represents the difference between the exercise price of stock option grants to Tality employees and directors, and the price paid for restricted stock sales to certain Cadence executives and employees, and the deemed fair market value of Tality’s common stock at the time of those grants and sales. Deferred stock compensation from the CadMOS acquisition represents the difference between the exercise price of stock option grants to CadMOS employees and the fair market value of Cadence’s common stock at the time of acquisition. Cadence is amortizing the deferred stock compensation to expense over the period during which the stock options and restricted stock vest. In the second and third quarters of 2001, Cadence repurchased 1,740,000 restricted Tality shares from certain Cadence executives and employees, who then repaid their related notes payable to Cadence. Tality repurchased 220,000 restricted Tality shares from three of its directors. The purchase price was $6.10 per share, the fair market value of Tality stock at the time of repurchase. The increase in amortization of deferred stock compensation of $6.5 million for 2001 when compared to 2000, was primarily due to the absence of similar costs in the first six months of 2000. For the years ended December 29, 2001 and December 30, 2000, Cadence recorded a total of $40.4 million and $72.4 million of deferred stock compensation, respectively. Of the $40.4 million, $27.4 million is related to the acquisition of SPC, $10.0 million is related to the acquisition of CadMOS, and $3.0 million is related to Tality stock option grants. Of the $72.4 million, $64.1 million is related to the stock option grants and $8.3 million is related to the sales of Tality restricted stock in 2000. Cadence is amortizing the deferred stock compensation over the period during which the stock options and restricted stock were vesting. For the year ended December 29, 2001, Cadence reversed deferred stock compensation of $27.8 million related to the cancellation of options and the repurchase of Tality restricted stock.

Unusual Items

Described below are unusual items in 2001, 2000 and 1999.


		2001			2000		1999


		(In millions)
Avant! criminal restitution, net of related costs		$	(194.6	)	$	—	$	—
Tality IPO-related expense and separation costs			4.8			6.8		—
Write-off of acquired in-process technology			21.7			—		20.7
Acquired intangibles write-off			25.8			—		19.9
Restructuring charges and asset impairments			61.6			—		13.3
Merger costs			—			—		8.4
Litigation settlement			—			—		(3.0	)

	Total unusual items	$	(80.7	)	$	6.8	$	59.3

Avant! Criminal Restitution

On July 25, 2001, Avant! Corporation was ordered to pay Cadence $194.6 million in criminal restitution after Avant! entered a plea of no contest and was found guilty by the Superior Court of the State of California of conspiracy to take and use Cadence’s trade secrets. This conspiracy included the theft by Avant! and certain individuals of Cadence intellectual property, including software code, as well as other trade secrets. As of December 29, 2001, approximately $196.0 million, consisting of the entire restitution award plus interest was received. This amount was recorded in restructuring, asset impairment and unusual items in Cadence’s Consolidated Statements of Operations.

Tality IPO-Related Expense and Separation Costs

In the year ended December 29, 2001, Cadence recorded $4.8 million in separation costs. Of the $4.8 million, $2.8 million related to the postponement of the Tality IPO and $2.0 million related toTality separation costs, primarily information systems separation and legal, accounting and consulting fees.

In the year ended December 30, 2000, Cadence recorded $6.8 million in separation costs related to the separation, and the related planned IPO of Tality, Cadence’s then newly-formed subsidiary. These costs primarily include legal and accounting services, strategic business planning, information systems separation, development of compensation and benefits strategies, and recruitment and formation of Tality’s senior management team.

In-Process Technology

In December 2001, Cadence acquired SPC, a privately-held design technology firm for approximately 6.8 million shares of Cadence stock, valued at $132.5 million. SPC provides electronic design tools that bridge the gap between front-end logic designers and the back-end physical design process. The purchase price could increase if certain predetermined performance goals are achieved in fiscal 2002 and 2003. In connection with the acquisition, Cadence acquired goodwill of $97.9 million and technology, trademarks, employee agreements and other assumed contractual obligations intangibles of $19.5 million. The technology and other acquired intangibles are being amortized over one to five years.

Upon completion of the SPC acquisition, Cadence immediately charged to expense $8.6 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. The in-process technology is expected to be

commercially viable in 2002. As of December 29, 2001, expenditures to complete the in-process technology totaled $1.2 million and expenditures to complete the remaining in-process technology are expected to total approximately $0.9 million. This estimate is subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require additional research and development after they have reached a state of technological and commercial feasibility.

At the time of its acquisition by Cadence, SPC’s in-process research and development projects were related to the development of a signal integrity analysis and optimization tool, and development of an enhanced version of its routing-estimation technology. These capabilities are important for IC design at and below 0.13 micron geometries. The nature of the efforts to complete these projects related, in varying degrees, to the completion of all planning, designing, prototyping, verification and testing activities necessary to establish that the proposed technologies meet their design specifications, including functional, technical and economic performance requirements.

The net cash flows resulting from the projects underway at SPC used to value the purchased research and development were based on management’s estimates of revenue, cost of revenue, research and development costs, selling, general and administrative costs, and income taxes from such projects. The revenue projections were based on the potential market size that the projects address, Cadence’s ability to gain market acceptance in these segments, and the life cycle of this in-process technology.

Estimated total revenue from the acquired in-process technology is expected to peak in 2004 and decline rapidly thereafter as other new products are expected to enter the market. In addition, a portion of the anticipated revenue had been attributed to enhancements of the base technology under development, and has been excluded from net cash flow calculations. Existing technology was valued at $8.4 million. The net cash flows generated from the acquired in-process technology were expected to reflect earnings before interest, taxes and depreciation of approximately 35% of the revenue generated from in-process technology. However, there can be no assurance that these assumptions will prove accurate, or that Cadence will realize the anticipated benefit of the acquisition.

The discount of the net cash flows to their present value was based on the weighted average cost of capital, or WACC. The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on the required rates of return from investments in various areas of the enterprise. The rate used to discount the net cash flows from purchased in-process technology was 36%. The discount rate is sometimes higher than the WACC due to the inherent uncertainties in the estimates, including the uncertainty surrounding the successful development of the acquired in-process technology, the useful life of such technology, the profitability levels of such technology, if any, and the uncertainty of technological advances, all of which were unknown at that time.

In the three months ended June 30, 2001, Cadence acquired substantially all of the assets of two companies for a preliminary aggregate price of $10.5 million, of which $4.4 million was cash and $6.1 million was shares of Cadence common stock, plus future contingent payments. The acquisitions were accounted for as purchases. Upon consummation of the acquisitions, Cadence immediately charged to expense $1.0 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use.

In February 2001, Cadence acquired CadMOS Design Technology, Inc., a privately-held design tools firm for approximately 3.6 million shares of Cadence common stock valued at $92.7 million. The acquisition was accounted for as a purchase. CadMOS provides solutions to the noise problems experienced in ultra-deep submicron processes. The purchase price will increase up to an additional 488,970 shares if certain predetermined performance goals are achieved over the three years following the acquisition. These goals are bookings, product development and continued employment of certain CadMOS employees. In connection with the acquisition, Cadence preliminarily allocated the purchase price primarily to goodwill of $58.3 million and technology and other intangibles of $12.9 million. The technology and other acquired intangibles are being amortized over three to five years. The results of operations of CadMOS and the estimated fair value of the

assets acquired and liabilities assumed are included in Cadence’s consolidated financial statements from the date of acquisition.

Upon consummation of the CadMOS acquisition, Cadence immediately charged to expense $12.1 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. The in-process technology is expected to be commercially viable in 2002. As of December 29, 2001, expenditures to complete the in-process technology totaled $1.0 million and expenditures to complete the remaining in-process technology are expected to total approximately $0.9 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require additional research and development after they have reached a state of technological and commercial feasibility.

At the time of its acquisition by Cadence, CadMOS’ in-process research and development projects were related to the development of a static timing analysis tool, the development of advanced fixing capabilities in the noise analysis area, and in the mixed signal area, the development of a flow to integrate with Cadence tools and a tool to analyze large application-specific integrated circuit designs for substrate noise. The nature of the efforts to complete these projects related, in varying degrees, to the completion of all planning, designing, prototyping, verification and testing activities necessary to establish that the proposed technologies meet their design specifications including functional, technical and economic performance requirements.

The net cash flows resulting from the projects underway at CadMOS used to value the purchased research and development were based on management’s estimates of revenue, cost of revenue, research and development costs, selling, general and administrative costs and income taxes from such projects. The revenue projections were based on the potential market size that the projects address, Cadence’s ability to gain market acceptance in these segments, and the life cycle of this in-process technology.

Estimated total revenue from the acquired in-process technology is expected to peak in 2004 and decline rapidly thereafter as other new products are expected to enter the market. In addition, a portion of the anticipated revenue had been attributed to enhancements of the base technology under development, and has been excluded from net cash flow calculations. Existing technology was valued at $3.6 million. The net cash flows generated from the acquired in-process technology were expected to reflect earnings before interest, taxes, and depreciation of approximately 50% of the revenue generated from in-process technology. However, there can be no assurance that these assumptions will prove accurate, or that Cadence will realize the anticipated benefit of the acquisition.

The discount of the net cash flows to their present value was based on the WACC. The rate used to discount the net cash flows from purchased in-process technology was 28%. The discount rate is sometimes higher than the WACC due to the inherent uncertainties in the estimates, including the uncertainty surrounding the successful development of the acquired in-process technology, the useful life of such technology, the profitability levels of such technology, if any, and the uncertainty of technological advances, all of which were unknown at that time.

Upon consummation of the OrCAD acquisition, Cadence immediately charged to expense $11.8 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. See “Notes to Consolidated Financial Statements.” The value assigned to acquired

in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. Certain acquired in-process technology was commercially viable in 1999 and other acquired in-process technology became commercially viable in 2000. Expenditures to complete this acquired in-process technology did not exceed $2.3 million.

At the time of its acquisition by Cadence, OrCAD’s in-process research and development projects in the schematic entry area were related to the development of an online component catalog and a new schematic design entry interface. In-process research and development projects in the simulation area were related to a rearchitecture of the simulation engine and replacement of the simulation engine. Additional features under development included randomized expressions and no selection limits. The nature of the efforts to complete these projects related, in varying degrees, to the completion of all planning, designing, prototyping, verification and testing activities that were necessary to establish that the proposed technologies meet their design specifications including functional, technical and economic performance requirements.

The net cash flows resulting from the projects underway at OrCAD used to value the purchased research and development were based on management’s estimates of revenue, cost of revenue, research and development costs, selling, general and administrative costs and income taxes from such projects. The revenue projections were based on the potential market size that the projects address, Cadence’s ability to gain market acceptance in these segments, and the life cycle of this in-process technology.

Estimated total revenue from the acquired in-process technology is expected to peak in 2001 and decline rapidly thereafter as other new products are expected to enter the market. In addition, a portion of the anticipated revenue had been attributed to enhancements of the base technology under development, and had been excluded from net cash flow calculations. Existing technology was valued at $10.8 million. The net cash flows generated from the acquired in-process technology were expected to reflect earnings before interest, taxes and depreciation of approximately 32% of the sales generated from in-process technology. However, there can be no assurance that these assumptions will prove accurate, or that Cadence will realize the anticipated benefit of the acquisition.

The discount of the net cash flows to their present value was based on the WACC. The rate used to discount the net cash flows from purchased in-process technology was 22%. The discount rate is sometimes higher than the WACC due to the inherent uncertainties in the estimates, including the uncertainty surrounding the successful development of the acquired in-process technology, the useful life of such technology, the profitability levels of such technology, if any, and the uncertainty of technological advances, all of which were unknown at that time.

In January 1999, Cadence acquired Design Automation, Inc., or DAI, a supplier of design verification technology used in SoC design. Cadence acquired all of the outstanding stock of DAI for approximately 0.6 million shares of Cadence common stock and $2.9 million of cash. The total purchase price was $25.7 million and the acquisition was accounted for as a purchase.

Upon consummation of the DAI acquisition, Cadence immediately charged to expense $8.9 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. See “Notes to Consolidated Financial Statements — Other Acquisitions.” The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. Certain acquired in-process technology under development at the time of acquisition was initially expected to become commercially viable in 1999, but instead became viable in 2000. Expenditures to complete this in-process technology did not exceed $1.5 million.

At the time of its acquisition by Cadence, DAI had several significant research and development projects in process that were intended to provide a next generation environment for design verification and analysis. These efforts included the development of a highly automated approach for high-level test bench creation and analysis, a waveform viewer capable of supporting analog and mixed signal designs and a tool designed to analyze verification code coverage at the transactional level. The nature of the efforts to complete these in-process research and development projects related, in varying degrees, to the completion of all planning, designing, prototyping, verification and testing activities that were necessary to establish that the proposed in-process technologies meet their design specifications, which include functional, technical and economic performance requirements.

The net cash flows generated by the projects underway at DAI used to value the acquired in-process technology were based on management’s estimates of revenue, cost of revenue, research and development costs, selling, general and administrative costs and income taxes from such projects. The revenue projections were based on the potential market size that these projects address, Cadence’s ability to gain market acceptance for these projects, and the life cycle of this in-process technology.

Estimated total revenue from the acquired in-process technology is expected to peak in 2001 through 2002 and decline rapidly thereafter as other new products are expected to enter the market. In addition, a portion of the anticipated revenue has been attributed to enhancements of the base technology under development, and has been excluded from net cash flow calculations. Existing technology was valued at $11.4 million at the time of acquisition. The net cash flows generated from the acquired in-process technology are expected to reflect earnings before interest, taxes and depreciation of approximately 60% of the sales generated from in-process technology. However, there can be no assurance that these assumptions will prove accurate, or that Cadence will realize the anticipated benefits of this acquisition.

The discount applied to the net cash flows to calculate the present value of such net cash flows was based on the WACC. The rate used to discount the net cash flows from purchased in-process technology was 22%.

Acquired Intangibles Write-Offs

In reaction to the current decline in business conditions generally and the wireless communications industry in particular, Cadence restructured certain of its businesses and realigned resources to focus on profit contribution, high-growth markets and core opportunities. As a result, Cadence recorded a charge of $25.8 million in 2001 related to the impairment of goodwill and acquired intangibles associated with the acquisition of Diablo (a part of Tality). Key factors in this write-off were significant downsizing or reassignment of personnel directly related to these assets and abandonment of most of Diablo’s line of business. The charge was determined as the amount by which the carrying value of the intangible assets associated with Diablo’s acquisition exceeded the fair value of those assets.

In 1999, Cadence incurred a total of $19.9 million in asset impairment charges. Of this amount, $13.3 million represented asset impairment of acquired intangibles from the Excellent Design, or EXD, acquisition. This asset impairment charge resulted from reduced Japanese sales and the loss of key EXD employees, which together resulted in diminished cash flow projections. Cadence entered into certain support agreements with third parties to provide support for EXD software tools previously sold by Cadence customers. The fair value of the EXD acquired intangibles was based on an evaluation of the present value of the estimated expected future cash flows, discounted at 16%. The remaining $6.6 million in asset impairment charges were incurred in connection with the cancellation of an information technology services contract with a third-party, the abandonment of capitalized software development costs associated with certain Cadence products that were discontinued, and the abandonment of certain third-party software licenses, related to Research and Development.

Restructurings Charges and Asset Impairments

The restructuring was primarily aimed at reducing excess personnel and capacity costs within its Tality subsidiary, dedicating Cadence’s resources to growth areas, and focusing on profit contribution. Cadence recorded $61.6 million of restructuring charges classified as unusual operating expenses associated with the worldwide restructuring plan. Cadence’s restructuring plan and associated costs consisted of $20.8 million for reduction in personnel, $22.7 million to downsize and close excess facilities and $16.6 million of asset impairment charges related to certain long-lived assets. Management estimates that the restructuring will result in annualized cost reductions of approximately $70.4 million in employee salary and benefit costs and $47.6 million in facility costs.

The restructuring plan resulted in a reduction of 705 employees, which were predominately Tality employees. While employee reductions are across all business functions, operating units and geographic regions, Cadence’s wireless communications-related areas within Tality were affected more than other areas. In addition, the number of temporary and contract workers employed by Cadence has been reduced. Severance costs resulting from the restructuring included severance benefits, notice pay and out-placement services. As the result of the separation of Tality from Cadence, approximately $5.3 million of the restructuring charges was paid to certain Tality employees who were participants in Cadence’s employee stock purchase plan prior to Tality’s separation from Cadence in October 2000. All terminations and termination benefits were communicated to the affected employees prior to December 29, 2001. All severance benefits will be paid out before the end of the first quarter of 2002.

Facilities consolidation charges of $22.7 million were incurred in connection with the downsizing and closing of 16 sites. Closure and downsizing costs included payments required under lease contracts, less any applicable estimated sublease income after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements, and costs to maintain facilities during the period after abandonment. To determine the lease loss, which is the loss after Cadence’s cost recovery efforts from subleasing a building, certain assumptions were made related to the: (1) time period over which the relevant building would remain vacant, (2) sublease terms and (3) sublease rates, including common area charges. The lease loss is an estimate under Statement of Financial Accounting Standards No. 5 Accounting for Contingencies and represents the low end of the range, as required by this statement, $13.1 million, which will be adjusted in the future upon triggering events (e.g., change in estimate of time to sublease, actual sublease rates, etc.). Cadence has estimated that the high end of the lease loss could be $52.8 million if facilities operating lease rental rates continue to decrease in the applicable markets or if it takes longer than expected to find a suitable tenant to sublease the facility. As of December 29, 2001, six sites had been vacated and eight sites had been downsized.

Asset-related charges of $16.6 million consisted primarily of $13.9 million of leasehold improvements for facilities and other fixed assets that were either abandoned or for which the resulting estimated future reduced cash flows were insufficient to cover the associated expenses. Cadence also recorded $2.2 million of asset-related charges for abandoned software and $1.5 million related to consulting services performed to restructure the research and development process.

In 1999, Cadence recorded $13.3 million of restructuring charges that consisted of $11.3 million to terminate approximately 100 employees and $2.0 million to downsize and close excess facilities. Cadence’s restructuring plans were primarily aimed at reducing costs after Cadence merged with Quickturn, further restructuring of Cadence’s services business in Japan, and severance resulting from the resignation of Cadence’s former Chief Executive Officer. Severance costs include severance benefits, notice pay and outplacement services. All terminations and termination benefits were communicated to the affected employees prior to year-end and substantially all remaining severance benefits were paid in 2000.

Facilities consolidation charges of $2.0 million were incurred in connection with the closure of 15 Quickturn facilities, including $1.0 million to close duplicate and excess facilities and $1.0 million of abandonment costs for the related leasehold improvements. Closure and exit costs include payments required under lease contracts, less any applicable sublease income after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements, and costs to maintain facilities during the period after abandonment. Asset related write-offs consist of leasehold improvements of facilities that were

abandoned and whose estimated fair market value is zero. As of December 29, 2001, 14 of the 15 Quickturn sites had been vacated. Noncancelable lease payments on vacated facilities will be paid through 2003.

Liabilities for excess facilities and other restructuring charges are included in accrued and other long-term liabilities while severance and benefits liabilities are included in payroll and payroll-related accruals. Actual amounts of termination benefits, facilities and other restructuring-related payments can be found in Notes to Consolidated Financial Statements under “Restructuring, Asset Impairment and Unusual Items.”

Merger Costs

In connection with the acquisition of Quickturn in 1999, Cadence charged to expense merger costs of $8.4 million, representing professional fees for financial advisors, attorneys and accountants.

Litigation Settlement

In 1999, Cadence and Mentor announced the settlement of a patent infringement action pending in the U.S. District Court for the District of Oregon. As a result, the Court entered a judgment declaring that certain Quickturn patents are valid, enforceable and were infringed by Mentor’s sale of SimExpress products in the United States. Mentor is permanently enjoined from producing, marketing, or selling SimExpress emulation systems in the United States. In connection with the settlement, Mentor paid Cadence $3.0 million.

Other Income, net

Other income, net for 2001, 2000 and 1999 is as follows:


		2001			2000			1999


		(In millions)
Interest income		$	6.5		$	4.6		$	5.4
Minority interest income (expense)			1.9			0.6			0.1
Gain (loss) on foreign exchange			0.6			5.1			(0.6	)
Equity income from investments, net			0.2			1.1			0.1
Interest expense			(2.6	)		(2.4	)		(3.3	)
Other expense, net			(4.9	)		(4.4	)		(0.3	)

	Total other income, net	$	1.7		$	4.6		$	1.4

Other income, net, decreased $2.9 million in 2001, when compared to 2000, primarily due to a decrease in foreign exchange gains, partially offset by an increase in interest income. Other income, net, increased $3.2 million in 2000, when compared to 1999, primarily due to an increase in foreign exchange gains, partially offset by $2.2 million of investment losses from Telos Venture Partners, LP, in which Cadence holds a limited partnership interest, shown in other expense, net.

Income Taxes

The provision for income taxes and the effective tax rates for 2001, 2000 and 1999 are as follows:


	2001		2000		1999


	(Dollars in millions)
Provision for income taxes	$	100.9	$	18.0	$	2.7
Effective tax rate		41.7%		26.5%		(23.7	)%

As of December 29, 2001, Cadence had total net deferred tax assets of approximately $66.4 million. Realization of the deferred tax assets will be dependent on generating sufficient taxable income prior to the expiration of certain net operating loss and tax credit carryforwards. Although realization is not assured, management believes that it is more likely than not that the net deferred tax assets will be realized. The

amount of the net deferred tax assets, however, could be reduced or increased in the near term if actual facts, including the estimate of future taxable income, differ from those estimated.

The 2001 effective tax rate includes the approximately $196.0 million received from Avant! as criminal restitution, the write-off of acquired in-process technology of approximately $21.7 million and stock compensation amortization of approximately $17.9 million. The effective tax rate, excluding the Avant! restitution proceeds, the write-off of acquired in-process technology and stock compensation was 26.5%. The effective tax rate for 1999 includes the write-off of acquired in-process technology of approximately $20.7 million. The effective tax rate for 1999 excluding the write-off of acquired in-process technology was 28.9%.

Disclosures About Market Risk

Interest Rate Risk

Cadence’s exposure to market risk for changes in interest rates relates primarily to its investment portfolio. While Cadence is exposed to interest rate fluctuations in many of the world’s leading industrialized countries, Cadence’s interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on Cadence’s cash and cash equivalents, short-term and long-term investments and interest paid on its long-term debt obligations as well as costs associated with foreign currency hedges.

Cadence invests in high quality credit issuers and, by policy, limits the amount of its credit exposure to any one issuer. As part of its policy, Cadence’s first priority is to reduce the risk of principal loss. Consequently, Cadence seeks to preserve its invested funds by limiting default risk, market risk and reinvestment risk. Cadence mitigates default risk by investing in only high quality credit securities that it believes to be low risk and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.

On September 29, 2000, Cadence entered into two syndicated, senior unsecured credit facilities that allow Cadence to borrow up to $360.0 million. These two credit facilities are referred to as the 2000 Facilities. One of the 2000 Facilities is a $100.0 million three-year revolving credit facility, which terminates on September 29, 2003, referred to as the Three-Year Facility. The other 2000 Facility, referred to as the 364-Day Facility, consists of a $260.0 million, 364-day revolving credit facility convertible into a term loan. The 364-Day Facility will terminate on September 27, 2002, at which time loans outstanding thereunder may be converted to a one-year term loan with a maturity date of September 29, 2003, or, at the request of Cadence and with the consent of members of the bank group that wish to do so, the Facility may be extended for one additional 364-day period with respect to the portion of the 364-Day Facility outstanding loans that a consenting bank holds. For both of the 2000 Facilities, Cadence has the option to pay interest based on LIBOR plus a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial covenant, or the higher of (i) the Federal Funds Rate plus 0.50% or (ii) the prime rate. As a result, Cadence’s interest expense associated with borrowings under the 2000 Facilities will vary with market rates. In addition, commitment fees are payable on the unused portion of the Three-Year Facility at rates between 0.25% and 0.34% based on a pricing grid tied to a financial covenant and on the unused portion of the 364-Day Facility at a fixed rate of 0.225%. A utilization fee of 0.25% is payable on amounts borrowed under the 364-Day Facility whenever combined borrowings under the two 2000 Facilities exceed $118.8 million. Cadence may not borrow under the 364-Day Facility at any time that any portion of the Three-Year Facility remains unused. The 2000 Facilities contain certain financial and other covenants, which must be maintained. The financial covenants specify that Cadence must maintain a minimum EBITDA of not less than $200.0 million. Additionally, Cadence must maintain a minimum fixed charge coverage ratio (the ratio of EBITDA to the sum of (i) interest expense plus (ii) 20% of funded debt plus (iii) taxes paid in cash less (iv) capital lease payments) of not less than 1.5 to 1.0. Other covenants require Cadence to maintain a minimum one-to-one ratio of current assets to current liabilities and a maximum two-to-one funded debt to EBITDA ratio. From time to time, Cadence borrows under the 2000 Facilities. At December 29, 2001, there were no borrowings outstanding.

The table below presents the carrying value and related weighted average interest rates for Cadence’s interest bearing instruments. All highly liquid investments with an original maturity of three months or less at the date of purchase are considered to be cash equivalents; investments with original maturities between three and 12 months are considered to be short-term investments. Investments with original maturities greater than 12 months are considered long-term investments. As of December 29, 2001, all of Cadence’s investments have maturities of less than 12 months. The carrying value approximated fair value at December 29, 2001.


			Carrying		Average
			Value		Interest Rate

			(In millions)
Interest Bearing Instruments:
	Cash — variable rate		$	96.2		3.29	%
	Cash — fixed rate			26.5		2.03	%
	Cash equivalents — variable rate			16.4		2.30	%
	Short-term investments — fixed rate			1.0		0.70	%

		Total interest bearing instruments	$	140.1		2.92	%

Foreign Currency Risk

Cadence’s operations include transactions in foreign currencies and, as such, Cadence benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, the primary effect of foreign currency transactions on Cadence’s results of operations is a reduction in revenue from a strengthening U.S. dollar, offset by a smaller reduction in expenses.

Cadence enters into foreign currency forward exchange contracts with financial institutions to protect against currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying asset exposures decrease in value or underlying liability exposures increase in value. Conversely, a foreign currency forward exchange contract decreases in value when underlying asset exposures increase in value or underlying liability exposures decrease in value. Forward contracts are not accounted for as hedges and, therefore, the unrealized gains and losses are recognized in other income, net in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded as accrued liabilities.

Cadence also purchases foreign currency put options from financial institutions to hedge the currency exchange risks associated with probable but not firmly committed transactions. Although there were no foreign currency put options outstanding in 2001, Cadence may choose to use put options in the future. A foreign currency put option acts as a hedge by increasing in value as the underlying transactional value decreases. Probable but not firmly committed transactions consist of revenue from Cadence’s products and maintenance contracts in a currency other than the functional currency. These transactions are made through Cadence’s subsidiaries in Ireland and Japan. The premium costs of the put options are recorded in prepaid expenses and other current assets while the gains and losses are deferred and recognized in income in the same period as the hedged transaction. Gains and losses on accounting hedges realized before the settlement date of the related hedged transaction are also generally deferred and recognized in income in the same period as the hedged transaction.

Cadence does not use forward contracts and put options for trading purposes. Cadence’s ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates in effect as the forward contracts and put options mature.

The table below provides information as of December 29, 2001 about Cadence’s forward foreign currency contracts. As of December 29, 2001, there were no put options outstanding. The information is provided in U.S. dollar equivalent amounts. The table presents the notional amounts, at contract exchange rates, and the weighted average contractual foreign currency exchange rates. These forward contracts mature prior to March 14, 2002.


				Weighted
				Average
		Notional		Contract
		Principal		Rate

		(In millions)
Forward Contracts:
	Euro	$	56.4		0.89
	Japanese yen		40.5		123.51
	British pound sterling		18.9		1.43
	Swedish krona		7.3		10.55
	Canadian dollars		2.2		1.58
	Singapore dollars		1.2		1.83
	Hong Kong dollars		1.0		7.80

		$	127.5

	Estimated fair value	$	1.5

While Cadence actively manages its foreign currency risks on an ongoing basis, there can be no assurance that Cadence’s foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on its results of operations, cash flows and financial position. On a net basis, foreign currency fluctuations did not have a material impact on Cadence’s results of operations and financial position during the year ended December 29, 2001. The realized gain (loss) on the forward contracts as they matured was not material to the consolidated operations of Cadence.


	Equity Price Risk

Cadence repurchases shares of its common stock under its stock repurchase program. Repurchased shares may be used for general corporate purposes including the share issuance requirements of Cadence’s employee stock option and purchase plans and acquisitions. As part of this repurchase programs, Cadence has purchased and will purchase call options or has sold and will sell put warrants to mitigate equity price risk associate with its stock repurchase program. The put warrants, if exercised and settled by physical delivery of shares, would entitle the holder to sell shares of Cadence common stock to Cadence at a specified price. Similarly, the call options entitle Cadence to buy shares of Cadence common stock at a specified price. Cadence has the option to elect “net share settlement”, rather than physical settlement, of put warrants that are exercised; that is, Cadence has the right to settle the exercised put warrants with shares of Cadence common stock valued at the difference between the exercise price and the fair value of the stock at the date of exercise. These transactions may result in sales of a large number of shares and consequent decline in the market price of Cadence common stock. Cadence’s stock repurchase program includes the following characteristics:

• Call options allow Cadence to buy shares of its common stock on a specified day at a specified price. If the market price of the stock is greater than the exercise price of a call option, Cadence will typically exercise the option and receive shares of its stock. If the market price of the common stock is less than the exercise price of a call option, Cadence typically will not exercise the option.

• Call option issuers may accumulate a substantial number of shares of Cadence common stock in anticipation of Cadence’s exercising its call option and may dispose of these shares if and when Cadence fails to exercise its call option. This could cause the market price of Cadence common stock to fall.

• Depending on the exercise price of the put warrants and the market price of Cadence common stock at the time of exercise, “net share settlement” of the put warrants with Cadence common stock could cause Cadence to issue a substantial number of shares to the holder of the put warrant. The holder may sell these shares in the open market, which could cause the price of Cadence common stock to fall.

• Put warrant holders may accumulate a substantial number of shares of Cadence common stock in anticipation of exercising their put warrants and may dispose of these shares if and when they exercise their put warrants and Cadence issues shares in settlement of their put warrants. This could also cause the market price of Cadence common stock to fall.

The table below provides information as of December 29, 2001 about Cadence’s outstanding put warrants and call options. The table presents the contract amounts and the weighted average strike prices. The put warrants and call options expire on various dates through May 2002 and Cadence has the contractual ability to settle the options prior to their maturity.


		2002		Estimated
		Maturity		Fair Value


		(Shares and contract
		amounts in millions)
Put Warrants:
	Shares		2.9
	Weighted average strike price	$	21.11
	Contract amount	$	61.2	$	8.0
Call Options:
	Shares		2.3
	Weighted average strike price	$	21.10
	Contract amount	$	47.5	$	8.3

Liquidity and Capital Resources

At December 29, 2001, Cadence’s principal sources of liquidity consisted of $274.8 million of cash and cash equivalents and short-term investments, compared to $137.0 million at December 30, 2000, and two syndicated senior unsecured credit facilities totaling $360.0 million. As of December 29, 2001, Cadence had no outstanding borrowings under these credit facilities.

Cash provided by operating activities increased $107.1 million to $250.9 million at December 29, 2001 as compared to the year ended December 30, 2000, primarily due to higher net income before depreciation and amortization and unusual items in 2001.

At December 29, 2001, Cadence had net working capital of $162.5 million, as compared with $65.3 million at December 30, 2000. The working capital increase was driven primarily by increases in cash and cash equivalents of $121.1 million, short-term investments of $16.7 million and a decrease in accounts payable and accrued liabilities of $14.6 million, partially offset by a decrease in net receivables of $31.1 million and prepaid expenses and other of $26.7 million.

In addition to its short-term investments, Cadence’s primary investing activities in 2001 consisted of acquisitions and the related acquired intangibles, purchases of property, plant and equipment, capitalization of software development costs and venture capital partnership investments, which combined represented $212.1 million at December 29, 2001, compared to $183.7 million at December 30, 2000 of cash used for investing activities.

Cadence sells put warrants and purchases call options through private placements. See “Disclosures about Market Risk — Equity Price Risk” above. At December 29, 2001, Cadence had a maximum potential obligation related to put warrants to buy back 2.9 million shares of its common stock at an aggregate price of approximately $61.2 million. These put warrants expire at various dates through May 2002 and Cadence has the contractual ability to settle the put warrants and call options prior to their maturity. Cadence has the

ability to settle these put warrants with its stock and, therefore, no amount was classified out of stockholders’ equity in Cadence’s Consolidated Balance Sheets.

Cadence has made permanent investments of assets including cash in foreign countries, for which no U.S. tax has been provided. At December 29, 2001, the cumulative amount of earnings upon which U.S. income taxes have not been provided are $501.0 million. At December 29, 2001, the unrecognized deferred tax liability for these earnings was $84.7 million.

Cadence has entered into agreements whereby it may transfer qualifying accounts receivables, for which Cadence has recognized the related revenue, to certain financing institutions on a non-recourse basis. These transfers are recorded as sales and accounted for in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” During the fiscal years ended December 29, 2001 and December 30, 2000, Cadence transferred accounts receivable totaling $235.8 million and $201.2 million, respectively, which approximated fair value, to financing institutions on a non-recourse basis. Transfers of accounts receivable for cash are reported in Cadence’s Consolidated Statements of Cash Flows as a financing activity.

Cadence also purchased $299.0 million of its stock and reissued $99.9 million of stock through its employee option and stock purchase programs.

As part of its overall investment strategy, Cadence is a limited partner in Telos LP, a venture capital fund, and is committed to invest up to $100.0 million. As of December 29, 2001, Cadence had contributed approximately $76.4 million to the fund, net of operating expenses.

On September 29, 2000, Cadence entered into two syndicated, senior unsecured credit facilities that allow Cadence to borrow up to $360.0 million. These two credit facilities are referred to as the 2000 Facilities. One of the 2000 Facilities is a $100.0 million three-year revolving credit facility that terminates on September 29, 2003, referred to as the Three-Year Facility. The other 2000 Facility, referred to as the 364-Day Facility, consists of a $260.0 million, 364-day revolving credit facility convertible into a term loan. The 364-Day Facility will terminate on September 27, 2002, at which time loans outstanding thereunder may be converted to a one-year term loan with a maturity date of September 29, 2003, or, at the request of Cadence and with the consent of members of the bank group that wish to do so, the Facility may be extended for one additional 364-day period with respect to the portion of the 364-Day Facility outstanding loans that a consenting bank holds. For both of the 2000 Facilities, Cadence has the option to pay interest based on LIBOR plus a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial covenant, or the higher of (i) the Federal Funds Rate plus 0.50% or (ii) the prime rate. As a result, Cadence’s interest expense associated with borrowings under the 2000 Facilities will vary with market rates. In addition, commitment fees are payable on the unused portion of the Three-Year Facility at rates between 0.25% and 0.34% based on a pricing grid tied to a financial covenant and on the unused portion of the 364-Day Facility at a fixed rate of 0.225%. A utilization fee of 0.25% is payable on amounts borrowed under the 364-Day Facility whenever combined borrowings under the two 2000 Facilities exceed $118.8 million. Cadence may not borrow under the 364-Day Facility at any time that any portion of the Three-Year Facility remains unused. The 2000 Facilities contain certain financial and other covenants, which must be maintained. The financial covenants specify that Cadence must maintain a minimum EBITDA of not less than $200.0 million. Additionally, Cadence must maintain a minimum fixed charge coverage ratio (the ratio of EBITDA to the sum of (i) interest expense plus (ii) 20% of funded debt plus (iii) taxes paid in cash less (iv) capital lease payments) of not less than 1.5 to 1.0. Other covenants require Cadence to maintain a minimum one-to-one ratio of current assets to current liabilities and a maximum two-to-one funded debt to EBITDA ratio. From time to time, Cadence borrows under the 2000 Facilities.

Cadence anticipates that current cash and short-term investment balances, cash flow from operations, and its $360.0 million revolving credit facilities will be sufficient to meet its working capital and capital requirements on a short-and long-term basis.

New Accounting Standards

In August 2001, the FASB, issued SFAS, No. 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets.” SFAS No. 143 addresses financial accounting and reporting for the retirement obligation of an asset. This statement provides that companies should recognize the asset retirement cost at its fair value as part of the cost of the asset and classify the accrued amount as a liability in the condensed Consolidated Balance Sheet. The asset retirement liability is then accreted to the ultimate payout as interest expense. The initial measurement of the liability would be subsequently updated for revised estimates of the discounted cash outflows. The Statement will be effective for fiscal years beginning after June 15, 2002. Cadence has not yet determined the effect SFAS No. 143 will have on its consolidated financial position, results of operations or cash flows.

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other acquired assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. With the adoption of this Statement, goodwill is no longer subject to amortization over its estimated useful life. Goodwill will be assessed for impairment each year using the fair-value-based test. This Statement becomes effective January 1, 2002. Cadence is currently analyzing the impact of SFAS 142 and expects to complete its analysis by the end of its fiscal quarter ended March 30, 2002. As of December 29, 2001, Cadence had existing net goodwill and identifiable assets of $396.3 million. Cadence expects that upon adoption of SFAS 142, Cadence would no longer record annual fiscal year amortization associated with existing goodwill of approximately $311.0 million.

In June 2001, the FASB issued SFAS No. 141, “Business Combinations.” SFAS No. 141 addresses financial accounting and reporting for business combinations and it requires business combinations in the scope of this Statement to be accounted for using one method, the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. The adoption of this Statement did not have a material effect of Cadence’s consolidated financial position, results of operations or cash flows.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required by Item 7A is incorporated by reference from the section entitled “Disclosures About Market Risk” found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 8. Financial Statements and Supplementary Data

The financial statements required by Item 8 are submitted as a separate section of this Annual Report on Form 10-K. See Item 14.

Summary Quarterly Data — Unaudited



	2001										2000

	4th		3rd			2nd			1st		4th		3rd		2nd		1st


	(In thousands, except per share amounts)
Revenue	$	378,200	$	360,008		$	347,575		$	344,657	$	390,914	$	332,461	$	298,682	$	257,493
Cost of revenue	$	71,546	$	97,530	*	$	93,447	*	$	92,337	$	101,072	$	96,105	$	88,012	$	83,668
Amortization of acquired intangibles	$	20,415	$	23,995		$	25,928		$	21,992	$	20,321	$	20,648	$	19,868	$	19,666
Net income (loss)	$	38,929	$	127,425		$	(28,889	)	$	3,822	$	42,489	$	13,671	$	5,626	$	(11,809	)
Net income (loss) per share — diluted	$	0.15	$	0.50		$	(0.12	)	$	0.01	$	0.16	$	0.05	$	0.02	$	(0.05	)

* Amounts reflect the reclassification between Cost of Revenue and Restructuring, Asset Impairment and Unusual Items.

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

None.

PART III.

Item 10. Directors and Executive Officers of the Registrant

The information required by Item 10 as to directors is incorporated by reference from the sections entitled “Election of Directors” and “Compliance with the Reporting Requirements of Section 16(a)” in Cadence’s definitive Proxy Statement for its 2002 annual stockholders’ meeting.

The executive officers of Cadence are listed at the end of Part I of this Annual Report on Form 10-K.

Item 11. Executive Compensation

The information required by Item 11 is incorporated by reference from the section entitled “Director and Executive Compensation” in Cadence’s definitive Proxy Statement for its 2002 annual stockholders’ meeting.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by Item 12 is incorporated by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management” in Cadence’s definitive Proxy Statement for its 2002 annual stockholders’ meeting.

Item 13. Certain Relationships and Related Transactions

The information required by Item 13 is incorporated by reference from the section entitled “Certain Transactions” in Cadence’s definitive Proxy Statement for its 2002 annual stockholders’ meeting.

PART IV.

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


		Page


(a)	1. Financial Statements

	• Report of Independent Public Accountants		54

	• Consolidated Balance Sheets at December 29, 2001 and December 30, 2000		55

	• Consolidated Statements of Operations for the three fiscal years ended December 29, 2001		56

	• Consolidated Statements of Stockholders’ Equity for the three fiscal years ended December 29, 2001		57

	• Consolidated Statements of Cash Flows for the three fiscal years ended December 29, 2001		58

	• Notes to Consolidated Financial Statements		59

(a)	2. Financial Statement Schedules:

	II. Valuation and Qualifying Accounts and Reserves		93

	All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.

(a)	3. Exhibits:

	The following exhibits are filed with this Annual Report on Form 10-K:




Exhibit
Number		Exhibit Title


	2.02	Master Separation Agreement, dated as of July 14, 2000 by and among the Registrant, Cadence Holdings, Inc. and Tality Corporation (Incorporated by reference to Exhibit 2.01 to the Registrant’s Form 10-Q for the quarter ended July 1, 2000 (the “2000 Second Quarter Form 10-Q”)).

	2.03	Amended and Restated Agreement of Limited Partnership of Tality, LP, dated as of October 4, 2000 between Tality Corporation and Cadence Holdings, Inc (Incorporated by reference to Exhibit 2.01 to the Registrant’s Form 10-Q for the quarter ended September 30, 2000 (the “2000 Third Quarter Form 10-Q”)).

	2.04	Amended and Restated Master Separation Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality LP (Incorporated by reference to Exhibit 2.02 to the 2000 Third Quarter Form 10-Q).

	2.05	General Assignment and Assumption Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.03 to the 2000 Third Quarter Form 10-Q).

	2.06	Master Intellectual Property Ownership and License Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.04 to the 2000 Third Quarter Form 10-Q).

	2.07	Employee Matters Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.05 to the 2000 Third Quarter Form 10-Q).

	2.08	Master Corporate Services Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.06 to the 2000 Third Quarter Form 10-Q).

	2.09	Real Estate Matters Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.07 to the 2000 Third Quarter Form 10-Q).

	2.10	Master Confidentiality Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.08 to the 2000 Third Quarter Form 10-Q).

	2.11	Indemnification and Insurance Matters Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.09 to the 2000 Third Quarter Form 10-Q).

	2.12	Asset Purchase Agreement, dated as of October 4, 2000 by and among the Registrant, Cadence Design System (Canada) Limited and Tality Canada Corporation (Incorporated by reference to Exhibit 2.10 to the 2000 Third Quarter Form 10-Q).

	2.13	Asset Purchase Agreement, dated as of October 3, 2000 by and among Symbionics Limited, the Registrant and Cadence Design Systems Limited (Incorporated by reference to Exhibit 2.11 to the 2000 Third Quarter Form 10-Q).

	2.14	Fixed Term License Agreement, dated as of October 4, 2000 between the Registrant and Tality, LP (Incorporated by reference to Exhibit 2.12 to the 2000 Third Quarter Form 10-Q).

	2.15	Joint Technology Development and Support Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.13 to the 2000 Third Quarter Form 10-Q).




Exhibit
Number		Exhibit Title


	2.16	Joint Sales Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.14 to the 2000 Third Quarter Form 10-Q).

	2.17	General Assignment and Assumption Agreement, dated as of June 2, 2001 between Tality Corporation and Tality, LP. (Incorporated by reference to Exhibit 2.17 to the Registrant’s Form 10-Q for the quarter ended June 30, 2001 (the “2001 Second Quarter Form 10-Q”)).

	2.18	Master Amendment and Consent, effective as of June 2, 2001 by and among the Registrant, Tality Corporation, Tality Transition Corporation, Tality, LP and Cadence Holdings, Inc. (Incorporated by reference to Exhibit 2.18 to the 2001 Second Quarter Form 10-Q).

	2.19	Form of offer to exchange outstanding Tality options for Cadence options, together with Form of Letter to Option Holders including summary of terms and election form, dated as of November 26, 2001.

	3.01	(a) The Registrant’s Certificate of Ownership and Merger as filed with the Secretary of State of the State of Delaware on June 1, 1988 (Incorporated by reference to Exhibit 3.02(c) to the Registrant’s Form S-1 Registration Statement (No. 33-23107) filed on July 18, 1988 (the “1988 Form S-1”)).

		(b) The Registrant’s Certificate of Designation of Series A Junior Participating Preferred Stock, as amended on February 1, 2000, as filed with the Secretary of State of the State of Delaware on June 8, 1989 (Incorporated by reference to Exhibit 3A to the Registrant’s Current Report on Form 8-K (No. 0-15867) filed on June 12, 1989 (the “1989 Form 8-K”) and amended by Exhibit 4.01 to this Form 10-K).

		(c) The Registrant’s Certificate of Designation of Series A Convertible Preferred Stock as filed with the Secretary of State of the State of Delaware on December 30, 1991 (Incorporated by reference to Exhibit 3.01(f) to the Registrant’s Form 10-K for the year ended December 31, 1991).

		(d) The Registrant’s Certificate of Amendment of Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on May 13, 1998 (Incorporated by reference to Exhibit 3.01(i) to the Registrant’s Form 10-Q for the quarter ended July 4, 1998 (the “1998 Second Quarter Form 10-Q”)).

		(e) The Registrant’s Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on May 13, 1998 (Incorporated by reference to Exhibit 3.01(j) to the 1998 Second Quarter Form 10-Q).

	3.02	The Registrant’s Amended and Restated Bylaws, as currently in effect (Incorporated by reference to Exhibit 3.01 to the Registrant’s Form 10-Q for the quarter ended April 3, 1999).

	4.01	Specimen Certificate of the Registrant’s Common Stock (Incorporated by reference to Exhibit 4.01 to the Registrant’s Form S-4 Registration Statement (No. 33-43400) filed October 17, 1991).

	4.02	Amended and Restated Rights Agreement, dated as of February 1, 2000 between the Registrant and ChaseMellon Shareholder Services, L.L.C., which includes as exhibits thereto the Certificate of Designation for the Series A Junior Participating Preferred Stock, the form of Rights Certificate, and the Summary of Rights to Purchase Preferred Shares. (Incorporated by reference to Exhibit 4.02 to the Registrant’s Form 10-K for the fiscal year ended January 1, 2000.)




Exhibit
Number		Exhibit Title


	*10.01	The Registrant’s 1987 Stock Option Plan, as amended and restated, effective February 23, 1998 (Incorporated by reference to the Registrant’s Definitive Proxy Statement filed on March 31, 1998 (the “1998 Definitive Proxy Statement”)).

	*10.02	Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under the Registrant’s 1987 Stock Option Plan, as amended (Incorporated by reference to Exhibit 4.01 to the Registrant’s Form S-8 Registration Statement (No. 33-22652) filed on June 20, 1988).

	*10.03	The Registrant’s 1988 Directors Stock Option Plan, as amended, effective May 4, 1993, including the Stock Option Grant and Form of Stock Option Exercise Notice and Agreement (The first document is incorporated by reference to Exhibit 4.02 to the Registrant’s Form S-8 Registration Statement (No. 33-53913) filed on May 31, 1994 (the “1994 Form S-8”) and the latter two documents are incorporated by reference to Exhibits 10.08 to 10.10 to the 1988 Form S-1).

	*10.04	The Registrant’s 1993 Directors Stock Option Plan, effective July 22, 1993, including the Form of Stock Option Grant (Incorporated by reference to Exhibit 4.04 to the 1994 Form S-8).

	*10.05	The Registrant’s 1995 Directors Stock Option Plan, as amended, effective May 5, 1999, including the Form of Stock Option Grant (The first document is incorporated by reference to Exhibit 10.49 to the Registrant’s Form 10-Q for the quarter ended July 3, 1999 (the “1999 Second Quarter Form 10-Q”) and the latter is incorporated by reference to Exhibit 10.05 to the Registrant’s Form 10-K for the fiscal year ended December 30, 1995 (the “1995 Form 10-K”)).

	*10.06	The Registrant’s 1990 Employee Stock Purchase Plan, as amended and restated, effective May 5, 1999 (Incorporated by reference to Exhibit 10.50 to the 1999 Second Quarter Form 10-Q).

	*10.07	The Registrant’s Senior Executive Bonus Plan (previously the Chief Executive Officer Bonus Plan for 1996), as amended, effective January 1, 2001 (Incorporated by reference to the Registrant’s Definitive Proxy Statement filed on April 12, 2001).

	*10.08	The Registrant’s Deferred Compensation Plan for 1994, as amended and restated effective January 1, 2001.

	*10.09	The Registrant’s 1996 Deferred Compensation Venture Investment Plan, as amended and restated January 1, 2001.

	10.10	The 1993 Non-Statutory Stock Option Plan, as currently in effect, including amendment effective July, 1995.

	*10.11	The Registrant’s 401(k) Plan, as amended and restated, effective July 1, 1995 (Incorporated by reference to Exhibit 10.29 to the Registrant’s Form 10-Q for the quarter ended March 30, 1996 (the “1996 First Quarter Form 10-Q”)).

	10.14	Distribution Agreement, dated as of April 28, 1997 by and among Cadence Design Systems (Ireland) Ltd., Cadence Design Systems K.K., and Cadence Design Systems (Japan) B.V. (Incorporated by reference to Exhibit 10.48 to the Registrant’s Form 10-Q for the quarter ended June 28, 1997).

	10.15	CCT 1993 Equity Incentive Plan, as amended and restated, effective August 16, 1995, Form of Equity Incentive Plan Stock Option Agreement, Form of Exercise of Equity Incentive Plan Stock Option and Form of Equity Incentive Plan Stock Option Exercise Agreement (Incorporated by reference to Exhibit 10.49 to the Registrant’s Form S-4 Registration Statement (No. 333-16779) filed on November 26, 1996).




Exhibit
Number		Exhibit Title


	*10.18	Form of Executive Severance Agreement (Incorporated by reference to Exhibit 10.43 to the Registrant’s Form 10-K for the fiscal year ended January 3, 1998).

	10.19	Revolving Credit Agreement, dated as of September 29, 1998 between ABN-AMRO Bank and the Registrant (Incorporated by reference to Exhibit 10.45 to the Registrant’s Form 10-Q for the quarter ended October 3, 1998 (the “1998 Third Quarter Form 10-Q”)).

	10.20	First Amendment to the Revolving Credit Agreement, dated as of October 16, 1998 between ABN-AMRO Bank and the Registrant (Incorporated by reference to Exhibit 10.46 to the 1998 Third Quarter Form 10-Q).

	*10.22	Consulting Agreement, dated as of March 8, 1999 between the Registrant and George M. Scalise (Incorporated by reference to Exhibit 10.36 to the Registrant’s Form 10-K for the fiscal year ended January 1, 2000 (the “1999 Form 10-K”)).

	*10.26	Employment Agreement, dated as of September 16, 1999 between the Registrant and H. Raymond Bingham (Incorporated by reference to Exhibit 10.51 to the Registrant’s Form 10-Q for the quarter ended October 2, 1999 (the “1999 Third Quarter Form 10-Q”)).

	*10.27	Consulting Agreement, dated as of July 1999 between the Registrant and Alberto Sangiovanni-Vincentelli (Incorporated by reference to Exhibit 10.52 to the 1999 Third Quarter Form 10-Q).

	10.28	Design Acceleration, Inc. 1994 Stock Option Plan (Incorporated by reference to Exhibit 99 to the Registrant’s Form S-8 Registration Statement (No. 333-71717) filed on February 3, 1999).

	10.29	Quickturn Design Systems, Inc. 1988 Stock Option Plan, as amended, (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-69589) filed on June 7, 1999 (the “June 1999 Form S-8”)).

	10.30	Pi Design Systems, Inc. 1990 Stock Option Plan, as amended, (Incorporated by reference to Exhibit 99.2 to the June 1999 Form S-8).

	10.31	Quickturn Design Systems, Inc. 1992 Key Executive Stock Option Plan, as amended (Incorporated by reference to Exhibit 99.3 to the June 1999 Form S-8).

	10.32	Quickturn Design Systems, Inc. 1993 Employee Qualified Stock Purchase Plan, as amended, (Incorporated by reference to Exhibit 99.4 to the June 1999 Form S-8).

	10.33	Quickturn Design Systems, Inc. 1994 Outside Director Stock Option Plan (Incorporated by reference to Exhibit 99.7 to the June 1999 Form S-8).

	10.34	Quickturn Design Systems, Inc. 1996 Supplemental Stock Plan, as amended, (Incorporated by reference to Exhibit 99.5 to the June 1999 Form S-8).

	10.35	Quickturn Design Systems, Inc. 1997 Stock Option Plan, as amended, (Incorporated by reference to Exhibit 99.6 to the June 1999 Form S-8).

	10.36	SpeedSim, Inc. 1995 Incentive and Nonqualified Stock Option Plan (Incorporated by reference to Exhibit 99.8 to the June 1999 Form S-8).

	10.37	OrCAD, Inc. 1991 Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-85591) filed on August 19, 1999 (the “August 1999 Form S-8”)).

	10.38	OrCAD, Inc. 1995 Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the August 1999 Form S-8).

	10.39	OrCAD, Inc. Amended 1995 Stock Incentive Plan (Incorporated by reference to Exhibit 99.3 to the August 1999 Form S-8).




Exhibit
Number		Exhibit Title


	*10.40	Form of Executive Retention Agreement between the Registrant and Key Executives of the Registrant (Incorporated by reference to Exhibit 10.57 to the 1999 Form 10-K).

	10.41	Diablo Research Company LLC 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-93609) filed on December 24, 1999 (the “December 1999 Form S-8”)).

	10.42	Diablo Research Company LLC 1999 Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the December 1999 Form S-8).

	10.43	The Registrant’s 2000 Non-Statutory Equity Incentive Plan, as amended and restated November 1, 2001 (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No.333-69589) filed on November 14, 2001).

	*10.44	Form of Indemnity Agreement between the Registrant and its directors and executive officers (Incorporated by reference to Exhibit 10.01 to the 2000 Second Quarter Form 10-Q).

	10.45	Credit Agreement, dated as of September 29, 2000 by and among the Registrant and ABN AMRO Bank N.V., Bank One, N.A., KeyBank National Association and UBS AG, Stamford Branch (Incorporated by reference to Exhibit 10.01 to the 2000 Third Quarter Form 10-Q).

	10.46	Amended and Restated 364 Day Credit Agreement, dated September 28, 2001 by and among the Registrant., Fleet National Bank, KeyBank National Association, UBS AG, Stamford Branch and ABN AMRO Bank N.V. (Incorporated by reference to Exhibit 10.61 to the Registrant’s Form 10-Q for the quarter ended September 29, 2001 (the “2001 Third Quarter Form 10-Q”)).

	10.47	The Registrant’s 1997 Nonstatutory Stock Option Plan, as amended and restated, effective November 1, 2000 (Incorporated by reference to Exhibit 10.03 to the 2000 Third Quarter Form 10-Q).

	10.50	Tality Holdings, Inc. 2000 Equity Incentive Plan, effective July 26, 2001 (Incorporated by reference to Exhibit 10.50 to the 2001 Second Quarter Form 10-Q).

	10.51	Tality Holdings, Inc. 2000 Directors Stock Option Plan, effective July 26, 2001 (Incorporated by reference to Exhibit 10.51 to the 2001 Second Quarter Form 10-Q).

	10.52	Employment Agreement between Ronald R. Barris and the Registrant dated July 1, 2000 (Incorporated by reference to the Registrant’s Form 10-K for the fiscal year ended December 30, 2000 (the “2000 Form 10-K”)).

	*10.53	Description of the Registrant’s Stock Purchase Program (Incorporated by reference to Exhibit 10.53 to the Registrant’s Form 10-K for the fiscal year ended December 30, 2000 (the “2000 Form 10-K”)).

	10.54	Form of Promissory Note and Pledge Agreement for employees of the Registrant delivered in connection with purchases of shares of Tality Corporation restricted Class A common stock (Incorporated by reference to Exhibit 10.54 to the 2000 Form 10-K).

	10.55	Form of Promissory Note of Ronald R. Barris to the Registrant dated September 18, 2000 (Incorporated by reference to Exhibit 10.56 to the 2000 Form 10-K).

	10.56	Form of Letter Agreement between the Registrant and certain holders of Tality Corporation Class A Common Stock and regarding the repurchase of Tality stock (Incorporated by reference to Exhibit 10.56 to the 2001 Second Quarter Form 10-Q).

	10.57	The Registrant’s 2001 Employee Stock Purchase Plan, effective July 13, 2001 (Incorporated by reference to Exhibit 10.57 to the 2001 Second Quarter Form 10-Q).




Exhibit
Number		Exhibit Title


	10.58	The Registrant’s 2001 Non-Qualified Employee Stock Purchase Plan, effective July 13, 2001 (Incorporated by reference to Exhibit 10.58 to the Second Quarter 2001 10-Q).

	*10.59	Executive Separation, Release and Consulting Agreement, dated as of August 31, 2001 between the Registrant, Tality Corporation and Robert P. Wiederhold (Incorporated by reference to Exhibit 10.59 to the 2001 Third Quarter Form 10-Q).

	10.60	First Amendment to Credit Agreement, dated September 28, 2001, among the Registrant, Bank One, N.A., Key Bank National Association, UBS AG and ABN AMRO Bank N.V. (Incorporated by reference to Exhibit 10.60 to the 2001 Third Quarter Form 10-Q).

	10.61	CadMOS Design Technology, Inc. 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-56898) filed on March 12, 2001 (the “March 2001 S-8”)).

	10.62	CadMOS Design Technology, Inc. 2001 Supplemental Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the March 2001 S-8).

	10.63	DSM Technologies, Inc. 2000 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-82044) filed on February 4, 2002).

	10.64	Silicon Perspective Corporation 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-75874) filed on December 21, 2001).

	10.65	The Registrant’s SPC Plan, effective December 20, 2001.

	*10.66	Executive Separation, Release and Consulting Agreement, dated as of December 3, 2001, between the Registrant and Ronald R. Barris.

	21.01	Subsidiaries of the Registrant.

	23.01	Consent of Arthur Andersen LLP.

* Management contract or compensatory plan or arrangement covering executive officers or directors of the Registrant.

(b) Reports on Form 8-K:

On November 16, 2001, the Registrant filed a Current Report on Form 8-K reporting its definitive agreement to acquire Silicon Perspective Corporation, a privately-held design technology firm.

On December 21, 2001, the Registrant filed a Current Report on Form 8-K reporting the completion of its acquisition of Silicon Perspective Corporation.

Cadence hereby files as part of this Form 10-K the Exhibits listed in Item 14.(a) 3 above.

(d) Financial Statement Schedule:

See Item 14.(a) 2 of this Form 10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Cadence Design Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Cadence Design Systems, Inc. (a Delaware corporation) and subsidiaries as of December 29, 2001 and December 30, 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three fiscal years in the period ended December 29, 2001. These financial statements and the schedule referred to below are the responsibility of Cadence’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cadence Design Systems, Inc. and subsidiaries as of December 29, 2001 and December 30, 2000, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 29, 2001, in conformity with accounting principles generally accepted in the United States of America.

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14.(a)2. is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

San Jose, California

March 11, 2002

CADENCE DESIGN SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

December 29, 2001 and December 30, 2000

(In thousands, except per share amounts)

ASSETS


				2001			2000

Current Assets:
	Cash and cash equivalents			$	206,311		$	85,220
	Short-term investments				68,483			51,749
	Receivables, net				258,402			289,468
	Inventories, net				18,151			20,149
	Prepaid expenses and other				83,575			110,262

		Total current assets			634,922			556,848
Property, plant and equipment, net					417,189			368,879
Software development costs, net					11,938			10,738
Acquired intangibles, net					413,641			326,518
Installment contract receivables, net					58,918			38,420
Other assets					193,422			175,918

Total Assets				$	1,730,030		$	1,477,321

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Current portion of capital leases			$	1,397		$	2,212
	Accounts payable and accrued liabilities				259,029			273,594
	Deferred revenue				211,965			215,768

		Total current liabilities			472,391			491,574

Long-Term Liabilities:
	Capital leases				1,476			3,298
	Minority interest				—			11,612
	Other long-term liabilities				134,816			61,372

		Total long-term liabilities			136,292			76,282

Stockholders’ Equity:
	Preferred stock — $0.01 par value; authorized 400 shares in 2001 and 2000, none issued or outstanding				—			—
	Common Stock and capital in excess of $0.01 par value
		Authorized: 600,000 shares
		Issued: 255,637 shares in 2001 and 255,637 shares in 2000
		Outstanding: 249,904 shares in 2001 and 243,662 shares in 2000			628,697			590,839
	Deferred stock compensation				(56,241	)		(60,978	)
	Retained earnings				535,511			394,224
	Accumulated other comprehensive income (loss)				13,380			(14,620	)

			Total stockholders’ equity		1,121,347			909,465

Total Liabilities and Stockholders’ Equity				$	1,730,030		$	1,477,321

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

CADENCE DESIGN SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three fiscal years ended December 29, 2001

(In thousands, except per share amounts)


			2001			2000		1999

Revenue:
	Product		$	830,490		$	627,429	$	505,459
	Services			263,355			335,967		294,916
	Maintenance			336,595			316,154		292,928

		Total revenue		1,430,440			1,279,550		1,093,303

Costs and Expenses:
	Cost of product			98,177			89,937		79,504
	Cost of services			191,384			215,605		191,760
	Cost of maintenance			65,299			63,315		53,579
	Marketing and sales			393,614			390,139		354,205
	Research and development			297,329			263,947		219,181
	General and administrative			114,594			94,478		86,735
	Amortization of acquired intangibles			92,330			80,503		61,788
	Amortization of deferred stock compensation (1)			17,911			11,390		—
	Restructuring, asset impairment and unusual items			(80,649	)		6,821		59,301

		Total costs and expenses		1,189,989			1,216,135		1,106,053

Income (loss) from operations				240,451			63,415		(12,750	)
	Other income, net			1,697			4,581		1,370

Income (loss) before provision for income taxes				242,148			67,996		(11,380	)
	Provision for income taxes			100,861			18,019		2,695

Net income (loss)			$	141,287		$	49,977	$	(14,075	)

Basic Net Income (Loss) Per Share			$	0.57		$	0.20	$	(0.06	)

Diluted Net Income (Loss) Per Share			$	0.55		$	0.19	$	(0.06	)

Weighted average common shares outstanding				245,839			244,565		242,037

Weighted average common and potential common shares outstanding — assuming dilution				257,660			262,696		242,037


(1) Amortization of deferred stock compensation would be further classified as follows:
Cost of services			$	4,037		$	3,445	$	—
Marketing and sales				4,049			2,131		—
Research and development				2,845			498		—
General and administrative				6,980			5,316		—

			$	17,911		$	11,390	$	—

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

CADENCE DESIGN SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three fiscal years ended December 29, 2001

(In thousands)



					Stock

								Par Value									Accumulated
								and Capital			Deferred						Other
		Comprehensive						in Excess			Stock			Retained			Comprehensive
		Income			Shares			of Par			Compensation			Earnings			Income (Loss)

BALANCE, JANUARY 2, 1999						237,212		$	598,907		$	(346	)	$	358,322		$	(9,053	)
	Purchase of stock					(4,585	)		(115,834	)		—			—			—
	Issuance of stock					8,780			77,917			—			—			—
	Issuance of stock in connection with warrants exercised					1,271			13,340			—			—			—
	Tax benefits from employee stock transactions					—			10,305			—			—			—
	Stock issued in connection with acquisitions					650			16,124			—			—			—
	Equity adjustments related to acquisitions					—			16,682			—			—			—
	Amortization of deferred compensation					—			—			117			—			—
	Net loss	$	(14,075	)		—			—			—			(14,075	)		—
	Unrealized holding gain on marketable securities, net		36,249			—			—			—			—			36,249
	Translation loss		(2,506	)		—			—			—			—			(2,506	)

		$	19,668

BALANCE, JANUARY 1, 2000						243,328			617,441			(229	)		344,247			24,690
	Purchase of stock					(11,737	)		(234,418	)		—			—			—
	Issuance of stock					12,071			191,013			—			—			—
	Tax benefits from employee stock transactions					—			11,470			—			—			—
	Equity adjustments related to acquisitions					—			5,333			—			—			—
	Deferred stock compensation								—			(72,369	)
	Amortization of deferred compensation — Tality					—			—			11,390			—			—
	Amortization of deferred compensation — other								—			230
	Net income	$	49,977			—			—			—			49,977			—
	Unrealized holding loss on marketable securities, net		(34,567	)		—			—			—			—			(34,567	)
	Translation loss		(4,743	)		—			—			—			—			(4,743	)

		$	10,667

BALANCE, DECEMBER 30, 2000						243,662			590,839			(60,978	)		394,224			(14,620	)
	Purchase of stock					(12,846	)		(299,036	)		—			—			—
	Issuance of stock					8,976			99,874			—			—			—
	Tax benefits from employee stock transactions					—			2,009			—			—			—
	Stock issued in connection with acquisitions					10,112			259,222			—			—			—
	Deferred stock compensation — reversal for forfeitures					—			(27,793	)		27,793			—			—
	Deferred stock compensation — acquisitions and grants					—			2,973			(40,359	)		—			—
	Amortization of deferred compensation — Tality					—			—			13,888			—			—
	Amortization of deferred compensation — other					—			609			3,415			—			—
	Net income	$	141,287			—			—			—			141,287			—
	Unrealized holding loss on marketable securities, net		28,943			—			—			—			—			28,943
	Translation loss		(943	)		—			—			—			—			(943	)

		$	169,287

BALANCE, DECEMBER 29, 2001						249,904		$	628,697		$	(56,241	)	$	535,511		$	13,380

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

CADENCE DESIGN SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three fiscal years ended December 29, 2001

(In thousands)


					2001			2000			1999

Cash and Cash Equivalents at Beginning of Year					$	85,220		$	111,401		$	209,074

Cash Flows From Operating Activities:
	Net income (loss)					141,287			49,977			(14,075	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization				230,434			206,810			163,896
		Asset impairment and write-off of equipment and non current assets				—			—			20,973
		Net investment gain on sale, equity (income) loss and write-down				(13,015	)		(13,904	)		(124	)
		Provision for impairment of venture capital partnership				2,549			1,500			5,500
		Write-off of acquired in-process technology				21,700			—			20,700
		Write-off of goodwill				25,834			—			—
		Non-cash restructuring and other related charges				36,802			—			—
		Tax benefit on stock option exercise				2,009			11,470			10,305
		Minority interest expense (income)				(1,959	)		(638	)		(125	)
		Fair market value of options issued to consultants				609			1,670			199
		Deferred income taxes				(13,187	)		(28,744	)		(25,843	)
		Provisions for losses on trade accounts receivable				45,809			18,313			50,365
		Changes in operating assets and liabilities, net of effect of acquired and disposed businesses:
			Receivables			(204,353	)		(283,322	)		(194,957	)
			Inventories			(16,516	)		(5,739	)		(9,969	)
			Prepaid expenses and other			10,337			(16,308	)		12,462
			Installment contract receivables			(63,469	)		89,263			57,008
			Accounts payable and accrued liabilities			(17,358	)		15,285			2,391
			Deferred revenue			(10,044	)		63,652			37,694
			Other long-term liabilities			73,444			34,485			(8,979	)

				Net cash provided by operating activities		250,913			143,770			127,421

Cash Flows From Investing Activities:
	Maturities of short-term investments — held-to-maturity					—			999			25,990
	Purchases of short-term investments — held-to-maturity					—			—			(43	)
	Maturities of short-term investments — available-for-sale					91,268			6,308			26,349
	Purchases of short-term investments — available-for-sale					(40,478	)		(49,636	)		(15	)
	Purchases of property, plant and equipment					(154,311	)		(119,471	)		(110,444	)
	Capitalization of software development costs					(30,189	)		(28,435	)		(25,684	)
	Increase in acquired intangibles and other assets					(45,757	)		(37,578	)		(28,490	)
	Proceeds from sale of investments					33,469			19,281			—
	Investment in venture capital partnership and equity investment					(20,492	)		(12,960	)		(9,144	)
	Cash effect of business acquisitions					5,165			(4,503	)		(133,055	)
	Sale of put warrants					14,934			42,440			3,609
	Purchase of call options					(14,934	)		(42,440	)		(3,609	)

				Net cash used for investing activities		(161,325	)		(225,995	)		(254,536	)

Cash Flows From Financing Activities:
	Proceeds from credit facility and capital leases					222,900			60,000			261,600
	Principal payments on credit facility and capital leases					(225,203	)		(83,704	)		(372,851	)
	Proceeds from minority interest					—			1,375			—
	Proceeds from repayment of notes receivable					10,523			—			—
	Repurchase of minority interest					(11,958	)		—			—
	Proceeds from issuance of common stock					99,874			115,659			91,047
	Purchases of treasury stock					(299,036	)		(232,958	)		(115,834	)
	Proceeds from transfer of financial assets in exchange for cash					235,806			201,164			167,680

				Net cash provided by financing activities		32,906			61,536			31,642

Effect of exchange rate changes on cash						(1,403	)		(5,492	)		(2,200	)

Increase (Decrease) in cash and cash equivalents						121,091			(26,181	)		(97,673	)

Cash and Cash Equivalents at End of Year					$	206,311		$	85,220		$	111,401

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

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 29, 2001

CADENCE

Cadence Design Systems, Inc. provides comprehensive software and other technology and offers design and methodology services for the product development requirements of the world’s leading electronics companies. Cadence® licenses its leading-edge electronic design automation software and hardware technology and provides a range of services to companies throughout the world to help optimize their product development processes. Cadence’s products and services are used by companies to design and develop complex integrated circuits and electronic systems, including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products and other advanced electronics. These industries are experiencing a general economic slowdown. This slowdown led Cadence to record in 2001 worldwide restructuring and asset impairment charges totaling $61.6 million, inventory write downs of $18.9 million and acquired intangibles write-offs of $25.8 million.

On July 17, 2000, Cadence announced its plan to separate its electronics design services group into a new company named Tality Corporation. Tality filed a registration statement with the Securities and Exchange Commission for Tality’s IPO. Tality’s separation from Cadence was substantially completed on October 4, 2000, and the electronic design services business thereafter operated as a subsidiary of Cadence. As a result of the separation in the third quarter of 2000, Cadence recorded deferred stock compensation resulting from Tality option grants and sales of Tality restricted stock. On October 9, 2000, Cadence announced the postponement of Tality’s IPO due to unfavorable market conditions. As a result of the postponement of the Tality IPO, Cadence wrote off $2.8 million of IPO-related expenses in the first quarter of 2001. In addition to the $2.8 million, Cadence also expensed $2.0 million of Tality separation costs in 2001, related primarily to information systems separation, legal and consulting fees. On April 17, 2001, Cadence announced the withdrawal of the Tality IPO registration statement. Tality was reorganized and restructured during the second, third and fourth quarters of 2001, and is currently a wholly-owned subsidiary of Cadence. See “Restructuring, Asset Impairment and Unusual Items.”

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Cadence and its subsidiaries after elimination of intercompany accounts and transactions. Investments in companies in which ownership interests range from 20% to 50% are accounted for using the equity method of accounting. Cadence has one investment with ownership interest less than 20% which is accounted for using the equity method of accounting due to the fact Cadence has significant influence on this investment.

Cadence’s fiscal year end is the Saturday closest to December 31. Certain prior year consolidated financial statement balances have been reclassified to conform to the 2001 presentation.

Use of Estimates

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

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

Foreign Currency Translation

Assets and liabilities of foreign subsidiaries, where the functional currency is the local currency, are translated using exchange rates in effect at the end of the period and revenue and costs are translated using average exchange rates for the period. Gains and losses on the translation into U.S. dollars of amounts denominated in foreign currencies are included in net income (loss) for those operations whose functional currency is the U.S. dollar, and as a component of accumulated other comprehensive income (loss) within stockholders’ equity for those operations whose functional currency is the local currency.

Derivative Financial Instruments

Revenue Recognition

Cadence applies the provisions of Statement of Position 97-2, “Software Revenue Recognition,” as amended by Statement of Position 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” to all transactions involving the sale of software products and, sales of hardware where the software is not incidental.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

arrangement if sold separately and is established when a software vendor demonstrates a history of having sold the element separately and of collecting on that element from a representative sample of arrangements on a consistent basis. If vendor-specific objective evidence of fair value does not exist for all elements to support the allocation of the total fee among all delivered and undelivered elements of the arrangement, revenue is deferred until such evidence does exist for the undelivered elements, or until all elements are delivered, whichever is earlier.

Cadence sells software using three license types. These license types are:

For term and subscription licenses, Cadence uses a signed contract as evidence of an arrangement. For perpetual licenses, hardware sales and maintenance renewals Cadence uses a purchase order as evidence of an arrangement. Sales through its Japanese distributor are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction-by-transaction basis. For services, Cadence uses a signed statement of work to evidence an arrangement.

Software is delivered to customers electronically or on a CD-ROM. With respect to hardware, delivery of an entire system is deemed to occur upon installation.

Cadence assesses whether the fee is fixed and determinable based on the payment terms associated with the transaction. Cadence uses installment contracts for term licenses and subscription licenses for which it has established a history of collecting under the original contract without providing concessions on payments, products or services. The time periods of installment payment contracts are equal to or less than the time period of the licenses and are generally collected quarterly.

Cadence assesses collectibility based on a number of factors, including the customer’s past payment history and its current credit-worthiness. If Cadence determines that collection of a fee is not reasonably assured, Cadence defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment.

Provided all the related conditions discussed above are met, Cadence recognizes revenue for each software license type as follows:

• Term licenses and Perpetual licenses — revenue associated with delivered software is recognized upon the effective date of the license; and

• Subscription licenses — revenue associated with delivered software is recognized ratably over the term of the license commencing upon the effective date of the license.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

price-projects, such as training classes and small, standard methodology service engagements of approximately $10,000 in size or less, revenue is recognized when the work is completed.

Deferred Revenue

Deferred revenue arises when customers are billed for products and/or services in advance of their being provided and therefore earned. Cadence’s deferred revenue consists primarily of billing to customers for software maintenance and subscription product licenses made in advance of the period over which the maintenance and/or software license will be provided. Maintenance on perpetual licenses is generally renewed annually and is billed in advance. The revenue is deferred and earned ratably over the 12 month renewal period. Subscription licensed product and maintenance billing is generally billed quarterly in advance. The revenue is deferred and recognized ratably over the ensuing quarter.

Comprehensive Income

Comprehensive income includes foreign currency translation gains and losses and other unrealized gains and losses that have been previously excluded from net income (loss) and reflected instead in stockholders’ equity. Cadence has reported the components of comprehensive income on its consolidated statements of stockholders’ equity.

Cash, Cash Equivalents and Short-Term Investments

Cadence considers all highly liquid debt instruments, including commercial paper, euro time deposits, repurchase agreements and certificates of deposit with an original maturity of three months or less to be cash equivalents. Investments with original maturities greater than three months and less than one year are classified as short-term investments. Investments with original maturities greater than one year are classified as long-term investments.

Management determines the appropriate classification of its investments at the time of purchase. Securities classified as held-to-maturity are stated at amortized cost based on Cadence’s positive intent to hold such securities until maturity. The cost of securities sold is determined using the specific identification method when computing realized gains and losses. Securities classified as available-for-sale are stated at fair value, with the unrealized gains and losses reported as a component of stockholders’ equity until realized. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in other income, net.

Inventories

Inventories are stated at the lower of cost (using the first-in, first-out method) or market. Cadence’s inventories include high technology parts and components for complex computer systems that emulate the performance and operation of computer IC and electronic systems. These parts and components may be specialized in nature or subject to rapid technological obsolescence. While Cadence has programs to minimize the required inventories on hand and considers technological obsolescence when estimating required reserves to reduce recorded amounts to market values, it is reasonably possible that such estimates could change in the near term.

In the year ended December 29, 2001, Cadence recorded an $18.9 million reserve against inventory in cost of product in the Consolidated Statements of Operations. Of the $18.9 million reserve, $15.2 million was related to excess inventory from revised sales forecasts and $3.7 million related to two product lines that were discontinued as part of Cadence’s restructuring. The excess inventory charge of $15.2 million was due to a sudden and significant decrease in forecasted revenue for emulation products and was calculated in accordance with Cadence’s policy, which is based on inventory in excess of 12-month demand. Inventory purchases and

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

commitments are based on future sales forecasts. Cadence typically buys and builds inventory levels for certain key components to mitigate component supply constraints. Based on Cadence’s current 12-month demand forecast, Cadence does not anticipate that the excess inventory subject to these reserves will be used at a later date.

Property, Plant and Equipment

Property, plant and equipment is stated at cost. Depreciation and amortization are provided over the estimated useful lives, using the straight-line method, as follows:


Computer equipment and related software		3-8 years
Buildings		10-32 years
Leasehold and building improvements		Shorter of the lease term or the estimated useful life
Furniture and fixtures		3-5 years
Equipment		3-5 years

Cadence capitalizes the costs of software developed for internal use in compliance with Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” and with Emerging Issues Task Force Issue 00-2 “Accounting for Web Site Development Costs”. Capitalization of software developed for internal use and web site development costs begins at the application development phase of the project. Amortization of software developed for internal use and web site development costs begins when the products are placed in productive use, and is computed on a straight-line basis over the estimated useful life of the product.

Cadence recorded depreciation expense of property, plant and equipment for the fiscal years ended December 29, 2001, December 30, 2000, and January 1, 2000 in the amount of $83.2 million, $76.7 million and $68.0 million, respectively.

Software Development Costs and Acquired Intangibles

Cadence capitalizes software development costs in compliance with Statement of Financial Accounting Standards, or SFAS, No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Capitalization of software development costs begins upon the establishment of technological feasibility of the product. Technological feasibility is established at the completion of detail program design and testing. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external factors including, but not limited to, anticipated future gross product revenue, estimated economic life and changes in software and hardware technology. Amortization of capitalized software development costs begins when the products are available for general release to customers and is computed on a straight-line basis over the remaining estimated economic life of the product, which is generally three years.

Cadence recorded amortization expense for software development costs for the fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000 in the amount of $29.0 million, $28.4 million and $26.6 million, respectively.

Acquired intangibles represent purchase price in excess of acquired tangible assets and in-process technology in connection with business combinations accounted for as purchases and are amortized on a straight-line basis over the remaining estimated economic life of the underlying products and technologies (original lives assigned are five to seven years).

Cadence is currently analyzing the impact of SFAS 142 “Goodwill and Other Intangible Assets”, and expects to complete its analysis by the end of its fiscal quarter ended March 30, 2002. As part of the adoption

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of SFAS No. 142, Cadence would no longer amortize goodwill or intangible assets with indefinite lives. Cadence expects that, upon adoption of SFAS 142, Cadence would no longer record annual fiscal year amortization associated with existing goodwill of approximately $311.0 million.

Long-lived Assets

Assets to be disposed of and for which management has committed to a plan to dispose of the assets, whether through sale or abandonment, are reported at the lower of carrying amount or fair value less cost to sell.

Advertising

Cadence expenses the production costs of advertising as incurred. Advertising expense was approximately $19.3 million, $22.9 million and $15.7 million for the fiscal years ended 2001, 2000 and 1999, respectively, and is included in marketing and sales in the accompanying Consolidated Statements of Operations.

Concentrations of Credit Risk

Financial instruments, including derivative financial instruments, that may potentially subject Cadence to concentrations of credit risk, consist principally of cash investments, short-term investments, long-term investments, accounts receivable, forward contracts and put options and call options purchased in conjunction with Cadence’s stock repurchase programs. Cadence’s investment policy limits investments to short-term, low-risk instruments. Concentration of credit risk related to accounts receivable is limited, due to the varied customers comprising Cadence’s customer base and their dispersion across geographies. Credit exposure related to the forward contracts and the call options is limited to the realized and unrealized gains on these contracts. All financial instruments are executed with financial institutions with strong credit ratings, which minimizes risk of loss due to nonpayment. Cadence has not experienced any losses due to credit impairment related to its financial instruments.

New Accounting Standards

In August 2001, the FASB issued SFAS, No. 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets.” SFAS No. 143 addresses financial accounting and reporting for the retirement obligation of an asset. This statement provides that companies should recognize the asset retirement cost at its fair value as part of the cost of the asset and classify the accrued amount as a liability in the condensed consolidated balance sheet. The asset retirement liability is then accreted to the ultimate payout as interest expense. The initial measurement of the liability would be subsequently updated for revised estimates of the discounted cash outflows. The Statement will be effective for fiscal years beginning after June 15, 2002. Cadence has not yet determined the effect SFAS No. 143 will have on its consolidated financial position, results of operations or cash flows.

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In June 2001, the FASB issued SFAS No. 142. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other acquired assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. With the adoption of this Statement, goodwill is no longer subject to amortization over its estimated useful life. Goodwill will be assessed for impairment each year using the fair-value-based test. This Statement becomes effective January 1, 2002. Cadence is currently analyzing the impact of SFAS 142 and expects to complete its analysis by the end of its fiscal quarter ended March 30, 2002. As of December 29, 2001, Cadence had existing net goodwill and identifiable assets of $396.3 million. Cadence expects that upon adoption of SFAS 142, Cadence would no longer record annual fiscal year amortization associated with existing goodwill of approximately $311.0 million.

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BALANCE SHEET COMPONENTS

A summary of balance sheet components as of December 29, 2001 and December 30, 2000 follows:


			2001			2000


			(In thousands)
Receivables:

	Accounts receivables		$	211,843		$	294,997
	Installment contract receivables — current			90,119			47,148

		Total Receivables		301,962			342,145
	Less: Allowances			(43,560	)		(52,677	)

		Receivables, net	$	258,402		$	289,468

Inventories:
	Raw materials		$	18,133		$	17,897
	Work in process			18			2,252

		Inventories, net	$	18,151		$	20,149

Prepaid Expenses and Other:
	Prepaid expenses and other		$	47,727		$	57,286
	Deferred income taxes			35,848			52,976

		Prepaid expenses and other, net	$	83,575		$	110,262

Property, Plant and Equipment:
	Computer equipment and related software		$	366,094		$	324,678
	Buildings			97,530			97,169
	Land			71,877			68,544
	Leasehold and building improvements			72,449			65,014
	Furniture and fixtures			54,104			53,572
	Equipment			38,087			43,882
	Construction in progress and internally developed software			95,578			36,760

		Total cost		795,719			689,619
	Less: Accumulated depreciation and amortization			(378,530	)		(320,740	)

		Property, plant and equipment, net	$	417,189		$	368,879

Software Development Costs:
	Cost		$	82,155		$	63,133
	Less: Accumulated amortization			(70,217	)		(52,395	)

		Software development costs, net	$	11,938		$	10,738

Acquired Intangibles:
	Goodwill and other intangibles		$	634,497		$	465,287
	Purchased software			63,620			62,301
	Less: Accumulated amortization			(284,476	)		(201,070	)

		Acquired intangibles, net	$	413,641		$	326,518

Accounts Payable and Accrued Liabilities:
	Payroll and payroll-related accruals		$	149,919		$	148,051
	Other accrued liabilities			87,857			90,219
	Accounts payable			21,253			35,324

		Accounts payable and accrued liabilities	$	259,029		$	273,594

Other Long-term Liabilities:
	Income taxes payable		$	97,900		$	28,730
	Other long-term liabilities			36,916			32,642

		Other long-term liabilities	$	134,816		$	61,372

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December 29, 2001

FINANCIAL INSTRUMENTS

Investments

The following tables summarize Cadence’s investment activities as of December 29, 2001 and December 30, 2000:


				Gross		Gross
				Unrealized		Unrealized
		Cost		Gains		Losses		Fair Value
December 29, 2001

		(In thousands)
Time Deposits		$	960	$	—	$	—	$	960
Corporate Debt Securities			2,420		—		—		2,420
Marketable Securities — available-for-sale			16,276		51,985		738		67,523
Non-Marketable Securities			75,695		—		—		75,695

	Total:	$	95,351	$	51,985	$	738	$	146,598

Reported as:
Short-term investments								$	68,483
Long-term investments in other assets									78,115

	Total:							$	146,598


				Gross		Gross
				Unrealized		Unrealized
		Cost		Gains		Losses		Fair Value
December 30, 2000

		(In thousands)
Time Deposits		$	49,750	$	—	$	—	$	49,750
Corporate Debt Securities			2,007		—		8		1,999
Marketable Securities — available-for-sale			3,837		2,823		1,008		5,652
Non-Marketable Securities			48,441		—		—		48,441

	Total:	$	104,305	$	2,823	$	1,008	$	105,842

Reported as:
Short-term investments								$	51,749
Long-term investments in other assets									54,093

	Total:							$	105,842

Cadence’s marketable securities available-for-sale are carried at market value and unrealized gains, net of taxes, are in other comprehensive income. Net realized gains on marketable securities were $17.7 million and $14.3 million for the years ended December 29, 2001 and December 30, 2000, respectively. There were no realized gains or losses for the year ended January 1, 2000. As of December 30, 2000, the unrealized gain on the corporate debt security was negligible.

Cadence’s non-marketable securities are carried at the lower of cost or market of net realizable value and are included in other assets in the Consolidated Balance Sheet.

Since 1996, Cadence has made venture capital investments through Telos Venture Partners, LP, or Telos LP, a venture capital firm independently managed by Telos Management, LLC, or Telos LLC, an entity in which Cadence holds no ownership interest and which is not affiliated with any Cadence director or executive officer. Cadence and the Cadence 1996 Deferred Compensation Venture Investment Plan are the

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sole limited partners of Telos LP. The total capital commitment by Cadence to Telos LP is $100 million, of which Cadence had contributed $76.4 million as of December 29, 2001. Undistributed investments in Telos LP are included in non-marketable securities.


	Financing

Cadence has entered into agreements whereby it may transfer qualifying accounts receivables, for which Cadence has recognized the related revenue, to certain financing institutions on a non-recourse basis. These transfers are recorded as sales and accounted for in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” During the fiscal years ended December 29, 2001 and December 30, 2000, Cadence transferred accounts receivable totaling $235.8 million and $201.2 million, respectively, which approximated fair value, to financing institutions on a non-recourse basis. Transfers of accounts receivable for cash are reported in Cadence’s consolidated statements of cash flows as a financing activity.


	Derivative Financial Instruments

The following table shows the notional principal and fair value of Cadence’s derivative financial instruments as of December 29, 2001 and December 30, 2000:



	2001				2000

	Notional		Fair		Notional		Fair
	Principal		Value		Principal		Value


	(In thousands)
Forward contracts	$	127,539	$	1,465	$	130,472	$	2,689

The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of December 29, 2001 and December 30, 2000. As of December 29, 2001 and December 30, 2000, the credit risk associated with the forward contracts and put options was negligible. Although the table above reflects the notional principal and fair value amounts of Cadence’s foreign exchange instruments, it does not reflect the gains or losses associated with the underlying exposures and underlying transactions. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

ACQUISITIONS


	Silicon Perspective Corporation

In December 2001, Cadence acquired Silicon Perspective®Corporation, or SPC, a privately-held design technology firm for approximately 6.8 million shares of Cadence common stock, valued at $132.5 million. SPC provides electronic design tools that bridge the gap between front-end logic designers and the back-end physical design process. The purchase price could increase if certain predetermined performance goals are achieved in fiscal 2002 and 2003. In connection with the acquisition, Cadence preliminarily allocated the purchase price primarily to goodwill of $97.9 million and technology, trademarks, employee agreements and other assumed contractual obligations intangibles of $19.5 million. The technology and other acquired intangibles are being amortized over one to five years.

Upon consummation of the SPC acquisition, Cadence immediately charged to expense $8.6 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The value assigned to acquired in-process technology was determined by identifying

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research projects in areas for which technological feasibility has not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. The in-process technology is expected to be commercially viable in 2002. As of December 29, 2001, expenditures to complete the in-process technology have totaled $1.2 million and expenditures to complete the remaining in-process technology are expected to total approximately $0.7 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require additional research and development after they have reached a state of technological and commercial feasibility.

Comparative pro forma financial information has not been presented because the results of operations of SPC were not material to Cadence’s consolidated financial statements, either individually or in the aggregate.


	Other Acquisitions

In the three months ended June 30, 2001, Cadence acquired substantially all of the assets of two companies for a preliminary aggregate price of $10.5 million, of which $4.4 million was cash and $6.1 million was shares of Cadence stock, plus future contingent payments. Each acquisition was accounted for as a purchase. Upon consummation of the acquisitions, Cadence immediately charged to expense $1.0 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use.


	CadMOS Design Technology, Inc.

In February 2001, Cadence acquired CadMOS Design Technology, Inc., a privately-held design tools firm for approximately 3.6 million shares of Cadence common stock, valued at $92.7 million, and the acquisition was accounted for as a purchase. CadMOS provides solutions to the noise problems experienced in ultra-deep submicron processes. The purchase price will increase up to an additional 488,970 shares if certain predetermined performance goals are achieved over the three years following the acquisition. These goals are bookings, product development and continued employment of certain CadMOS employees. In connection with the acquisition, Cadence preliminarily allocated the purchase price primarily to goodwill of $58.3 million and technology and other intangibles of $12.9 million. The technology and other acquired intangibles are being amortized over three to five years. The results of operations of CadMOS and the estimated fair value of the assets acquired and liabilities assumed are included in Cadence’s consolidated financial statements from the date of acquisition.

Upon consummation of the CadMOS acquisition, Cadence immediately charged to expense $12.1 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. See “Restructuring, Asset Impairment and Unusual Items.” The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. The in-process technology is expected to be commercially viable in 2002. As of December 29, 2001, expenditures to complete the in-process technology have totaled $1.0 million and expenditures to complete the remaining in-process technology are expected to total approximately $0.9 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will

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require additional research and development after they have reached a state of technological and commercial feasibility.

Comparative pro forma financial information has not been presented because the results of operations of CadMOS were not material to Cadence’s consolidated financial statements, either individually or in the aggregate.


	Diablo Research Company LLC

In December 1999, Cadence acquired all of the outstanding stock of Diablo Research Company LLC for $39.9 million in cash in a transaction accounted for as a purchase. Diablo is a high-technology engineering services company with expertise in wireless communication, global positioning satellite solutions and data transfer and home automation markets. In connection with the acquisition, Cadence acquired intangibles of $40.9 million, which are being amortized over three years. In 2001, Cadence recorded a charge of $25.8 million related to the impairment of acquired intangibles associated with Diablo. See “Restructuring, Asset Impairment and Unusual Items — Acquired Intangibles Write-Off.”


	OrCAD, Inc.

In August 1999, Cadence acquired OrCAD, Inc., a supplier of computer-aided engineering and computer-aided design software and services for the printed circuit board industry, for cash. Cadence acquired all of the outstanding stock of OrCAD and assumed all outstanding stock options. The purchase price was $131.4 million and the acquisition was accounted for as a purchase. In connection with the acquisition, Cadence acquired intangibles of $94.0 million. The results of operations of OrCAD and the estimated fair value of the assets acquired and liabilities assumed are included in Cadence’s consolidated financial statements from the date of acquisition. Intangibles arising from the OrCAD acquisition are being amortized on a straight-line basis over five years.

Management estimated that $11.8 million of the purchase price for OrCAD represented acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately charged to expense in the consolidated statements of operations upon consummation of the acquisition. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility had not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. The acquired in-process technology became commercially viable in 1999 and 2000.

Comparative pro forma financial information has not been presented because the results of operations of Diablo and OrCAD were not material to Cadence’s consolidated financial statements, either individually or in the aggregate.

Quickturn Design Systems, Inc.

In May 1999, Cadence completed its merger with Quickturn Design Systems, Inc. Quickturn designs, manufactures, sells and supports hardware and software products that verify the design of computer chips and electronic systems. Cadence acquired all of the outstanding shares of Quickturn common stock in a stock-for-stock transaction for approximately 24.6 million shares of Cadence common stock. The acquisition was accounted for as a pooling of interests. In addition, Cadence assumed all outstanding stock options and warrants of Quickturn. All prior period consolidated financial statements were restated as if the merger took

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place at the beginning of such periods in accordance with required pooling of interests accounting and disclosures.

Design Acceleration, Inc.

In January 1999, Cadence acquired Design Acceleration, Inc., or DAI, a supplier of design verification technology used in system-on-a-chip design. Cadence acquired all of the outstanding stock of DAI for approximately 0.6 million shares of Cadence common stock and $2.9 million of cash. The total purchase price was $25.7 million and the acquisition was accounted for as a purchase. In connection with the acquisition, Cadence acquired intangibles of $24.1 million. The results of operations of DAI and the estimated fair value of the assets acquired and liabilities assumed are included in Cadence’s consolidated financial statements from the date of acquisition. Intangibles arising from the acquisition are being amortized on a straight-line basis over five years.

Management estimated that $8.9 million of the purchase price for DAI represented acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately charged to expense in the consolidated statements of operations upon consummation of the acquisition. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility had not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the purchased in-process technology. The acquired in-process technology became commercially viable in 2000.

Comparative pro forma financial information has not been presented because the results of operations of DAI were not material to Cadence’s consolidated financial statements.

CREDIT FACILITY

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(ii) 20% of funded debt plus (iii) taxes paid in cash less (iv) capital lease payments) of not less than 1.5 to 1.0. Other covenants require Cadence to maintain a minimum one-to-one ratio of current assets to current liabilities and a maximum two-to-one funded debt to EBITDA ratio. From time to time, Cadence borrows amounts under the 2000 Facilities. At December 29, 2001, there were no borrowings outstanding.

COMMITMENTS

Equipment and facilities are leased under various capital and operating leases expiring at various dates through the year 2017. Certain of these leases contain renewal options. Rental expense was $25.6 million for 2001, $22.2 million for 2000 and $25.0 million for 1999.

Since 1996, Cadence has made venture capital investments through Telos LP, a venture capital firm independently managed by Telos LLC. The total capital commitment by Cadence to Telos LP is $100 million, of which Cadence had contributed $76.4 million as of December 29, 2001.

At December 29, 2001, future minimum lease payments under capital and operating leases and the present value of the capital lease payments were as follows:


			Capital		Operating
			Leases		Leases


			(In thousands)
For the years:
	2002		$	1,551	$	32,910
	2003			941		27,929
	2004			482		20,997
	2005			76		14,972
	2006			—		13,024
	2007 and after			—		81,410

		Total lease payments		3,050	$	191,242

Less: Amount representing interest (average interest rate of 7.99%)				177

		Present value of lease payments		2,873
Less: Current portion				1,397

		Long-term portion	$	1,476

The cost of equipment under capital leases included in the consolidated balance sheets as property, plant and equipment at December 29, 2001 and December 30, 2000 was approximately $6.0 million and $11.6 million, respectively. Accumulated amortization of the leased equipment at December 29, 2001 and December 30, 2000 was approximately $3.2 million and $6.2 million, respectively.

CONTINGENCIES

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On July 25, 2001, Avant! was ordered to pay Cadence $194.6 million in criminal restitution after Avant! entered a plea of no contest and was found guilty by the Superior Court of the State of California of conspiracy to take and use Cadence’s trade secrets. This conspiracy included the theft by Avant! and certain individuals of Cadence intellectual property, including software code, as well as other trade secrets. As of December 29, 2001, approximately $196.0 million, consisting of all of the restitution award plus interest was received. This amount is recorded in restructuring, asset impairment and unusual items in Cadence’s Consolidated Statements of Operations.

On September 7, 1999, the District Court ruled on the parties’ Motions for Summary Adjudication, and granted in part, and denied in part, each party’s motion regarding the scope of a June 6, 1994 Release Agreement between the parties. The court held that Cadence’s copyright infringement claim against Avant! is not barred by the release and that Cadence may proceed on that claim. The court also held that Cadence’s trade secret claim based on Avant!’s use, prior to June 1994, of Cadence’s Design Framework II source code is barred by the release. On May 15, 2001, the Ninth Circuit heard oral arguments by both parties on their appeals from the District Court’s order. On June 11, 2001, the Ninth Circuit certified a question of California law to the California Supreme Court and stayed the case. On October 31, 2001, the California Supreme Court agreed to accept such certification.

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On January 7, 1999, in a suit captioned Mentor Graphics Corporation, et al. v. Lobo, et al., Delaware Chancery Court, New Castle County, Civ. Action No. 16843-NC (“Mentor II”), Mentor filed and served an amended complaint asserting claims against Cadence, Quickturn and the Quickturn Board of Directors for declaratory and injunctive relief for various alleged breaches of fiduciary duty purportedly owned by Quickturn and its Board of Directors to Quickturn’s shareholders in connection with the merger between Quickturn and Cadence. Mentor further alleged that Cadence aided and abetted Quickturn and its Board of Directors in those purported breaches. Mentor has not prosecuted the matter since January 1999. In May 2000, Mentor advised the Delaware Chancery Court of its objection to the settlement of a companion action brought on behalf of certain Quickturn shareholders, and sought an award of attorneys’ fees related to its prosecution of Mentor II as well as the prior related action, to which Cadence was not a party. Settlement of the companion action is conditioned upon approval of the Chancery Court and Mentor’s not being awarded attorneys’ fees for Mentor II. In an order dated August 17, 2001, the Chancery Court denied Mentor’s fee application. Mentor has indicated that it will appeal this order.

On July 21, 1999, Mentor filed suit against Quickturn, which action is pending in the U.S. District Court for the Northern District of California, Civil Action No. C 99-5464. Mentor has alleged that Quickturn’s Mercury ^TM and Mercury ^TM Plus hardware emulation systems infringe U.S. Patent Nos. 5,777,489 and 5,790,832, allegedly assigned to Mentor. At Quickturn’s request, Cadence was added as a party defendant. Quickturn and Cadence are vigorously defending themselves against Mentor’s claims, and have filed counterclaims for declaratory judgment of non-infringement and invalidity of these patents.

On September 11, 2000, Mentor filed a complaint against Quickturn and Cadence in the U.S. District Court for the Northern District of California, Civil Action No. C-00-03291, accusing Quickturn and Cadence of infringing U.S. Patent No. 5,574,388, purportedly owned by Mentor, and seeking unspecified damages and injunctive relief. Cadence and Quickturn are vigorously defending themselves against Mentor’s claim, and have filed counterclaims for declaratory judgment of non-infringement and of this patent. The parties have agreed to consolidate this action with Civil Action Nos. C 99-5464 and C 00-01030, described above, for purposes of discovery and pre-trial motions. A trial date has been set for October 7, 2002. Meanwhile, on November 3, 2000, Mentor filed a motion for preliminary injunction, asking the Court to prohibit the sale of Quickturn’s MercuryPlus emulation systems prior to trial of this action. The Court denied the motion for preliminary injunction on August 30, 2001, stating that Quickturn and Cadence had raised substantial questions regarding the validity of U.S. Patent No. 5,574,388. However, the Court also stated that Mentor had demonstrated likelihood of success in proving that Quickturn’s MercuryPlus emulation systems infringe Claims 1 and 5 of the patent. Mentor subsequently filed a motion for summary judgment that Quickturn’s MercuryPlus ^TM emulation system infringes Claims 1 and 5 of U.S. Patent No. 5,574,388. Mentor’s summary judgment motion will be heard on March 22, 2002. Quickturn and Cadence believe the Court will ultimately conclude that no such infringement exists.

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and will not violate the permanent injunction entered by the Oregon District Court on July 7, 1999 in Civil Action No. C-96-00342. In January 2001, Quickturn and Cadence filed a Motion to Dismiss the action, based on lack of subject matter jurisdiction. On May 1, 2001, the Court provisionally granted Quickturn’s motion to dismiss. Cadence and Quickturn believe that Mentor’s complaint is without merit.

On April 30, 1999, Cadence and several of its officers and directors were named as defendants in a lawsuit filed in the U.S. District Court for the Northern District of California, entitled Spett v. Cadence Design Systems, et al., civil action no. C 99-2082. The action was brought on behalf of a class of stockholders who purchased Cadence common stock between November 4, 1998 and April 20, 1999, and alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On September 18, 2000, the District Court granted Cadence’s Motion to Dismiss Plaintiffs’ Claims with leave to amend. Plantiffs did not amend their complaint and on November 29, 2001, an order was filed dismissing the claims with prejudice and granting judgment in favor of Cadence and the individual defendants.

In early 1999, Cadence entered into negotiations with Intelect Communications, Inc. (since renamed TeraForce Technology Corporation), and Intelect’s wholly-owned subsidiary, DNA Enterprises, Inc., with respect to a potential purchase of substantially all the assets of DNA. The transaction was not consummated and, in July 1999, Intelect and DNA filed suit against Cadence in a Texas state court alleging breach of contract, fraud, negligent misrepresentation and breach of fiduciary duty, seeking unspecified compensatory and punitive damages. Cadence has answered, denying liability. In January 2002, the court denied Cadence’s motion for Partial Summary Judgment and set a trial for March 2002.

On December 28, 2000, a former design services customer, Scanz Communications, filed an action for various causes of action in the Los Angeles Superior Court of California against Cadence and Tality, seeking compensatory and punitive damages in an unspecified amount. The suit was filed after Cadence demanded payment of $4,657,556.17 for design services rendered to Scanz. Scanz filed a first amended complaint on April 2, 2001. Following demurrers by Cadence that were sustained in part, Scanz filed a second amended complaint on July 10, 2001 to which Cadence and Tality filed their answer on October 10, 2001. Scanz’s remaining causes of action are fraud, breach of contract, intentional interference with contract, unfair business practices and negligent misrepresentation, for which Scanz seeks damages in the “tens of millions of dollars”.

On June 7, 2001 Cadence filed a cross-complaint against Scanz alleging breach of contract and unjust enrichment, and seeking declaratory relief. On July 12, 2001, Scanz filed an answer to Cadence’s cross-complaint denying all allegations. Trial in this matter is scheduled for September 23, 2002. Cadence intends to vigorously defend the claims alleged by Scanz.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

STOCKHOLDERS’ EQUITY

Net Income (Loss) per Share

The following is a reconciliation of the weighted average common shares used to calculate basic net income (loss) per share to the weighted average common and potential common shares used to calculate diluted net income (loss) per share for the years 2001, 2000 and 1999:


		2001		2000		1999


		(In thousands)
Weighted average common shares used to calculate basic net income (loss) per share			245,839		244,565		242,037
	Options		11,001		17,053		—
	Puts		576		400		—
	Warrants and other contingent common shares		244		678		—

Weighted average common and potential common shares used to calculate diluted net income (loss) per share			257,660		262,696		242,037

Options to purchase 10,134,014 shares of common stock were outstanding at December 29, 2001, but were not included in the computation of diluted net income per share because their effect would be antidilutive. These options expire at various dates through 2011. Put warrants to purchase 2,897,500 shares of common stock were outstanding at December 29, 2001, but were not included in the computation of diluted net income per share because their effect would be antidilutive. The outstanding put warrants expire at various dates through May 2002.

Options to purchase 2,660,253 shares of common stock were outstanding at December 30, 2000, but were not included in the computation of diluted net income per share because their effect would be antidilutive. These options expire at various dates through 2010. Put warrants to purchase 5,496,807 shares of common stock were outstanding at December 30, 2000, but were not included in the computation of diluted net income per share because their effect would be antidilutive. The outstanding put warrants expire at various dated through November 2001.

Options to purchase 56,181,714 shares of common stock were outstanding at January 1, 2000, but were not included in the computation of diluted net loss per share because their effect would be antidilutive. These options expire at various dates through 2009. Warrants to purchase 394,237 shares of common stock were outstanding at January 1, 2000, but were not included in the computation of diluted loss per share because their effect would be antidilutive. The outstanding warrants expire in February 2000 and June 2003. Put warrants to purchase 1,615,175 shares of common stock were outstanding at January 1, 2000, but were not included in the computation of diluted loss per share because their effect would be antidilutive. The outstanding put warrants expired in February 2000.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

Stock Compensation Plans


	Stock Option Plans

Cadence’s 2000 Non-Statutory Stock Option Plan, referred to as the 2000 Plan, provides for the issuance of non-qualified options to its employees to purchase up to 50,000,000 shares of common stock at an exercise price not less than the fair market value of the stock on the date of grant. Options granted under the 2000 Plan become exercisable over periods up to four years, generally with one-fourth of the shares vesting one year from the vesting commencement date with respect to initial grants, and the remaining shares vesting in 36 equal monthly installments. Options under the 2000 Plan generally expire ten years from the date of grant.

Cadence’s 1997 Non-Statutory Stock Option Plan, referred to as the 1997 Plan, provides for the issuance of non-qualified options to its employees to purchase up to 30,000,000 shares of common stock at an exercise price not less than the fair market value of the stock on the date of grant. Options granted under the 1997 Plan become exercisable over periods up to five years, with, generally, one-fifth of the shares vesting one year from the vesting commencement date with respect to initial grants, and the remaining shares vesting in 48 equal monthly installments. Options under the 1997 Plan generally expire ten years from the date of grant.

Cadence’s 1987 Employee Stock Option Plan, referred to as the 1987 Plan, provides for the issuance of either incentive or non-qualified options to its employees to purchase up to 71,370,100 shares of common stock at an exercise price not less than fair market value of the stock on the date of grant. Options granted under the 1987 Plan become exercisable over periods of up to five years and generally expire five to ten years from the date of grant.

Cadence’s 1993 Non-Statutory Stock Option Plan, referred to as the 1993 Non-Statutory Plan, provides for the issuance of non-qualified options to its employees to purchase up to 24,750,000 shares of common stock at an exercise price not less than the fair market value of the stock on the date of grant. Options granted under the 1993 Non-Statutory Plan become exercisable over a four year period, with one-fourth of the shares vesting one year from the vesting commencement date, and the remaining shares vesting in 36 equal monthly installments. Options under the 1993 Non-Statutory Plan generally expire ten years from the date of grant.

Under the 1995 and 1993 Directors’ Stock Option Plans, referred to as the Directors’ Plans, Cadence may grant non-qualified options to its non-employee directors for up to 2,432,502 shares of common stock at an exercise price not less than the fair market value of the stock on the date of grant. Options granted under the Directors’ Plans have terms of up to ten years. Certain of the option grants vest one year from the date of grant, and other option grants vest one-third on the date which is one year from the date of grant and two-thirds ratably over the subsequent two years.

Cadence has assumed certain options granted to former employees of acquired companies, referred to as Acquired Options. The Acquired Options were assumed by Cadence outside of its stock option plans, and each option is administered as if issued under its respective original plan of the acquired entity. All of the Acquired Options have been adjusted to effectuate the price conversion under the terms of the acquisition agreement between Cadence and the relevant acquired company. The Acquired Options generally become exercisable over a four or five year period and generally expire between five and ten years from the date of grant. No additional options will be granted under any of the acquired companies’ plans.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

A summary of the status of all of Cadence’s stock option plans as of and during the years ended December 29, 2001, December 30, 2000 and January 1, 2000 follows:



		2001					2000					1999

					Weighted					Weighted					Weighted
					Average					Average					Average
					Exercise					Exercise					Exercise
		Shares			Price		Shares			Price		Shares			Price

Outstanding at beginning of year			50,000,159		$	15.53		56,181,714		$	14.29		42,678,756		$	14.07
Assumption of acquired companies options			1,250,896		$	1.10		—			—		2,649,553		$	5.78
	Granted		14,831,575		$	20.33		15,536,900		$	19.65		25,205,953		$	14.48
	Exercised		(5,949,943	)	$	11.48		(8,655,150	)	$	9.87		(6,658,815	)	$	7.64
	Forfeited		(3,997,861	)	$	19.86		(13,063,305	)	$	18.26		(7,693,733	)	$	16.50

Outstanding at end of year			56,134,826		$	16.79		50,000,159		$	15.53		56,181,714		$	14.29

Options exercisable at year end			25,189,585					19,881,259					21,226,714
Options available for future grant			27,833,386					38,544,937					11,541,925
Weighted average fair value of options granted during the year		$	11.49				$	10.84				$	9.19

A summary of the status of all of Cadence’s stock option plans at December 29, 2001 follows:



		Options Outstanding						Options Exercisable

				Weighted
				Average
Range of		Number		Remaining		Weighted		Number		Weighted
Exercise		Outstanding		Contractual		Average		Exercisable		Average
Prices		At 12/29/2001		Life		Exercise Price		At 12/29/2001		Exercise Price

$ 0.14 - $ 5.00			2,844,306		3.53	$	2.43		2,090,641	$	2.49
$ 5.01 - $10.00			4,333,025		5.09	$	7.48		3,592,541	$	7.28
$10.01 - $15.00			15,699,568		6.95	$	13.38		8,238,425	$	13.53
$15.01 - $20.00			16,738,008		8.32	$	17.95		5,505,552	$	18.14
$20.01 - $25.00			14,206,511		8.46	$	22.60		4,702,275	$	22.74
$25.01 - $30.00			2,075,958		7.72	$	26.70		854,905	$	26.24
$30.01 - $35.00			207,450		6.43	$	33.39		183,246	$	33.67
$35.01 - $35.06			30,000		6.28	$	35.06		22,000	$	35.06

	Total		56,134,826		7.49	$	16.79		25,189,585	$	15.04


	Stock Repurchase Plan

On August 1, 2001, Cadence authorized a share repurchase program under which repurchased shares with a value of up to $500.0 million are used for general corporate purposes, including the share issuance requirements of Cadence’s employee stock option and purchase plans and acquisitions.

Cadence had also authorized three stock repurchase programs under which it repurchased common stock to satisfy estimated requirements for shares to be issued under its employee stock option and purchase plans.

As part of its authorized repurchase program, Cadence has sold put warrants through private placements. At December 29, 2001, there were 2.9 million put warrants outstanding that entitle the holder to sell one share of common stock to Cadence on a specified date and at specified prices ranging from $15.50 to $25.13 per share. Additionally, during this same period, Cadence purchased call options that entitle Cadence to buy one share of common stock at a specified price to satisfy anticipated stock repurchase requirements under Cadence’s repurchase programs. At December 29, 2001, Cadence had 2.3 million call options outstanding at specified prices ranging from $15.75 to $25.38 per share. The put warrants and call options outstanding at

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

December 29, 2001 expire on various dates through May 2002, and Cadence has the contractual ability to settle the options prior to their maturity. At December 29, 2001, the estimated fair value of the call options was approximately $8.3 million and the fair value of the put warrants was approximately $8.0 million.

If exercised, Cadence has the right to settle the put warrants with common stock equal to the difference between the exercise price and the fair value of the common stock at the date of exercise. Settlement of the put warrants with common stock could cause Cadence to issue a substantial number of shares, depending on the exercise price of the put warrants and the per share fair value of Cadence’s common stock at the time of exercise. In addition, settlement of put warrants in common stock could lead to the disposition by put warrant holders of shares of Cadence’s common stock that such holders may have accumulated in anticipation of the exercise of the put warrants or call options, which may adversely affect the price of Cadence’s common stock. At December 29, 2001, Cadence had the ability to settle these put warrants with common stock and, therefore, no amount was classified out of stockholders’ equity in the Consolidated Balance Sheets.


	Employee Stock Purchase Plans

On July 1, 2001, Cadence adopted two employee stock purchase plans to allow Tality employees to participate in Cadence’s employee stock purchase program. The two plans are the 2001 Employee Stock Purchase Plan, or the ESPP, which is a qualified employee stock purchase plan under the Internal Revenue Code, and the 2001 Non-Qualified Employee Stock Purchase Plan, which is an employee stock purchase plan not qualified under the Internal Revenue Code and will be primarily used for Tality employees located outside the United States. Other than the qualified nature of the 2001 Employee Stock Purchase Plan, the provisions of the two plans are generally the same. The qualified plan will be presented to Cadence stockholders for approval at Cadence’s 2002 annual meeting of stockholders. The plans are administered by Cadence’s board of directors or by a committee appointed by the board. Tality employees, including officers and employee directors of Tality but excluding 5% or greater stockholders, are eligible to participate if they are regular employees who work 20 hours or more per week.

Under the Cadence ESPP, Cadence is authorized to issue up to 25,250,000 shares of common stock to its employees. Under the terms of the ESPP, employees can choose to have up to 12% of their annual base earnings plus bonuses withheld to purchase Cadence common stock. The purchase price of the stock is 85% of the lesser of the fair market value as of the beginning or the end of the offering periods. The offering periods provide for concurrent 24 month offering periods with a new 24 month offering period starting every six months. Each offering period will be divided into four consecutive six month purchase periods.

Under Cadence’s employee stock purchase plans, Cadence issued 3,025,646 shares to employees in 2001, 3,168,839 shares in 2000 and 2,110,222 shares in 1999. The weighted average purchase price and the weighted average fair value of shares issued in 2001 were $10.64 and $25.95, respectively.


	Pro Forma Information

This information is required to illustrate the financial results of operations as if Cadence had accounted for its grants of employee stock options under the fair value method of SFAS No. 123, “Accounting for Stock — Based Compensation.” The fair value of Cadence’s options granted and shares purchased under the ESPP program for years ended December 29, 2001, December 30, 2000 and January 1, 2000 reported below

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions assuming a dividend yield of zero for all periods:



	Stock Options

	2001		2000		1999

Risk-free interest rate		4.53%		5.07%		5.90%
Volatility factors of the expected market price of Cadence’s common stock		62%		59%		62%
Weighted average expected life of an option		5 Years		5 Years		5 Years



	Employee Stock Purchase Plan

	2001		2000		1999

Risk-free interest rate, based on weighted average		5.60%		6.03%		4.95%
Volatility factors of the expected market price of Cadence’s common stock		62%		59%		62%
Weighted average expected life of ESPP shares		0.5 Years		0.5 Years		0.5 Years

For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options’ vesting period. Cadence applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its plans. Had Cadence’s stock option and employee stock purchase plans been accounted for under SFAS No. 123, net income (loss) and net income (loss) per share would have been adjusted to the following pro forma amounts:


		2001		2000			1999


		(In thousands, except per share
		amounts)
Net income (loss):
	As reported	$	141,287	$	49,977		$	(14,075	)

	Pro forma	$	10,756	$	(65,296	)	$	(127,954	)

Basic net income (loss) per share:
	As reported	$	0.57	$	0.20		$	(0.06	)

	Pro forma	$	0.04	$	(0.27	)	$	(0.53	)

Diluted net income (loss) per share:
	As reported	$	0.55	$	0.19		$	(0.06	)

	Pro forma	$	0.04	$	(0.27	)	$	(0.53	)

The effects of applying SFAS No. 123 on pro forma disclosures of net income (loss) and net income (loss) per share for 2001, 2000 and 1999 are not likely to be representative of the pro forma effects on net income (loss) and net income (loss) per share in future years.


	Warrants

In connection with the purchase of the business and certain assets of Comdisco Systems, Inc., or Comdisco, a subsidiary of Comdisco, Inc., in June 1993, Cadence issued a warrant to purchase 5,850,000 shares of Cadence’s stock at $3.23 per share. Pursuant to the original terms of the warrant agreement, during 1996 and 1995, Cadence repurchased portions of the warrant applicable to 300,000 and 5,310,000 shares, respectively, for approximately $4.3 million and $17.2 million, respectively. In 1998,

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

Comdisco exercised 100,000 warrants. The warrant for the remaining 140,000 shares expires in June 2003 and can be exercised at any time in increments of not less than 50,000 shares. The warrant was valued at the time of issuance at approximately $1.8 million and was included as part of the total purchase price of the assets from Comdisco.


	Reserved for Future Issuance

At December 29, 2001, Cadence had reserved the following shares of authorized but unissued common stock for future issuance:


		Shares

Employee stock option plans			82,233,542
ESPPs			4,967,637
Put warrants			2,897,500
Directors stock option plans			1,727,170
Warrants			140,000
Other option agreements			7,500

	Total		91,222,877


	Stockholder Rights Plan

In February 1996, Cadence adopted a new stockholder rights plan to protect its stockholders’ rights in the event of a proposed or actual acquisition of 15% or more of the outstanding shares of Cadence common stock. As amended in February 2000, each share of Cadence common stock carries a right to purchase one one-thousandth ( 1/1000) of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, of Cadence at a price of $240.00 per one one-thousandth of a share, subject to adjustment. The rights are subject to redemption at the option of the Board of Directors at a price of $0.01 per right until the occurrence of certain events. The rights expire on February 20, 2006.

Deferred Stock Compensation

Cadence records deferred stock compensation resulting from Tality option grants for Tality stock, sales of Tality restricted stock, and Cadence’s acquisitions of CadMOS and SPC. Deferred stock compensation from Tality option grants and restricted stock sales represents the difference between the exercise price of stock option grants to Tality employees and directors, and restricted stock sales to certain Cadence executives and employees, and the deemed fair market value of Tality’s common stock at the time of those grants and sales. Deferred stock compensation from the CadMOS and SPC acquisitions represents the difference between the exercise price of stock option grants to employees and the fair market value of Cadence’s common stock at the time of acquisition. Cadence is amortizing the deferred stock compensation to expense over the period during which the stock options and restricted stock vest. In the third quarter of 2001, Cadence reacquired 1,740,000 restricted Tality shares from certain Cadence executives and employees who then repaid their related notes payable to Cadence. Tality repurchased 220,000 restricted shares from three of its directors.

In connection with the acquisition of CadMOS, Cadence assumed options exercisable for 33,043 shares of Cadence common stock granted in exchange for services at a range of exercise prices between $0.29 and $1.34 per share. The options vest over a five year period. Cadence has valued the estimated fair value of the options during 2001 as they vest using the Black-Scholes model. In 2001, the estimated fair value of the options vested was determined to be approximately $0.57 million and was recorded as Amortization of Deferred Stock Compensation in the accompanying Consolidated Statements of Operations.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

For the years ended December 29, 2001 and December 30, 2000, Cadence recorded a total of $40.4 million and $72.4 million of deferred stock compensation, respectively. Of the $40.4 million, $27.4 million is related to the acquisition of SPC, $10.0 million related to the acquisition of CadMOS, and $3.0 million related to Tality stock option grants. Of the $72.4 million, $64.1 million is related to the stock option grants and $8.3 million related to the restricted stock sales in 2000. Cadence is amortizing deferred stock compensation to expense over the period during which the stock options and restricted stock vest. For the year ended December 29, 2001, Cadence reversed deferred stock compensation of $27.8 million related to the cancellation of options.

Other Comprehensive Income

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



		2001									2000								1999


											(In thousands)
								Net-of-								Net-of-								Net-of-
		Pre-Tax			Tax			Tax			Pre-Tax			Tax		Tax			Pre-Tax			Tax		Tax
		Amount			Expense			Amount			Amount			Expense		Amount			Amount			Expense		Amount

Other comprehensive income (loss):
	Unrealized holding gains (losses) on marketable securities	$	49,442		$	(20,499	)	$	28,943			(34,567	)	$	—	$	(34,567	)	$	36,249		$	—	$	36,249
	Foreign currency translation loss		(943	)		—			(943	)		(4,743	)		—		(4,743	)		(2,506	)		—		(2,506	)

		$	48,499		$	(20,499	)	$	28,000		$	(53,483	)	$	—	$	(39,310	)	$	33,743		$	—	$	33,743

INCOME TAXES

The provision for income taxes consisted of the following components:


				2001			2000			1999


				(In thousands)
Current:
	Federal			$	73,799		$	39,678		$	16,391
	State				21,472			6,369			1,771
	Foreign				18,777			716			10,376

		Total current			114,048			46,763			28,538

Deferred (prepaid):
	Federal				(2,614	)		(24,009	)		(22,074	)
	State				(1,472	)		(3,486	)		(5,486	)
	Foreign				(9,101	)		(1,249	)		1,717

		Total deferred (prepaid)			(13,187	)		(28,744	)		(25,843	)

			Total provision for income taxes	$	100,861		$	18,019		$	2,695

Income (loss) before income taxes included income of approximately $139.2 million for 2001, $43.2 million for 2000 and $11.5 million for 1999, from Cadence’s foreign subsidiaries.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

The provision for income taxes differs from the amount estimated by applying the statutory federal income tax rate to income (loss) before income taxes as follows:


		2001			2000			1999


		(In thousands)
Provision (benefit) computed at federal statutory rate		$	84,752		$	23,799		$	(3,983	)
State income tax, net of federal tax effect			13,000			6,369			(539	)
Separation costs			—			2,451			—
Amortization of acquired intangibles			3,455			1,489			(11,429	)
Acquisition costs			—			—			2,952
Write-off of in-process technology			7,595			—			7,245
Research and development tax credit			—			—			(5,219	)
Foreign income tax at a higher (lower) rate			(13,005	)		(1,609	)		3,014
Change in valuation allowance			3,224			(15,173	)		11,429
Other			1,840			693			(775	)

	Provision for income taxes	$	100,861		$	18,019		$	2,695

Effective tax rate			41.7	%		26.5	%		(23.7	)%

The components of deferred tax assets and liabilities consisted of the following:


				2001			2000


				(In thousands)
Deferred Tax Assets:
	Intangibles			$	64,007		$	71,726
	Accruals and reserves				28,943			34,545
	Sales returns and allowance				22,283			30,957
	Tax credits				39,503			28,452
	Accrued intercompany royalty				20,769			24,546
	Stock compensation				9,156			5,932
	Net operating losses				17,707			10,617
	Compensation expense				11,248			9,048
	Depreciation and amortization				5,024			—
	Other				6,628			4,371

		Total deferred tax assets			225,268			220,194
	Valuation allowance — provision for income taxes				(9,156	)		(5,932	)
	Valuation allowance — equity and intangibles				(39,043	)		(16,949	)

		Net deferred tax assets			177,069			197,313

Deferred Tax Liabilities:
	Intangibles				(70,981	)		(89,743	)
	Unrealized gains on investments				(20,499	)
	Depreciation and amortization				—			(8,927	)
	Capitalized software				(7,025	)		(6,560	)
	Other				(12,170	)		(9,380	)

		Total deferred tax liabilities			(110,675	)		(114,610	)

			Total net deferred tax assets	$	66,394		$	82,703

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

Cadence provides for U.S. income taxes on the earnings of foreign subsidiaries unless they are considered permanently invested outside of the United States. At December 29, 2001, the cumulative amount of earnings upon which U.S. income taxes have not been provided are approximately $501.0 million. At December 29, 2001, the unrecognized deferred tax liability for these earnings was approximately $84.7 million.

The net valuation allowance increased by $25.3 million in 2001. The valuation allowance for provision for income taxes increased by $3.2 million due to the benefit of the amortization of stock compensation which will only be realized if the fair market value of the Cadence common stock on the date of exercise is greater than the exercise price of the Cadence stock option. The valuation allowance for equity and intangibles increased by $22.0 million in 2001. The valuation allowance for equity and intangibles is due to the uncertainty of domestic entities generating sufficient taxable income, including the deduction for stock options to realize certain domestic deferred tax assets. This portion of the valuation allowance, identified in the above table as “valuation allowance — equity and intangibles”, if realizable, may reduce other intangibles or increase equity and may not be available to offset future provision for income taxes.

Cadence has net operating loss carryforwards totaling $49.6 million for 2001, $28.9 million for 2000 and $28.3 million for 1999, and tax credit carryforwards of $39.5 million for 2001 and $28.2 million for 2000. The remaining net operating loss carryforwards will expire at various dates from 2002 through 2021 and tax credit carryforwards will expire at various dates from 2002 through 2016.

EMPLOYEE BENEFIT PLANS

Cadence maintains a 401(k) savings plan to provide retirement benefits through tax deferred salary deductions for all of its U.S. employees. Cadence may make discretionary contributions, as determined by the Board of Directors, which cannot exceed a specified percentage of the annual aggregate salaries of those employees eligible to participate. Cadence made total contributions to the plan of $10.5 million for 2001, $9.3 million for 2000 and $3.9 million for 1999.

Since 1996, Cadence has made venture capital investments through Telos LP, a venture capital firm independently managed by Telos LLC. Cadence and the Cadence 1996 Deferred Compensation Venture Investment Plan, or the 1996 Plan, are the sole limited partners of Telos LP. The total capital commitment by Cadence to Telos LP is $100 million, of which Cadence had contributed $76.4 million as of December 29, 2001. Under the 1996 Plan, Cadence directors can defer some or all of their compensation, and certain executives can defer payment of a portion of their compensation to be to be invested in Telos LP.

MINORITY INTEREST

In connection with the termination of the Tality IPO, Cadence and Tality redeemed the minority interest in Tality. As of December 29, 2001, Cadence and Tality had repurchased all the minority interest shares outstanding.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

STATEMENT OF CASH FLOWS

The supplemental cash-flow information for 2001, 2000 and 1999:


		2001		2000			1999


		(In thousands)
Cash Paid During the Year for:
	Interest	$	2,344	$	2,476		$	2,975

	Income taxes (including foreign withholding tax)	$	18,267	$	14,825		$	25,330

Non-Cash Investing and Financing Activities:
	Capital lease obligations incurred for equipment	$	179	$	1,015		$	7,727

	Common and treasury stock issued for acquisitions	$	259,222	$	5,333		$	21,201

	Transfer on Non-Qualified Deferred Compensation investment to Cadence	$	3,908	$	—		$	—

	Notes receivables on employee investments in subsidiary	$	—	$	10,759		$	—

	Transfer of inventory to fixed assets	$	—	$	5,462		$	—

	Equity investment by transfer of equipment or software	$	—	$	8,140		$	—

	Unrealized gain (loss) on available-for-sale securities	$	28,943	$	(34,567	)	$	36,249

	Deferred stock compensation of stock options and restricted stock	$	12,589	$	72,369		$	—

	Reversal of deferred stock compensation for forfeitures	$	27,793	$	—		$	—

RESTRUCTURING, ASSET IMPAIRMENT AND UNUSUAL ITEMS

Described below are unusual items and restructuring charges in 2001, 2000 and 1999:


		2001			2000		1999


		(In thousands)
Avant! criminal restitution, net of related costs			(194,558	)		—		—
Tality IPO-related expense and separation costs			4,756			6,821		—
Write-off of acquired in-process technology			21,700			—		20,700
Acquired intangibles write-off			25,834			—		19,891
Restructuring charges and asset impairments			61,619			—		13,274
Merger costs			—			—		8,436
Litigation settlement			—			—		(3,000	)

	Total restructuring, asset impairment and unusual items	$	(80,649	)	$	6,821	$	59,301


	Avant! Criminal Restitution

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

received. This amount is recorded in restructuring, asset impairment and unusual items in Cadence’s Consolidated Statements of Operations.


	Tality IPO-Related Expense and Separation Costs

In the year ended December 29, 2001, Cadence recorded $4.8 million in separation costs. Of the $4.8 million, $2.8 million related to the postponement of the Tality IPO and $2.0 million related to Tality separation costs, primarily information systems separation and legal, accounting and consulting fees.


	In-Process Technology

Described below are the write-offs of acquired in-process technology charges in 2001 and 1999. There were no write-offs of acquired in-process technology in 2000.


		2001		1999


		(In thousands)
CadMOS		$	12,100	$	—
SPC			8,600		—
Other			1,000		—
OrCAD			—		11,800
DAI			—		8,900

	Total in process technology	$	21,700	$	20,700

In the three months ended June 30, 2001, Cadence acquired substantially all of the assets of two companies for a preliminary aggregate price of $10.5 million, of which $4.4 million was cash and $6.1 million was shares of Cadence stock, plus future contingent payments. Each acquisition was accounted for as a purchase. Upon consummation of the acquisitions, Cadence immediately charged to expense $1.0 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use.

Acquired in-process technology charges represent in-process technology that had not reached technological feasibility and had no probable alternative future use. See “Acquisitions.”


	Acquired Intangibles Write-Off

In reaction to the current decline in business conditions in the United States generally and the wireless communications industry in particular, Cadence restructured certain of its businesses and realigned resources to focus on profit contribution, high-growth markets and core opportunities. As a result, Cadence recorded a charge of $25.8 million in 2001 related to the impairment of goodwill and acquired intangibles associated with the acquisition of Diablo (a part of Tality). Key factors in this write-off were significant downsizing or reassignment of personnel directly related to these assets and abandonment of most of Diablo’s line of business. The charge was determined as the amount by which the carrying value of the intangible assets associated with Diablo’s acquisition exceeded the fair value of those assets.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001


	Restructuring Charges and Asset Impairments

In 2001, Cadence announced a worldwide restructuring and asset impairment plan targeted at reducing workforce and consolidating facilities and assets. The restructuring plan was initiated primarily due to the severe downturn in the economic environment in the United States, particularly in the electronics industry. Cadence’s restructuring was primarily aimed at reducing excess personnel and capacity costs within its Tality subsidiary, dedicating Cadence’s resources to growth areas, and focusing on profit contribution. Cadence recorded $61.6 million of restructuring charges associated with the worldwide restructuring plan. Cadence’s restructuring plan and associated costs consisted of $20.8 million for reduction in personnel, $22.7 million to downsize and close excess facilities and $16.6 million of asset impairment charges related to certain long-lived assets. Management estimates that the restructuring will result in annualized cost reductions of approximately $70.4 million in employee salary and benefit costs and $47.6 million in facility costs.

Facilities consolidation charges of $22.7 million were incurred in connection with the downsizing and closing of 16 sites. Closure and downsizing costs included payments required under lease contracts, less any applicable estimated sublease income after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements and costs to maintain facilities during the period after abandonment. To determine the lease loss, which is the loss after Cadence’s cost recovery efforts from subleasing a building, certain assumptions were made related to the: (1) time period over which the relevant building would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. The lease loss is an estimate under Statement of Financial Accounting Standards No. 5 Accounting for Contingencies and represents the low end of the range, as required by this statement, $13.1 million, which will be adjusted in the future upon triggering events (e.g., change in estimate of time to sublease, actual sublease rates, etc.). Cadence has estimated that the high end of the lease loss could be $52.8 million if facilities operating lease rental rates continue to decrease in the applicable markets or if it takes longer than expected to find a suitable tenant to sublease the facility. As of December 29, 2001, six sites had been vacated and eight sites had been downsized.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

Facilities consolidation charges of $2.0 million were incurred in connection with the closure of 15 Quickturn facilities, including $1.0 million to close duplicate and excess facilities and $1.0 million of abandonment costs for the related leasehold improvements. Closure and exit costs include payments required under lease contracts, less any applicable sublease income after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements, and costs to maintain facilities during the period after abandonment. Asset-related write-offs consist of leasehold improvements of facilities that were abandoned and whose estimated fair market value is zero. As of December 29, 2001, 14 of the 15 Quickturn sites had been vacated. Noncancelable lease payments on vacated facilities will be paid through 2003.

Liabilities for excess facilities and other restructuring charges are included in accrued and other long-term liabilities, while severance and benefits liabilities are included in payroll and payroll-related accruals. The following table summarizes Cadence’s restructuring activity during fiscal years 2001, 2000 and 1999:


		Severance
		And			Excess			Other
		Benefits			Facilities			Restructuring			Assets			Total


		(In thousands)
Balance, January 2, 1999.			13,115			14,496			2,213			11,304			41,128
	1999 restructuring charges		11,271			978			—			1,025			13,274
	Reclassifications		(515	)		179			501			(165	)		—
	Non-cash utilization		(356	)		(813	)		(241	)		(4,543	)		(5,953	)
	Cash payments		(15,502	)		(8,376	)		(2,047	)		(1,760	)		(27,685	)

Balance, January 1, 2000.			8,013			6,464			426			5,861			20,764
	Reclassifications		—			(1,061	)		1,822			(761	)		—
	Non-cash utilization		(242	)		(73	)		(744	)		(4,716	)		(5,775	)
	Cash payments		(5,452	)		(392	)		(1,504	)		(104	)		(7,452	)

Balance, December 30, 2000.			2,319			4,938			—			280			7,537
	Reclassifications		—			525			—			—			525
	2001 restructuring charges		20,832			22,671			—			18,116			61,619
	Non-cash charges		(9	)		(2,587	)		—			(13,960	)		(16,556	)
	Cash charges		(19,774	)		(7,499	)		—			(2,369	)		(29,642	)

Balance, December 29, 2001		$	4,183		$	17,233		$	—		$	2,067		$	23,483

In 2001, approximately $3.7 million of the restructuring reserve balance at December 30, 2000 was offset to the 2001 restructuring plan.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001


	Merger Costs

In connection with the Quickturn acquisition in 1999, Cadence charged to expense merger costs of $8.4 million representing professional fees for financial advisors, attorneys and accountants.

OTHER INCOME, NET

Other income, net components for 2001, 2000 and 1999 follows:


		2001			2000			1999


		(In thousands)
Interest income		$	6,517			4,559		$	5,406
Minority interest income (expense)			1,959			638			125
Gain (loss) on foreign exchange			555			5,069			(600	)
Equity income (loss) from investments			187			1,128			124
Interest expense			(2,632	)		(2,398	)		(3,296	)
Other expense, net			(4,889	)		(4,415	)		(389	)

	Total other income, net	$	1,697		$	4,581		$	1,370

SEGMENT REPORTING

Cadence’s chief operating decision-making group is its Executive Staff, which includes Cadence’s President and Chief Executive Officer and Cadence’s other senior management. Cadence’s Executive Staff reviews the Cadence consolidated results within three segments: Product, Services and Maintenance, and also reviews Tality’s results separately as a stand-alone entity.

The Product segment includes revenue and associated costs to design and license to customers a variety of electronic design automation products. The Services segment includes revenue and associated costs to offer methodology and design services either to assist companies in developing electronic designs or to assume responsibility for the design effort when customers wish to outsource this work. The Maintenance segment includes revenue and associated costs primarily for a technical support organization, and maintenance agreements are offered to customers either as part of Cadence’s product license agreements or separately. Within the Cadence consolidated results, Tality revenue is included in the Services segment, associated Tality cost of goods sold is reflected in each of the three segments, consistent with the benefit derived by the respective segments from those services, and Tality operating expenses are included in the other items.

Segment income from operations is defined as gross margin under generally accepted accounting principles and excludes amortization of acquired intangibles, inventory write-down and other, operating expenses (marketing and sales, research and development and general and administrative), unusual items, other income, net, and income taxes. Profitability information about Cadence’s segments is available only to the extent of gross margin by segment, and operating expenses and other income and expense items are managed on a functional basis. There are no differences between the accounting policies used to measure profit and loss for segments and those used on a consolidated basis. Revenue is defined as revenue from external customers with no inter-segment revenue. Tality revenue includes inter-company revenue of $9.3 million for the year ended 2001. There was no inter-company revenue in 2000 or 1999.

Cadence’s management does not identify or allocate its assets, including capital expenditures, by operating segment. Accordingly, assets are not being reported by segment because the information is not available by segment and is not reviewed by Cadence’s Executive Staff to make decisions about resources to be allocated among the segments or to assess their performance. Depreciation and amortization of purchased software is allocated among the segments in order to determine each segment’s gross margin.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

The following tables present information about reported segments for the years ended December 29, 2001, December 30, 2000 and January 1, 2000:


												Consolidated
			Product		Services		Maintenance		Other			Total			Tality


			(In thousands)
2001:
	Revenue		$	830,490	$	263,355	$	336,595	$	—		$	1,430,440		$	157,867
	Cost of revenue			98,177		191,384		65,299		—			354,860			121,809
	Amortization of acquired intangibles			—		—		—		92,330			92,330			—

		Gross margin		732,313		71,971		271,296		(92,330	)		983,250			36,058
	Marketing and sales			—		—		—		(393,614	)		(393,614	)		(25,384	)
	Research and development			—		—		—		(297,329	)		(297,329	)		(22,917	)
	General and administrative			—		—		—		(114,594	)		(114,594	)		(41,064	)
	Amortization of acquired intangibles			—		—		—		—			—			(12,101	)
	Amortization of deferred stock compensation			—		—		—		(17,911	)		(17,911	)		(9,780	)
	Restructuring, asset impairment and unusual items			—		—		—		80,649			80,649			(64,175	)
	Other income (expenses), net			—		—		—		1,697			1,697			(1,351	)

Income (loss) before
	provision (benefit) for income taxes		$	732,313	$	71,971	$	271,296	$	(833,432	)	$	242,148		$	(140,714	)

	Depreciation and amortization		$	114,448	$	26,252	$	2,524	$	87,211		$	230,434		$	27,085


2000:
	Revenue		$	627,429	$	335,967	$	316,154	$	—		$	1,279,550		$	198,423
	Cost of revenue			89,937		215,605		63,315		—			368,857			152,369
	Amortization of acquired intangibles			—		—		—		80,503			80,503			—

		Gross margin		537,492		120,362		252,839		(80,503	)		830,190			46,054
	Marketing and sales			—		—		—		(390,139	)		(390,139	)		(35,661	)
	Research and development			—		—		—		(263,947	)		(263,947	)		(11,895	)
	General and administrative			—		—		—		(94,478	)		(94,478	)		(38,171	)
	Amortization of acquired intangibles			—		—		—		—			—			(16,257	)
	Amortization of deferred stock compensation			—		—		—		(11,390	)		(11,390	)		(7,258	)
	Unusual items			—		—		—		(6,821	)		(6,821	)		(4,877	)
	Other income, net			—		—		—		4,581			4,581			802

	Income (loss) before provision (benefit) for income taxes		$	537,492	$	120,362	$	252,839	$	(842,697	)	$	67,996		$	(67,263	)

	Depreciation and amortization		$	99,203	$	30,062	$	2,463	$	75,082		$	206,810		$	30,063

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001


												Consolidated
			Product		Services		Maintenance		Other			Total			Tality


			(In thousands)
1999:
	Revenue		$	505,459	$	294,916	$	292,928	$	—		$	1,093,303		$	128,873
	Cost of revenue			79,504		191,760		53,579		—			324,843			113,141
	Amortization of acquired intangibles			—		—		—		61,788			61,788			—

		Gross margin		425,955		103,156		239,349		(61,788	)		706,672			15,732
	Marketing and sales			—		—		—		(354,205	)		(354,205	)		(32,799	)
	Research and development			—		—		—		(219,181	)		(219,181	)		(9,588	)
	General and administrative			—		—		—		(86,735	)		(86,735	)		(28,546	)
	Amortization of acquired intangibles			—		—		—		—			—			(7,114	)
	Amortization of deferred stock compensation			—		—		—		—			—			—
	Unusual items			—		—		—		(59,301	)		(59,301	)		—
	Other income, net			—		—		—		1,370			1,370			33

	Income (loss) before provision (benefit) for income taxes		$	425,955	$	103,156	$	239,349	$	(779,840	)	$	(11,380	)	$	(62,282	)

	Depreciation and amortization		$	85,843	$	20,289	$	2,192	$	55,572		$	163,896		$	21,866

Internationally, excluding Japan, Cadence markets and supports its products and services primarily through its subsidiaries and various distributors. Cadence licenses its products in Japan through Innotech Corporation, in which Cadence is an approximately 15% stockholder. Cadence markets its methodology services in Japan through a wholly-owned subsidiary.

Revenues are attributed to geographic areas based on the country in which the customer is domiciled. In 2001, 2000 and 1999, no one customer accounted for more than 10% of total revenues. Long-lived assets are attributed to geographic areas based on the country where the assets are located.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 29, 2001

The following table presents a summary of revenues and long-lived assets by geographic region for years ended December 29, 2001, December 30, 2000 and January 1, 2000:



				2001				2000				1999


				(In thousands)
						Long-Lived				Long-Lived				Long-Lived
				Revenues		Assets		Revenues		Assets		Revenues		Assets

North America:
	United States			$	785,386	$	365,742	$	720,802	$	316,091	$	526,824	$	273,542
	Other				35,624		2,291		33,878		3,344		25,853		3,843

		Total North America		$	821,010	$	368,033	$	754,680	$	319,435	$	552,677	$	277,385

Europe:
	United Kingdom			$	79,862	$	33,991	$	99,154	$	35,729	$	94,037	$	37,250
	Germany				76,525		1,261		55,092		925		38,839		860
	Other				177,234		4,357		112,421		2,847		122,736		3,231

		Total Europe		$	333,621	$	39,609	$	266,667	$	39,501	$	255,612	$	41,341

Japan and Asia:
	Japan			$	181,263	$	3,001	$	195,793	$	4,702	$	223,425	$	5,079
	Asia				94,546		6,546		62,410		5,241		61,589		6,604

		Total Japan and Asia			275,809		9,547		258,203		9,943		285,014		11,683

			Total	$	1,430,440	$	417,189	$	1,279,550	$	368,879	$	1,093,303	$	330,409

SUBSEQUENT EVENT

In early 1999, Cadence entered into negotiations with Intelect Communications, Inc. (since renamed TeraForce Technology Corporation), and Intelect’s wholly-owned subsidiary, DNA Enterprises, Inc., with respect to a potential purchase of substantially all the assets of DNA. The transaction was not consummated and, in July 1999, Intelect and DNA filed suit against Cadence in a Texas state court alleging breach of contract, fraud, negligent misrepresentation and breach of fiduciary duty, seeking unspecified compensatory and punitive damages. Cadence has answered, denying liability. In January 2002 the court denied Cadence’s motion for Partial Summary Judgment and set a trial date for March 2002.

CADENCE DESIGN SYSTEMS, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(In thousands)

Schedule II



			Addition

	Balance at		Charged to		Charged					Balance at
	Beginning		Costs and		to Other					End of
Description	of Period		Expenses		Accounts(1)		Deductions(2)			Period

Deducted from asset accounts:
Provisions for losses on trade accounts receivable and sales returns:
Year Ended December 29, 2001	$	52,677	$	13,809	$	32,000	$	(51,564	)	$	46,922	*
Year Ended December 30, 2000	$	58,490	$	2,306	$	16,007	$	(24,126	)	$	52,677
Year Ended January 1, 2000	$	41,034	$	9,070	$	41,295	$	(32,909	)	$	58,490

(1) Sales returns allowance, offset against revenue.

(2) Uncollectible accounts written-off, net of recoveries, and sales returns.

* Includes $3.3 million in Long-Term Installment Contract Receivables.

SIGNATURES

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

CADENCE DESIGN SYSTEMS, INC.

/s/ H. RAYMOND BINGHAM

H. Raymond Bingham

President and Chief Executive Officer

Dated: March 11, 2002

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


NAME/TITLE		DATE


/s/ H. RAYMOND BINGHAM H. Raymond Bingham President, Chief Executive Officer and Director (Principal Executive Officer)		March 11, 2002

/s/ WILLIAM PORTER William Porter Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)		March 11, 2002

ADDITIONAL DIRECTORS
/s/ DONALD L. LUCAS Donald L. Lucas		March 11, 2002

/s/ SUSAN L. BOSTROM Susan L. Bostrom		March 11, 2002

/s/ DR. LEONARD Y. W. LIU Dr. Leonard Y. W. Liu		March 11, 2002

/s/ DR. ALBERTO SANGIOVANNI-VINCENTELLI Dr. Alberto Sangiovanni-Vincentelli		March 11, 2002

/s/ GEORGE M. SCALISE George M. Scalise		March 11, 2002

/s/ DR. JOHN B. SHOVEN Dr. John B. Shoven		March 11, 2002

/s/ ROGER SIBONI Roger Siboni		March 11, 2002

EXHIBIT INDEX




Exhibit
Number		Exhibit Title


	2.02	Master Separation Agreement, dated as of July 14, 2000 by and among the Registrant, Cadence Holdings, Inc. and Tality Corporation (Incorporated by reference to Exhibit 2.01 to the Registrant’s Form 10-Q for the quarter ended July 1, 2000 (the “2000 Second Quarter Form 10-Q”)).

	2.03	Amended and Restated Agreement of Limited Partnership of Tality, LP, dated as of October 4, 2000 between Tality Corporation and Cadence Holdings, Inc (Incorporated by reference to Exhibit 2.01 to the Registrant’s Form 10-Q for the quarter ended September 30, 2000 (the “2000 Third Quarter Form 10-Q”)).

	2.04	Amended and Restated Master Separation Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality LP (Incorporated by reference to Exhibit 2.02 to the 2000 Third Quarter Form 10-Q).

	2.05	General Assignment and Assumption Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.03 to the 2000 Third Quarter Form 10-Q).

	2.06	Master Intellectual Property Ownership and License Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.04 to the 2000 Third Quarter Form 10-Q).

	2.07	Employee Matters Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.05 to the 2000 Third Quarter Form 10-Q).

	2.08	Master Corporate Services Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.06 to the 2000 Third Quarter Form 10-Q).

	2.09	Real Estate Matters Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.07 to the 2000 Third Quarter Form 10-Q).

	2.10	Master Confidentiality Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.08 to the 2000 Third Quarter Form 10-Q).

	2.11	Indemnification and Insurance Matters Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.09 to the 2000 Third Quarter Form 10-Q).

	2.12	Asset Purchase Agreement, dated as of October 4, 2000 by and among the Registrant, Cadence Design System (Canada) Limited and Tality Canada Corporation (Incorporated by reference to Exhibit 2.10 to the 2000 Third Quarter Form 10-Q).

	2.13	Asset Purchase Agreement, dated as of October 3, 2000 by and among Symbionics Limited, the Registrant and Cadence Design Systems Limited (Incorporated by reference to Exhibit 2.11 to the 2000 Third Quarter Form 10-Q).

	2.14	Fixed Term License Agreement, dated as of October 4, 2000 between the Registrant and Tality, LP (Incorporated by reference to Exhibit 2.12 to the 2000 Third Quarter Form 10-Q).




Exhibit
Number		Exhibit Title


	2.15	Joint Technology Development and Support Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.13 to the 2000 Third Quarter Form 10-Q).

	2.16	Joint Sales Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.14 to the 2000 Third Quarter Form 10-Q).

	2.17	General Assignment and Assumption Agreement, dated as of June 2, 2001 between Tality Corporation and Tality, LP. (Incorporated by reference to Exhibit 2.17 to the Registrant’s Form 10-Q for the quarter ended June 30, 2001 (the “2001 Second Quarter Form 10-Q”)).

	2.18	Master Amendment and Consent, effective as of June 2, 2001 by and among the Registrant, Tality Corporation, Tality Transition Corporation, Tality, LP and Cadence Holdings, Inc. (Incorporated by reference to Exhibit 2.18 to the 2001 Second Quarter Form 10-Q).

	2.19	Form of offer to exchange outstanding Tality options for Cadence options, together with Form of Letter to Option Holders including summary of terms and election form, dated as of November 26, 2001.

	3.01	(a) The Registrant’s Certificate of Ownership and Merger as filed with the Secretary of State of the State of Delaware on June 1, 1988 (Incorporated by reference to Exhibit 3.02(c) to the Registrant’s Form S-1 Registration Statement (No. 33-23107) filed on July 18, 1988 (the “1988 Form S-1”)).

		(b) The Registrant’s Certificate of Designation of Series A Junior Participating Preferred Stock, as amended on February 1, 2000, as filed with the Secretary of State of the State of Delaware on June 8, 1989 (Incorporated by reference to Exhibit 3A to the Registrant’s Current Report on Form 8-K (No. 0-15867) filed on June 12, 1989 (the “1989 Form 8-K”) and amended by Exhibit 4.01 to this Form 10-K).

		(c) The Registrant’s Certificate of Designation of Series A Convertible Preferred Stock as filed with the Secretary of State of the State of Delaware on December 30, 1991 (Incorporated by reference to Exhibit 3.01(f) to the Registrant’s Form 10-K for the year ended December 31, 1991).

		(d) The Registrant’s Certificate of Amendment of Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on May 13, 1998 (Incorporated by reference to Exhibit 3.01(i) to the Registrant’s Form 10-Q for the quarter ended July 4, 1998 (the “1998 Second Quarter Form 10-Q”)).

		(e) The Registrant’s Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on May 13, 1998 (Incorporated by reference to Exhibit 3.01(j) to the 1998 Second Quarter Form 10-Q).

	3.02	The Registrant’s Amended and Restated Bylaws, as currently in effect (Incorporated by reference to Exhibit 3.01 to the Registrant’s Form 10-Q for the quarter ended April 3, 1999).

	4.01	Specimen Certificate of the Registrant’s Common Stock (Incorporated by reference to Exhibit 4.01 to the Registrant’s Form S-4 Registration Statement (No. 33-43400) filed October 17, 1991).




Exhibit
Number		Exhibit Title


	4.02	Amended and Restated Rights Agreement, dated as of February 1, 2000 between the Registrant and ChaseMellon Shareholder Services, L.L.C., which includes as exhibits thereto the Certificate of Designation for the Series A Junior Participating Preferred Stock, the form of Rights Certificate, and the Summary of Rights to Purchase Preferred Shares. (Incorporated by reference to Exhibit 4.02 to the Registrant’s Form 10-K for the fiscal year ended January 1, 2000.)

	*10.01	The Registrant’s 1987 Stock Option Plan, as amended and restated, effective February 23, 1998 (Incorporated by reference to the Registrant’s Definitive Proxy Statement filed on March 31, 1998 (the “1998 Definitive Proxy Statement”)).

	*10.02	Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under the Registrant’s 1987 Stock Option Plan, as amended (Incorporated by reference to Exhibit 4.01 to the Registrant’s Form S-8 Registration Statement (No. 33-22652) filed on June 20, 1988).

	*10.03	The Registrant’s 1988 Directors Stock Option Plan, as amended, effective May 4, 1993, including the Stock Option Grant and Form of Stock Option Exercise Notice and Agreement (The first document is incorporated by reference to Exhibit 4.02 to the Registrant’s Form S-8 Registration Statement (No. 33-53913) filed on May 31, 1994 (the “1994 Form S-8”) and the latter two documents are incorporated by reference to Exhibits 10.08 to 10.10 to the 1988 Form S-1).

	*10.04	The Registrant’s 1993 Directors Stock Option Plan, effective July 22, 1993, including the Form of Stock Option Grant (Incorporated by reference to Exhibit 4.04 to the 1994 Form S-8).

	*10.05	The Registrant’s 1995 Directors Stock Option Plan, as amended, effective May 5, 1999, including the Form of Stock Option Grant (The first document is incorporated by reference to Exhibit 10.49 to the Registrant’s Form 10-Q for the quarter ended July 3, 1999 (the “1999 Second Quarter Form 10-Q”) and the latter is incorporated by reference to Exhibit 10.05 to the Registrant’s Form 10-K for the fiscal year ended December 30, 1995 (the “1995 Form 10-K”)).

	*10.06	The Registrant’s 1990 Employee Stock Purchase Plan, as amended and restated, effective May 5, 1999 (Incorporated by reference to Exhibit 10.50 to the 1999 Second Quarter Form 10-Q).

	*10.07	The Registrant’s Senior Executive Bonus Plan (previously the Chief Executive Officer Bonus Plan for 1996), as amended, effective January 1, 2001 (Incorporated by reference to the Registrant’s Definitive Proxy Statement filed on April 12, 2001).

	*10.08	The Registrant’s Deferred Compensation Plan for 1994, as amended and restated effective January 1, 2001.

	*10.09	The Registrant’s 1996 Deferred Compensation Venture Investment Plan, as amended and restated January 1, 2001.

	10.10	The 1993 Non-Statutory Stock Option Plan, as currently in effect, including amendment effective July, 1995.

	*10.11	The Registrant’s 401(k) Plan, as amended and restated, effective July 1, 1995 (Incorporated by reference to Exhibit 10.29 to the Registrant’s Form 10-Q for the quarter ended March 30, 1996 (the “1996 First Quarter Form 10-Q”)).




Exhibit
Number		Exhibit Title


	10.14	Distribution Agreement, dated as of April 28, 1997 by and among Cadence Design Systems (Ireland) Ltd., Cadence Design Systems K.K., and Cadence Design Systems (Japan) B.V. (Incorporated by reference to Exhibit 10.48 to the Registrant’s Form 10-Q for the quarter ended June 28, 1997).

	10.15	CCT 1993 Equity Incentive Plan, as amended and restated, effective August 16, 1995, Form of Equity Incentive Plan Stock Option Agreement, Form of Exercise of Equity Incentive Plan Stock Option and Form of Equity Incentive Plan Stock Option Exercise Agreement (Incorporated by reference to Exhibit 10.49 to the Registrant’s Form S-4 Registration Statement (No. 333-16779) filed on November 26, 1996).

	*10.18	Form of Executive Severance Agreement (Incorporated by reference to Exhibit 10.43 to the Registrant’s Form 10-K for the fiscal year ended January 3, 1998).

	10.19	Revolving Credit Agreement, dated as of September 29, 1998 between ABN-AMRO Bank and the Registrant (Incorporated by reference to Exhibit 10.45 to the Registrant’s Form 10-Q for the quarter ended October 3, 1998 (the “1998 Third Quarter Form 10-Q”)).

	10.20	First Amendment to the Revolving Credit Agreement, dated as of October 16, 1998 between ABN-AMRO Bank and the Registrant (Incorporated by reference to Exhibit 10.46 to the 1998 Third Quarter Form 10-Q).

	*10.22	Consulting Agreement, dated as of March 8, 1999 between the Registrant and George M. Scalise (Incorporated by reference to Exhibit 10.36 to the Registrant’s Form 10-K for the fiscal year ended January 1, 2000 (the “1999 Form 10-K”)).

	*10.26	Employment Agreement, dated as of September 16, 1999 between the Registrant and H. Raymond Bingham (Incorporated by reference to Exhibit 10.51 to the Registrant’s Form 10-Q for the quarter ended October 2, 1999 (the “1999 Third Quarter Form 10-Q”)).

	*10.27	Consulting Agreement, dated as of July 1999 between the Registrant and Alberto Sangiovanni-Vincentelli (Incorporated by reference to Exhibit 10.52 to the 1999 Third Quarter Form 10-Q).

	10.28	Design Acceleration, Inc. 1994 Stock Option Plan (Incorporated by reference to Exhibit 99 to the Registrant’s Form S-8 Registration Statement (No. 333-71717) filed on February 3, 1999).

	10.29	Quickturn Design Systems, Inc. 1988 Stock Option Plan, as amended, (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-69589) filed on June 7, 1999 (the “June 1999 Form S-8”)).

	10.30	Pi Design Systems, Inc. 1990 Stock Option Plan, as amended, (Incorporated by reference to Exhibit 99.2 to the June 1999 Form S-8).

	10.31	Quickturn Design Systems, Inc. 1992 Key Executive Stock Option Plan, as amended (Incorporated by reference to Exhibit 99.3 to the June 1999 Form S-8).

	10.32	Quickturn Design Systems, Inc. 1993 Employee Qualified Stock Purchase Plan, as amended, (Incorporated by reference to Exhibit 99.4 to the June 1999 Form S-8).

	10.33	Quickturn Design Systems, Inc. 1994 Outside Director Stock Option Plan (Incorporated by reference to Exhibit 99.7 to the June 1999 Form S-8).

	10.34	Quickturn Design Systems, Inc. 1996 Supplemental Stock Plan, as amended, (Incorporated by reference to Exhibit 99.5 to the June 1999 Form S-8).

	10.35	Quickturn Design Systems, Inc. 1997 Stock Option Plan, as amended, (Incorporated by reference to Exhibit 99.6 to the June 1999 Form S-8).




Exhibit
Number		Exhibit Title


	10.36	SpeedSim, Inc. 1995 Incentive and Nonqualified Stock Option Plan (Incorporated by reference to Exhibit 99.8 to the June 1999 Form S-8).

	10.37	OrCAD, Inc. 1991 Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-85591) filed on August 19, 1999 (the “August 1999 Form S-8”)).

	10.38	OrCAD, Inc. 1995 Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the August 1999 Form S-8).

	10.39	OrCAD, Inc. Amended 1995 Stock Incentive Plan (Incorporated by reference to Exhibit 99.3 to the August 1999 Form S-8).

	*10.40	Form of Executive Retention Agreement between the Registrant and Key Executives of the Registrant (Incorporated by reference to Exhibit 10.57 to the 1999 Form 10-K).

	10.41	Diablo Research Company LLC 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-93609) filed on December 24, 1999 (the “December 1999 Form S-8”)).

	10.42	Diablo Research Company LLC 1999 Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the December 1999 Form S-8).

	10.43	The Registrant’s 2000 Non-Statutory Equity Incentive Plan, as amended and restated November 1, 2001 (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No.333-69589) filed on November 14, 2001).

	*10.44	Form of Indemnity Agreement between the Registrant and its directors and executive officers (Incorporated by reference to Exhibit 10.01 to the 2000 Second Quarter Form 10-Q).

	10.45	Credit Agreement, dated as of September 29, 2000 by and among the Registrant and ABN AMRO Bank N.V., Bank One, N.A., KeyBank National Association and UBS AG, Stamford Branch (Incorporated by reference to Exhibit 10.01 to the 2000 Third Quarter Form 10-Q).

	10.46	Amended and Restated 364 Day Credit Agreement, dated September 28, 2001 by and among the Registrant., Fleet National Bank, KeyBank National Association, UBS AG, Stamford Branch and ABN AMRO Bank N.V. (Incorporated by reference to Exhibit 10.61 to the Registrant’s Form 10-Q for the quarter ended September 29, 2001 (the “2001 Third Quarter Form 10-Q”)).

	10.47	The Registrant’s 1997 Nonstatutory Stock Option Plan, as amended and restated, effective November 1, 2000 (Incorporated by reference to Exhibit 10.03 to the 2000 Third Quarter Form 10-Q).

	10.50	Tality Holdings, Inc. 2000 Equity Incentive Plan, effective July 26, 2001 (Incorporated by reference to Exhibit 10.50 to the 2001 Second Quarter Form 10-Q).

	10.51	Tality Holdings, Inc. 2000 Directors Stock Option Plan, effective July 26, 2001 (Incorporated by reference to Exhibit 10.51 to the 2001 Second Quarter Form 10-Q).

	10.52	Employment Agreement between Ronald R. Barris and the Registrant dated July 1, 2000 (Incorporated by reference to the Registrant’s Form 10-K for the fiscal year ended December 30, 2000 (the “2000 Form 10-K”)).

	*10.53	Description of the Registrant’s Stock Purchase Program (Incorporated by reference to Exhibit 10.53 to the Registrant’s Form 10-K for the fiscal year ended December 30, 2000 (the “2000 Form 10-K”)).




Exhibit
Number		Exhibit Title


	10.54	Form of Promissory Note and Pledge Agreement for employees of the Registrant delivered in connection with purchases of shares of Tality Corporation restricted Class A common stock (Incorporated by reference to Exhibit 10.54 to the 2000 Form 10-K).

	10.55	Form of Promissory Note of Ronald R. Barris to the Registrant dated September 18, 2000 (Incorporated by reference to Exhibit 10.56 to the 2000 Form 10-K).

	10.56	Form of Letter Agreement between the Registrant and certain holders of Tality Corporation Class A Common Stock and regarding the repurchase of Tality stock (Incorporated by reference to Exhibit 10.56 to the 2001 Second Quarter Form 10-Q).

	10.57	The Registrant’s 2001 Employee Stock Purchase Plan, effective July 13, 2001 (Incorporated by reference to Exhibit 10.57 to the 2001 Second Quarter Form 10-Q).

	10.58	The Registrant’s 2001 Non-Qualified Employee Stock Purchase Plan, effective July 13, 2001 (Incorporated by reference to Exhibit 10.58 to the Second Quarter 2001 10-Q).

	*10.59	Executive Separation, Release and Consulting Agreement, dated as of August 31, 2001 between the Registrant, Tality Corporation and Robert P. Wiederhold (Incorporated by reference to Exhibit 10.59 to the 2001 Third Quarter Form 10-Q).

	10.60	First Amendment to Credit Agreement, dated September 28, 2001, among the Registrant, Bank One, N.A., Key Bank National Association, UBS AG and ABN AMRO Bank N.V. (Incorporated by reference to Exhibit 10.60 to the 2001 Third Quarter Form 10-Q).

	10.61	CadMOS Design Technology, Inc. 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-56898) filed on March 12, 2001 (the “March 2001 S-8”)).

	10.62	CadMOS Design Technology, Inc. 2001 Supplemental Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the March 2001 S-8).

	10.63	DSM Technologies, Inc. 2000 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-82044) filed on February 4, 2002).

	10.64	Silicon Perspective Corporation 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-75874) filed on December 21, 2001).

	10.65	The Registrant’s SPC Plan, effective December 20, 2001.

	*10.66	Executive Separation, Release and Consulting Agreement, dated as of December 3, 2001, between the Registrant and Ronald R. Barris.

	21.01	Subsidiaries of the Registrant.

	23.01	Consent of Arthur Andersen LLP.

* Management contract or compensatory plan or arrangement covering executive officers or directors of the Registrant.

EXHIBIT 2.19

CADENCE DESIGN SYSTEMS, INC.

OFFER TO EXCHANGE OUTSTANDING TALITY OPTIONS
FOR CADENCE OPTIONS

THE OFFER EXPIRES AT 12:00 MIDNIGHT, CALIFORNIA, USA
TIME, ON DECEMBER 21, 2001, UNLESS THE OFFER IS EXTENDED.

Cadence Design Systems, Inc., which we refer to as "we," "the company" or "Cadence," is offering employees and directors of Tality, LP, Tality Holdings, Inc., Tality Corporation, Tality Canada Corporation, Tality UK, Ltd. and Tality India Services Private Limited the opportunity to exchange outstanding stock options of Tality Holdings, Inc. (the "Tality Options") for Cadence Options to purchase shares of our common stock (the "Cadence Options"). If you wish to accept this offer, you must elect to exchange all of your Tality Options. No partial elections to exchange will be accepted.

We are making this offer upon the terms and subject to the conditions described in this "Offer to Exchange," the related cover letter and attached "Summary of Terms" (which together, as they may be amended from time to time, constitute the "offer"). This offer is not conditioned upon a minimum number of option holders accepting the offer or a minimum number of options exchanged. This offer, however , is subject to conditions that we describe below in section 6 of this Offer to Exchange, which follows the Summary Term Sheet.

Who Can Participate in the Exchange? Any holder of Tality options who has received this offer package, provided such holder remains employed by Tality Holdings, Inc. or its affiliates through the expiration of this Offer to Exchange, may exchange all of his or her Tality option grants.

How Many Cadence Options Will I Receive? If you accept our offer, we will grant you Cadence options to purchase that number of shares of common stock which is equal to the number of shares of common stock subject to the Tality Options you elect to exchange and that we accept multiplied by the ratio of (i) $6.10 divided by (ii) the closing price of Cadence common stock on the New York Stock Exchange on December 21, 2001 multiplied by a factor. If you had unvested Cadence options at the time your Tality options were granted or have been granted Cadence options since receiving your Tality option grant, your factor is
1.0. If you did not have unvested Cadence options at the time your Tality options were granted or have not been granted Cadence options since receiving your Tality option grant, your factor is 1.5. For example, if you hold a Tality Option to purchase 1,000 shares and on December 21, 2001 the closing price of Cadence common stock is $25.00, and you hold unvested Cadence options (or have held unvested Cadence options on or since July 13, 2000), you will receive a Cadence Option to purchase 244 shares of Cadence common stock. If you do not hold unvested Cadence options (and have not held unvested Cadence options since July 13, 2000), you will receive a Cadence Option to purchase 366 (244 x 1.5) shares of Cadence common stock. The first part of the formula ensures that former Tality option holders hold equity with equivalent value before and after the exchange. The exact number of shares subject to the Tality Options that you have now is set forth in the enclosed Election Form. Review the Election Form now and contact

Elizabeth Villalobos, at the address and number below or your group Human Resources representative, if you have any questions.

What is the Exercise Price Per Share of the Cadence Options? If you exchange Tality options that were granted on or before April 15, 2001, each Cadence option you receive will have an exercise price equal to the product of 1.025 multiplied by the closing sale price of one share of Cadence common stock as reported by the New York Stock Exchange on the expiration date of the offer, which shall be December 21, 2001, unless the offer is extended resulting in a later expiration date. If you exchange Tality options that were granted after April 15, 2001, each Cadence option will have an exercise price equal to the closing sale price of one share of Cadence common stock as reported by the New York Stock Exchange on the expiration date of the offer, which shall be December 21, 2001, unless the offer is extended resulting in a later expiration date.

What is the Vesting Period and Term of the Cadence Options? Each new Cadence option granted in exchange for Tality options will be subject to 25% cliff vesting after one year from the date of grant of the original Tality Option, then vest ratably over the following thirty-six (36) months. Note that each Cadence Option will have the same vesting commencement date as the Tality Option it is replacing. Each Cadence Option will have a term that expires on the same ten year anniversary expiration date as the Tality Option it is replacing.

What does the Company Recommend that I Do? Although the Tality board of directors has approved Cadence making this offer, neither Tality nor its board of directors makes any recommendation as to whether you should elect to exchange or refrain from electing to exchange your options. You must make your own decision whether to elect to exchange options. Our board of directors recognizes that the decision to accept the offer is an individual one that should be based on a variety of factors and you should consult with your personal financial and tax advisors if you have questions about your financial or tax situation.

Shares of our common stock are quoted on the New York Stock Exchange under the symbol "CDN." On November 23, 2001, the closing price of the Cadence common stock on the New York Stock Exchange was $23.09 per share. We recommend that you obtain current market quotations for our common stock before deciding whether to elect to exchange your Tality Options.

You should direct questions about this offer or requests for assistance or for additional copies of the Offer to Exchange or the cover letter with the Summary of Terms to Elizabeth Villalobos by phone (408-944-7835) or e-mail (lizv@cadence.com), or your group Human Resources representative.

IMPORTANT

Regardless of whether you accept or reject this offer, you must complete and sign the Election Form and return it to Elizabeth Villalobos before 12:00 midnight, California USA time, on December 21, 2001, unless the offer is extended. You do not need to return any other documents relating to your Tality Options to effectively elect to accept this offer.

We have not authorized any person to make any recommendation on our behalf as to whether you should elect to exchange or refrain from electing to exchange your options pursuant to the offer. You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to give you any information or to make any representations in connection with the offer other than the information and representations contained in this document or in the related Election Form. If anyone makes any recommendation or representation to you or gives you any information, you must not rely upon that recommendation, representation or information as having been authorized by us.

TABLE OF CONTENTS

Page
----
SUMMARY TERM SHEET..........................................................................7

Q1. WHAT SECURITIES ARE WE OFFERING TO ACQUIRE AND EXCHANGE?.....................7

Q2. WHAT WILL BE THE PER SHARE EXERCISE PRICE OF THE CADENCE OPTIONS?............7

Q3. WHEN WILL THE CADENCE OPTIONS VEST?..........................................7

Q4. WHY ARE WE MAKING THE OFFER?.................................................8

Q5. ARE THERE CONDITIONS TO THE OFFER?...........................................8

Q6. ARE THERE ANY ELIGIBILITY REQUIREMENTS I MUST SATISFY IN ORDER
TO RECEIVE THE CADENCE OPTIONS?..............................................8

Q7. HOW MANY CADENCE OPTIONS WILL I RECEIVE IN EXCHANGE FOR THE
OPTIONS I ELECT TO EXCHANGE?.................................................8

Q8. WHEN WILL I RECEIVE MY CADENCE OPTIONS?......................................9

Q9. WHEN WILL THE CADENCE OPTIONS EXPIRE?........................................9

Q10. WILL I HAVE TO WAIT LONGER TO PURCHASE COMMON STOCK UNDER MY
CADENCE OPTIONS THAN I WOULD UNDER THE OPTIONS I EXCHANGE?...................9

Q11. IF I ELECT TO EXCHANGE TALITY OPTIONS, DO I HAVE TO EXCHANGE
ALL OF MY TALITY OPTIONS OR CAN I JUST EXCHANGE SOME OF THEM?...............10

Q12. WILL I HAVE TO PAY TAXES IF I EXCHANGE MY OPTIONS IN THE OFFER?.............10

Q13. IF I ELECT TO EXCHANGE OPTIONS IN THE OFFER, WILL I BE ELIGIBLE
TO RECEIVE OTHER OPTION GRANTS BEFORE I RECEIVE MY CADENCE OPTIONS?.........10

Q14. WHEN DOES THE OFFER EXPIRE? CAN THE OFFER BE EXTENDED, AND IF
SO, HOW WILL I KNOW IF IT IS EXTENDED?......................................10

Q15. WHAT DO I NEED TO DO?.......................................................10

TABLE OF CONTENTS
(CONTINUED)

                                                                                  Page
                                                                                  ----
Q16.   ONCE ACCEPTED, MAY I CHANGE MY PREVIOUS ELECTION?...........................11

Q17.   WHAT HAPPENS TO MY OPTIONS IF I DO NOT ACCEPT THE OFFER OR
       IF MY OPTIONS ARE NOT ACCEPTED FOR EXCHANGE?................................11

Q18.   WHAT DO WE AND OUR BOARD OF DIRECTORS THINK OF THE OFFER?...................11

Q19.   WHO CAN I TALK TO IF I HAVE QUESTIONS ABOUT THE OFFER TO EXCHANGE?..........11

1.     NUMBER OF OPTIONS; EXPIRATION DATE; WAIVER OF CLAIMS........................13

2.     PURPOSE OF THE OFFER........................................................14

3.     PROCEDURES..................................................................15

4.     NO REVOCATION...............................................................15

5.     ACCEPTANCE OF OPTIONS FOR EXCHANGE AND CANCELLATION, AND ISSUANCE
       OF NEW OPTIONS..............................................................16

6.     CONDITIONS OF THE OFFER.....................................................16

7.     PRICE RANGE OF COMMON STOCK UNDERLYING THE OPTIONS..........................18

8.     SOURCE AND AMOUNT OF CONSIDERATION; TERMS OF CADENCE OPTIONS................18

9.     INFORMATION CONCERNING CADENCE DESIGN SYSTEMS, INC..........................20

10.    INTERESTS OF DIRECTORS AND OFFICERS; TRANSACTIONS AND ARRANGEMENTS
       CONCERNING THE OPTIONS......................................................21

11.    LEGAL MATTERS; REGULATORY APPROVALS.........................................21

12.    MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES, U.K. PAYE AND
       NATIONAL INSURANCE CONTRIBUTIONS AND CERTAIN CANADIAN FEDERAL
       INCOME TAX CONSEQUENCES.....................................................22

13.    EXTENSION OF THE OFFER; TERMINATION; AMENDMENT..............................24

14.    FEES AND EXPENSES...........................................................25

15.    ADDITIONAL INFORMATION......................................................25

TABLE OF CONTENTS
(CONTINUED)

                                                                                  Page
                                                                                  ----
16.    FORWARD LOOKING STATEMENTS; MISCELLANEOUS...................................26

ANNEX A CADENCE DESIGN SYSTEMS, INC. 2000 ANNUAL REPORT ON FORM 10-K AND QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 29, 2001

ANNEX B CADENCE DESIGN SYSTEMS, INC. 2001 PROXY STATEMENT

ANNEX C CADENCE DESIGN SYSTEMS, INC. AMENDED AND RESTATED 2000 NONSTATUTORY EQUITY INCENTIVE PLAN

SUMMARY TERM SHEET

The following are answers to some of the questions that you may have about this offer. We urge you to carefully read the remainder of this Offer to Exchange and the accompanying cover letter because the information in this summary is not complete. We have included references to the relevant sections of this Offer to Exchange where you can find a more complete description of the topics in this summary.

Q1. WHAT SECURITIES ARE WE OFFERING TO ACQUIRE AND EXCHANGE?

We are offering to acquire and exchange substantially all outstanding stock options of Tality Holdings, Inc. that are outstanding under its option plans held by current Tality employees.

Q2. WHAT WILL BE THE PER SHARE EXERCISE PRICE OF THE CADENCE OPTIONS?

Each Cadence Option received for Tality options granted on or before April 15, 2001 will have an exercise price equal to the product of 1.025 multiplied by the closing sale price of one share of Cadence common stock as reported by the New York Stock Exchange on the expiration date of this Offer to Exchange, which is December 21, 2001, unless the Offer to Exchange is extended, resulting in a later expiration date. The reason this multiplier must be applied is because the current fair market value of each Tality share of common stock is less than the exercise price of options granted on or before April 15, 2001 ($6.10 current fair market value vs. $6.25 exercise price). The multiplier will result in the intrinsic value of the options received being equal to the intrinsic value of the options surrendered in the exchange. See the example in question 7 below.

Each Cadence Option received for Tality options granted after April 15, 2001 will have an exercise price equal to the closing sale price of one share of Cadence common stock as reported by the New York Stock Exchange on the expiration date of this Offer to Exchange, which is December 21, 2001, unless the Offer to Exchange is extended, resulting in a later expiration date. No multiplier must be applied in the instance of Tality options granted after April 15, 2001 as those options were granted at $6.10, which is equal to the current per share value of Tality common stock.

Q3. WHEN WILL THE CADENCE OPTIONS VEST?

Each new Cadence option granted in exchange for Tality options will be subject to 25% cliff vesting after one year from the date of grant of the original Tality Option, then vest ratably over the following thirty-six (36) months. Note that each Cadence Option will have the same vesting commencement date as the Tality Option it is replacing. Each Cadence Option will have a term that expires on the same ten year anniversary expiration date as the Tality Option it is replacing.

Q4. WHY ARE WE MAKING THE OFFER?

Because we believe in the importance of equity ownership by employees and Tality service providers, and in light of the withdrawal of the registration statement for Tality Corporation's initial public offering, Tality and Cadence decided to make available this option exchange program. This program encourages employee ownership in Cadence and allows employees greater liquidity by allowing Tality Option holders to exchange their current Tality Options for Cadence Options, subject to terms, conditions and consequences described in this Offer to Exchange.

Q5. ARE THERE CONDITIONS TO THE OFFER?

The offer is subject to a number of conditions, including the conditions described in Section 1 below. However, the offer is not conditioned on a minimum number of option holders accepting the offer or a minimum number of options being exchanged. Any holder of a Tality Option must exchange his or her Tality Option, on an all-or-nothing basis, for a new Cadence option grant. Any such holder must also agree to waive claims against Cadence, Tality Holdings, Inc., Tality Transition Corporation, Tality Corporation, Tality, LP, Tality Canada Corporation, Tality UK, Ltd. and Tality India Services Private Limited relating to the offer and his or her ownership of Tality Corporation equity.

Q6. ARE THERE ANY ELIGIBILITY REQUIREMENTS I MUST SATISFY IN ORDER TO
RECEIVE THE CADENCE OPTIONS?

Any holder of Tality options who has received this offer package, provided such holder remains employed by Tality Holdings, Inc. or its affiliates through the expiration of this Offer to Exchange, may exchange all of his or her Tality option grants.

Q7. HOW MANY CADENCE OPTIONS WILL I RECEIVE IN EXCHANGE FOR THE OPTIONS I
ELECT TO EXCHANGE?

If you accept our offer, we will grant you Cadence Options to purchase that number of shares of Cadence common stock which is equal to the number of shares of Tality Corporation Class A common stock subject to the Tality Options multiplied by the ratio of (i) $6.10 divided by (ii) the closing price of Cadence common stock on the NYSE on December 21, 2001 multiplied by a factor. If you had unvested Cadence options at the time your Tality options were granted or have had unvested options since receiving your Tality option grant, your factor is 1.0. If you did not have unvested Cadence options at the time your Tality options were granted or have not been granted Cadence options since receiving your Tality option grant, your factor is 1.5. The exact number of shares subject to Tality Options that you have now is set forth in the enclosed Election Form. The example below illustrates the exchange calculation. You may wish to refer to question 2 when reviewing the example.

Assume you hold a Tality Option to purchase 1,000 shares at an exercise price of $6.25 per share and the option grant was made on July 13, 2000. Further assume that you received another Tality Option to purchase 1,000 shares, also at an exercise price of $6.25 per share, on April 1, 2001. You had unvested Cadence Options on July 13, 2000. Also assume that the closing price of Cadence common stock at the expiration of the offer is $25.00. In order to

participate in the offer, you would need to elect to exchange both options for cancellation. You would receive two Cadence Options: (i) one to purchase 244 shares of Cadence common stock at $25.61 per share; and (ii) the other to purchase 244 shares, also at an exercise price of $25.61 per share. The Cadence Options you receive will be subject to 25% cliff vesting after one year from the date of grant of the original Tality Options, then vesting ratably over the following thirty-six (36) months. Your Cadence Options would have the same vesting commencement date and termination date as the original Tality Options. Therefore, the first set of options above will have a vesting period with reference to July 13, 2000 and the second set of options above will have a vesting period with reference to April 1, 2001.

Assume the same facts above except that you did not have unvested Cadence options on July 13, 2000 or any date prior to the exchange. You would receive two Cadence Options: (i) one to purchase 366 (244 x 1.5) shares of Cadence common stock at $25.61 per share; and (ii) the other to purchase 366 (244 x 1.5) shares, also at an exercise price of $25.61 per share. The Cadence Options you receive will be subject to 25% cliff vesting after one year from the date of grant of the original Tality Options, then vesting ratably over the following thirty-six (36) months. Your Cadence Options would have the same vesting commencement date and termination date as the original Tality Options. Therefore, the first set of options above will have a vesting period with reference to July 13, 2000 and the second set of options above will have a vesting period with reference to April 1, 2001.

Q8. WHEN WILL I RECEIVE MY CADENCE OPTIONS?

We expect that the Cadence Options will be granted, and any vested Cadence Options will be exercisable, on the date that we accept the offer. The Cadence Options will be exercisable through Elizabeth Villalobos, the Cadence Stock Plan Administrator, once you receive your Cadence Option Agreement. We expect to distribute the Cadence Option Agreements within three weeks following the expiration of the offer.

Q9. WHEN WILL THE CADENCE OPTIONS EXPIRE?

The Cadence Options will expire on the same expiration date of the Tality Option(s) which you elected to exchange.

Q10. WILL I HAVE TO WAIT LONGER TO PURCHASE COMMON STOCK UNDER MY CADENCE OPTIONS THAN I WOULD UNDER THE OPTIONS I EXCHANGE?

Each new Cadence option granted in exchange for Tality options will vest as to 25% after one year from the date of grant of the original Tality option, then ratably over the following thirty-six (36) months. Note that your vesting commencement date will also remain the same for each of your new Cadence options.

Q11. IF I ELECT TO EXCHANGE TALITY OPTIONS, DO I HAVE TO EXCHANGE ALL OF MY TALITY OPTIONS OR CAN I JUST EXCHANGE SOME OF THEM?

You must exchange all of your Tality Options in order to participate. If you have more than one Tality Option grant, then you must exchange all of these option grants.

Q12. WILL I HAVE TO PAY TAXES IF I EXCHANGE MY OPTIONS IN THE OFFER?

If you accept the Offer to Exchange, you will not recognize income for U.S. federal income tax purposes at the time of the exchange and at the time we grant new options to you. We strongly recommend that you consult with your own tax advisor to determine the tax consequences of accepting the offer. If you are an employee based outside of the United States, we recommend that you consult with your own tax advisor to determine the tax and related consequences of this transaction under the laws of the country in which you live and work and the specific tax consequences to you. (See Section 12 below)

Q13.    IF I ELECT TO EXCHANGE OPTIONS IN THE OFFER, WILL I BE ELIGIBLE TO
        RECEIVE OTHER OPTION GRANTS BEFORE I RECEIVE MY CADENCE OPTIONS?

        We intend to continue to review the option grants of all employees and

other service providers from time to time as part of our normal compensation program.

Q14.    WHEN DOES THE OFFER EXPIRE? CAN THE OFFER BE EXTENDED, AND IF SO, HOW
        WILL I KNOW IF IT IS EXTENDED?

        This Offer to Exchange expires on December 21, 2001, at 12:00 midnight,

California USA time, unless we extend it.

Although we do not currently intend to do so, we may, in our discretion, extend the offer at any time. If we extend the offer, we will publicly announce the extension no later than 9:00 a.m., California USA time, on the next business day following the previously scheduled expiration of the offer period. If the offer is extended, then the grant date of the Cadence Options will also be extended. (See Section 13 below)

Q15. WHAT DO I NEED TO DO?

Whether you accept the offer or not, you need to make your election and sign the Election Form and deliver it to Elizabeth Villalobos, Cadence's Stock Plan Administrator, before 12:00 midnight, California USA time, on December 21, 2001, unless we extend the offer. If you do not sign and deliver the Election Form before the Offer to Exchange expires, it will have the same effect as if you rejected the offer. The contact information for Elizabeth Villalobos is listed under Question 23 and on the Election Form, but if you have questions about delivery, you may contact Elizabeth by phone (408-944-7558) or via e-mail (lizv@cadence.com), or your group Human Resources representative.

You should review the Offer to Exchange, the cover letter and Summary of Terms, the Election Form and all of their attachments before making your election. We will only accept a paper (including fax) copy of your Election Form. Delivery by e-mail will not be accepted. If you are not in Tality Corporation's San Jose offices, we recommend that you use registered mail, with return receipt requested, or discuss delivery methods with your group Human Resources Representative. In all cases, you should allow sufficient time to ensure timely delivery.

We may reject any Tality Options to the extent that we determine the Election Form is not properly signed and completed or to the extent that we determine it would be unlawful to accept the options. Although we may later extend, terminate or amend the offer, we currently expect to accept all properly exchanged options promptly after this Offer to Exchange expires. If you do not sign and deliver the Election Form before the Offer to Exchange expires, it will have the same effect as if you rejected the offer.

Q16. ONCE ACCEPTED, MAY I CHANGE MY PREVIOUS ELECTION?

No. Once your acceptance to the Offer to Exchange is received by Cadence, you may not revoke your acceptance. If you reject the Offer to Exchange, you may change your election to accept the Offer to Exchange on or before December 21, 2001, the expiration date, unless the offer is extended.

Q17.    WHAT HAPPENS TO MY OPTIONS IF I DO NOT ACCEPT THE OFFER OR IF MY OPTIONS
        ARE NOT ACCEPTED FOR EXCHANGE?

        Nothing. If you do not accept the offer, or if we do not accept the

options you elect to exchange, you will keep all of your current options, and you will not receive any Cadence Options. All of your Tality options will retain their current exercise price and current vesting schedule. Tality Options that not exchanged will not be registered under the Securities Act of 1933, and therefore will not constitute liquid securities before any initial public offering of Tality Holdings, Inc.

Q18. WHAT DO WE AND OUR BOARD OF DIRECTORS THINK OF THE OFFER?

Although both the Cadence and Tality boards of directors have approved Cadence making this offer, neither we nor our board of directors makes any recommendation as to whether you should elect to exchange or refrain from electing to exchange your options. You must make your own decision whether to elect to exchange options. Our board of directors recognizes that the decision to accept the offer is an individual one that should be based on a variety of factors and you should consult with your personal financial or tax advisors if you have questions about your financial or tax situation.

Q19. WHO CAN I TALK TO IF I HAVE QUESTIONS ABOUT THE OFFER TO EXCHANGE?

For additional information or assistance, you should contact Cadence Design Systems, Inc., Stock Administration, Attn: Elizabeth Villalobos, 2655 Seely Avenue, Building 5, San Jose,

California 95134, Tel: (408) 944-7813, Fax: (408) 944-7835, e-mail lizv@cadence.com, or your group Human Resources representative

THE OFFER

1. NUMBER OF OPTIONS; EXPIRATION DATE; WAIVER OF CLAIMS.

We are offering to exchange Cadence Options to purchase common stock in return for substantially all Tality Options that are properly elected for exchange before the "expiration date" as defined below.

We will grant you Cadence Options to purchase that number of shares of common stock which is equal to the number of shares of Class A common stock subject to the Tality Options you elect to exchange and we accept multiplied by the ratio of (i) $6.10 divided by (ii) the closing price of Cadence common stock on the NYSE on December 21, 2001 multiplied by a factor. If you had unvested Cadence options at the time your Tality options were granted or have been granted Cadence options since receiving your Tality option grant, your factor is
1.0 If you did not have unvested Cadence options at the time your Tality options were granted or have not been granted Cadence options since receiving your Tality option grant, your factor is 1.5. For example, if you hold a Tality Option to purchase 1,000 shares and on December 21, 2001 the closing price of Cadence common stock is $25.00, you will receive a Cadence Option to purchase 244 shares of Cadence common stock, if you have (or have had since July 12, 2000) unvested Cadence options. If do not have (and have not had since July 12, 2000) Cadence unvested options, you will receive a Cadence Option to purchase 366 shares of Cadence common stock. The exact number of shares subject to the Tality Options that you have now is set forth in the enclosed Election Form. Each new Cadence option granted in exchange for Tality options will vest as to 25% after one year from the date of grant of the original Tality option, then ratably over the following thirty-six (36) months. Note that your vesting commencement date and termination date will also remain the same for each of your new Cadence options.

All Cadence Options will be issued under the Cadence Design Systems Amended and Restated 2000 Nonstatutory Equity Incentive Plan (as applicable, the "option plan"), and pursuant to a Cadence Option agreement between you and us. The Cadence Options will be "nonqualified options," meaning that they will not be "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code.

The term "expiration date" means 12:00 midnight, California USA time, on December 21, 2001, unless and until we, in our discretion, extend the period of time during which the offer will remain open, in which event the term "expiration date" refers to the latest time and date at which the offer, as so extended, expires. See section 13 below for a description of our rights to extend, delay, terminate or amend the offer.

We will notify you if we decide to take any of the following actions:

- increasing or decreasing what we will give you in exchange for your options; or

- changing the class of options eligible to be exchanged in the offer.

If the offer is scheduled to expire within ten business days from the date we notify you of such an increase or decrease, we will also extend the offer so that the offer remains open for a period of ten business days after the date the notice is published.

For purposes of the offer, a "business day" means any day other than a Saturday, Sunday or U.S. federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, California USA time, of such day.

In addition to the other conditions to this Offer to Exchange, your acceptance of the offer is conditioned upon your agreement to waive and release Cadence, Tality Holdings, Inc., Tality Transition Corporation, Tality Corporation, Tality, LP, Tality Canada Corporation, Tality UK, Ltd. and Tality India Services Private Limited and their respective officers, directors, agents, servants, employees, attorneys, stockholders, successors, assigns and other affiliates (the "Releasees") from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys' fees, damages, indemnities and obligations of every kind and nature, in law, equity or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, directly or indirectly arising out of or in any way connected with the grant to you of Tality Options or the offer, the transactions contemplated by the offer, and issuance of stock or stock options, or any other ownership interests in Tality Corporation, including but not limited to, all such claims and demands pursuant to any federal, state or local law, statute, or causes of action under securities law, contract law or tort law; or any related events, acts or conduct at any time prior to and including the date of execution of your acceptance of the offer.

In addition, by accepting the offer, you understand and agree that the release of claims described above includes claims which may be unknown to you at present, and that you have read and understand Section 1542 of the California Civil Code, which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." By accepting the offer, you will waive and relinquish any and all rights under Section 1542 with respect to your release of any unknown or unsuspected claims you might have against the Releasees.

2. PURPOSE OF THE OFFER.

Because we believe in the importance of equity ownership by Tality employees and service providers, and in light of the withdrawal of the registration statement for Tality Corporation's initial public offering, we decided to make available this option exchange program. This program encourages employee ownership in Cadence and allows employees greater liquidity by allowing Tality Option holders to exchange their current Tality Options for Cadence Options, subject to terms, conditions and consequences described in this Offer to Exchange.

Although the Cadence and Tality boards of directors have approved this offer, neither we nor our board of directors makes any recommendation as to whether you should elect to exchange or refrain from electing to exchange your options. You must make your own decision whether to elect to exchange options. Our board of directors recognizes that the decision to

accept is an individual one that should be based on a variety of factors and you should consult with your personal advisors if you have questions about your financial or tax situation.

3. PROCEDURES.

Making Your Election. To make your election to accept or reject this offer, you must make your election, sign and deliver the Election Form and any other required documents to Elizabeth Villalobos at Cadence Design Systems, Inc., Stock Administration, 2655 Seely Avenue, Building 5, San Jose, California 95134, FAX: (408) 944-7835 before the expiration date. We will only accept a paper (including fax) copy of your Election Form. Delivery by e-mail will not be accepted. If you do not deliver your Election Form in person, we recommend that you use registered mail, with return receipt requested. In all cases, you should allow sufficient time to ensure timely delivery. You do not need to return any documents relating to your Tality Options to effectively elect to accept the offer.

Determination of Validity; Rejection of Options; Waiver of Defects; No Obligation to Give Notice of Defects. We will determine, in our discretion, all questions as to the number of shares subject to Tality Options, and the validity, form, eligibility (including time of receipt) and acceptance of Election Forms and Change in Election Forms. Our determination of these matters will be final and binding on all parties. We may reject any or all Election Forms, Change in Election Forms or options elected to be exchanged to the extent that we determine they were not properly executed or delivered or to the extent that we determine it is unlawful to accept the options electing to exchange. Otherwise, we will accept proper and timely elections to exchange options that are not validly withdrawn. We may waive any of the conditions of the offer or any defect or irregularity in any Election Form or Change in Election Form with respect to any particular options or any particular option holder. No options will be properly exchanged until all defects or irregularities have been cured by the option holder electing to exchange the options or until such defects or irregularities have been waived by us. Neither we nor any other person is obligated to give notice of any defects or irregularities involved in the election to exchange any options, and no one will be liable for failing to give notice of any defects or irregularities.

Our Acceptance Constitutes an Agreement. If you elect to exchange your options and you return the appropriate forms in accordance with the procedures described above, you will accept the terms and conditions of the offer. Our acceptance of Tality Options that are properly elected for exchange will form a binding agreement between us and you on the terms and subject to the conditions of this offer.

Subject to our rights to extend, terminate and amend the offer, we currently expect that we will accept promptly after the expiration of the offer all options properly elected for exchange.

4. NO REVOCATION.

If you elect to accept the offer and exchange your options and submit such election to Cadence, you may not revoke your acceptance of the offer.

5. ACCEPTANCE OF OPTIONS FOR EXCHANGE AND CANCELLATION, AND ISSUANCE OF NEW OPTIONS.

On the terms and subject to the conditions of this offer and as promptly as practicable following the expiration date, we will timely accept the Tality Options for exchange, and cancel all options properly elected for exchange before the expiration date. Within approximately three weeks after expiration of this offer, you will receive your Cadence Option agreement.

We intend to continue to review the option grants of all employees and other service providers from time to time as part of our normal compensation program. We will give you oral or written notice of our acceptance for exchange or cancellation of options validly elected for exchange. After we accept options validly elected for exchange, each option holder who accepted the offer will have his or her employee option account credited with that number of Cadence Options that would be exchanged for the Tality Options and we will send each such option holder a Cadence Option agreement confirming the Cadence Options that we granted to him or her.

6. CONDITIONS OF THE OFFER.

We will not be required to accept for cancellation any options elected for exchange, and we may terminate or amend the offer, or postpone our acceptance and cancellation of any options elected for exchange, in each case, if at any time before the expiration date, we determine that any of the following events has occurred, and, in our reasonable judgment, the occurrence of the event makes it inadvisable for us to proceed with the offer or to accept and cancel options elected for exchange:

- any action or proceeding by any government agency, authority or tribunal or any other person, domestic or foreign, is threatened or pending before any court, authority, agency or tribunal that directly or indirectly challenges the making of the offer, the acquisition of some or all of the options elected for exchange, the issuance of Cadence Options, or otherwise relates to the offer or that could cause a change or changes in our business, condition (financial or other), assets, income, operations, prospects or stock ownership that, in our reasonable judgment, is or may be material to us;

- any action is threatened, pending or taken, or any approval is withheld, by any court or any authority, agency or tribunal that, in our reasonable judgment, would or might directly or indirectly:

(a) make it illegal for us to accept some or all of the Tality Options or to issue some or all of the Cadence Options or otherwise restrict or prohibit consummation of the offer or otherwise relate to the offer;

(b) delay or restrict our ability, or render us unable, to accept the Tality Options for exchange and cancellation or to issue Cadence Options for some or all of the exchanged Tality Options;

(d) cause a change or changes in our business, condition (financial or other), assets, income, operations, prospects or stock ownership that is or may be material to us;

- there is:

(a) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market; or

(b) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, whether or not mandatory.

- another person publicly makes or proposes a tender or exchange offer for some or all of our common stock, or an offer to merge with or acquire us, or we learn that:

(a) any person, entity or "group," within the meaning of Section 13(d)(3) of the Securities Exchange Act, has acquired or proposed to acquire beneficial ownership of more than 5% of the outstanding shares of our common stock, or any new group shall have been formed that beneficially owns more than 5% of the outstanding shares of our common stock, other than any such person, entity or group that has filed a Schedule 13D or Schedule 13G with the SEC on or before the expiration date;

(b) any such person, entity or group that has filed a Schedule 13D or Schedule 13G with the SEC on or before the expiration date has acquired or proposed to acquire beneficial ownership of an additional 2% or more of the outstanding shares of our common stock; or

(c) any person, entity or group shall have filed a Notification and Report Form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or made a public announcement that it intends to acquire us or any of our assets or securities; or

- any change or changes occurs in our business, condition (financial or other), assets, income, operations, prospects or stock ownership that, in our reasonable judgment, is or may be material to us.

The conditions to the offer are for our benefit. We may assert them in our discretion before the expiration date, and we may waive them at any time and from time to time, whether or not we waive any other condition to the offer. Our failure to exercise any of these rights is not a waiver of any of these rights. The waiver of any of these rights with respect to particular facts and circumstances is not a waiver with respect to any other facts and circumstances. Any

determination we make concerning the events described in this section 6 will be final and binding upon everyone.

7. PRICE RANGE OF COMMON STOCK UNDERLYING THE OPTIONS

Please see the Cadence Annual Report on Form 10-K attached at Annex A for information regarding Cadence and the price range of its common stock. As of November 23, 2001, the last reported closing price of Cadence common stock on the NYSE, was $23.09 per share. We recommend that you obtain current market quotations for our common stock before deciding whether to elect to exchange your Tality Options.

8. SOURCE AND AMOUNT OF CONSIDERATION; TERMS OF CADENCE OPTIONS.

Consideration. We will grant you Cadence Options to purchase that number of shares of common stock which is equal to the number of shares of common stock subject to the Tality Options you elect to exchange and that we accept multiplied by the quotient of (i) $6.10 divided by (ii) the closing price of Cadence common stock on December 21, 2001. For example, if you hold a Tality Option to purchase 1,000 shares and on December 21, 2001 the closing price of Cadence common stock is $25.00, you will receive a Cadence Option to purchase 244 shares of Cadence common stock. The exact number of shares of common stock subject to the options that you have now is set forth in the enclosed Election Form.

If we receive and accept all outstanding elections to exchange Tality options, we will grant Cadence Options to purchase a total of approximately 1,750,000 shares of our common stock. The common stock issuable upon exercise of the Cadence Options will equal approximately 1% of the total shares of our common stock outstanding as of September 29, 2001.

Terms of Cadence Options. The Cadence Options will be issued under the Cadence Amended and Restated 2000 Nonstatutory Equity Incentive Plan and a Cadence Option agreement will be executed between each option holder who accepts the offer and us. The Cadence Options will have the same vesting commencement and termination date as the Tality Options accepted for exchange.

The issuance of Cadence Options under this offer will not create any contractual or other right for the recipients to receive any future grants of stock options or benefits in lieu of stock options.

The following description of the option plan and the Cadence Option agreement are summaries, and may not be complete. The full description of the option plan and the Cadence Option agreement are attached as Annex C to this Offer to Exchange, and are hereby incorporated by reference. You may also contact us at Stock Administration, Cadence Design Systems, Inc., 2655 Seely Avenue, Building 5, San Jose, California 95134, Tel: (408) 944-7813, Fax: (408) 944-7835 or via e-mail at lizv@cadence.com to request additional copies of the option plan or the form of the Cadence Option agreement. Upon your request, copies will be provided promptly and at our expense.

General. The option plan provides that the maximum number of shares issuable pursuant to options granted under the option plan may not exceed 30,000,000 shares. The Cadence Options will not qualify as incentive stock options.

Administration. The option plan is administered by our Administrator. The Administrator, as set forth in our option plan, is our board of directors or any of its committees that is authorized and delegated the duty of administering the option plan. Cadence's Compensation Committee generally administers the option plan. To the extent desirable to qualify transactions, Administrator members are intended to be "non-employee directors" as defined in Rule 16b-3 under the Securities Exchange Act. Similarly, to the extent the Administrator determines it to be desirable to qualify options as "performance- based compensation," the option plan shall be administered by a committee of two or more "outside directors" for purposes of Section 162(m) of the Internal Revenue Code.

Subject to the terms of the option plan, the Administrator has the authority, in its discretion, to: (i) determine the fair market value of common stock; (ii) select individuals to whom options and stock purchase rights may be granted; (iii) determine the number of shares of common stock to be covered by each option and stock purchase right granted pursuant to the option plan; (iv) determine the terms and conditions of any such option or stock purchase right;
(v) reduce the exercise price of any option or stock purchase right to the then current fair market value if the fair market value of the common stock covered by such option shall have declined since the date the option or stock purchase right was granted; (vi) construe and interpret the terms of the option plan;
(vii) modify or amend each option or stock purchase right, including the discretionary authority to extend the post-termination exercisability period beyond that provided for in the option plan; and (viii) to make all other determinations necessary or advisable for administering the option plan.

Term. The term of each option granted under the plan is stated in the option agreement, typically 10 years from the date of grant. The Cadence Options to be granted under the offer will have a term that expires on the expiration date of the Tality Option exchanged.

Termination. The Plan Administrator has the authority to determine the period of time, if any, after you retire, die, become disabled or your employment is otherwise terminated during which you may exercise such options. Except as your Cadence Option agreement or the option plan under which it is granted otherwise provides, the Cadence Options will terminate following termination of your employment. In that case, your new option will be exercisable, to the extent of the number of shares vested and exercisable at the date of such termination, (a) within three months of termination, if the termination is the result of your retirement or early retirement at our request (both as defined in the option plan), (b) within one year of termination for disability (as defined in the option plan), or (c) for the term of your option agreement (or if the option agreement is silent, within one year of your death), if the termination results from your death. Unless the Plan Administrator provides otherwise, vesting of Cadence Options granted under the option plan will be tolled during approved leaves of absence. In the event that we eliminate an option holder's position with our company during the first twelve months of such option holder's employment and his or her option begins vesting at or after the twelve-month period following his or her employment start date, his or her number of options will be accelerated and exercisable for an additional number of months equal to the number of months he or she had been employed

with the company. Any Cadence Option that is exercisable at the time of your death may be exercised, to the extent of the number of shares vested and exercisable at the date of death (plus an additional 33% of the unvested shares subject to the option), by the personal representative of your estate, the person(s) to whom your rights under the option have passed by will or by applicable law or the beneficiary designated in accordance with the provisions of the option plan. In addition, your Cadence Option may terminate following the occurrence of a merger or asset sale as described in the option plan and/or your Cadence Option agreement. If your option terminates under the circumstances specified in this section, your interests in the option plan will also terminate.

Exercise Price. Each Cadence Option issued in exchange for a Tality Option granted on or before April 15, 2001 will have an exercise price equal to the product of 1.025 multiplied by the per share closing sale prices of Cadence common stock as reported on the New York Stock Exchange on December 21, 2001, the expiration date of the Offer to Exchange, unless extended. Each Cadence Option issued in exchange for a Tality Option granted after April 15, 2001 will have an exercise price equal to the per share closing sales price of Cadence common stock as reported on the New York Stock Exchange on December 21, 2001, the expiration date of the Offer to Exchange, unless extended.

Vesting and Exercise. The Plan Administrator has the authority to determine the time or times at which options granted under the plans may be exercised. The Plan Administrator may also accelerate the exercisability of options. Each Cadence Option will have the same vesting schedule and vesting commencement date as the option for which it was exchanged.

Tax Consequences. You should refer to section 12 for a discussion of the material U.S. federal income tax consequences of the Cadence Options, the Tality options, as well as the consequences of accepting or rejecting the Cadence Options under this Offer to Exchange and the consequences of exercising Cadence Options. If you are an employee based outside of the United States, we recommend that you consult with your own tax advisor to determine the tax and social contribution consequences of this transaction under the laws of the country in which you live and work.

Registration of Shares Subject to Options. All shares of common stock issuable upon exercise of options under the option plan, including the shares that will be issuable upon exercise of all Cadence Options have been registered under the Securities Act on a registration statement on Form S-8 (File No. 333-69589), filed with the SEC on November 14, 2000. Unless you are considered an "affiliate" of Cadence, you may be able to sell your shares of common stock subject to the options free of any transfer restrictions under applicable federal, state and provincial securities laws.

9. INFORMATION CONCERNING CADENCE DESIGN SYSTEMS, INC.

Cadence Design Systems, Inc., provides comprehensive software and other technology and offers design and methodology services for the product development requirements of the world's leading electronics companies. Cadence licenses its leading-edge electronic design automation, or EDA, software and hardware technology and provides a range of services to companies throughout the world to help optimize their product development processes. Cadence is a supplier of end-to-

end products and services which are used by companies to design and develop complex chips and electronic systems, including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products, and other advanced electronics.

Please see the documents filed by Cadence with the SEC that are attached as annexes to this offer, including Cadence's 2000 Annual Report on Form 10-K ("Annual Report"), Quarterly Report on Form 10-Q for the quarter ended September 29, 2001 and 2001 Proxy Statement ("Proxy Statement") for more information regarding Cadence and Cadence common stock.

10. INTERESTS OF DIRECTORS AND OFFICERS; TRANSACTIONS AND ARRANGEMENTS CONCERNING THE OPTIONS.

A list of Cadence's directors and executive officers, and the beneficial ownership of Cadence common stock for each of these individuals can be found in our Annual Report and Proxy Statement attached to this Offer to Exchange. A list of Tality's directors and executive officers, and the beneficial ownership of Tality Class A common stock for each of these individuals can be found in Tality's Equity Holder Report dated September 28, 2001 previously delivered to you.

As of November 23, 2001, Cadence's executive officers and non-employee directors as a group held a total of 100,000 Tality Options. Tality executive officers as a group held a total of 760,000 Tality Options. Neither we, nor to the best of our knowledge any of Cadence's or Tality's directors or executive officers, nor any affiliates of Cadence, Tality or their respective directors or executive officers, engaged in transactions involving the Tality options during the 60 days prior to this Offer to Exchange and only one Tality executive officer traded in Cadence common stock during this period. Such trade activity occurred on November 8, 2001 and involved the exercise of 9,001 Cadence options and an immediate sale of the stock acquired in the exercise. Such trades were normal exchange trades.

11. LEGAL MATTERS; REGULATORY APPROVALS.

We are not aware of any license or regulatory permit that appears to be material to our business that might be adversely affected by the offer, or of any approval or other action by any U.S. or foreign government or regulatory authority or agency that is required for the acquisition or ownership of the options as described in the offer. If any other approval or action should be required, we presently intend to seek the approval or take the action. This could require us to delay the acceptance of options elected for exchange. We cannot assure you that we would be able to obtain any required approval or take any other required action. Our failure to obtain any required approval or take any required action might result in harm to our business. Our obligation under the offer to accept exchanged Tality Options and to issue Cadence Options is subject to conditions, including the conditions described in section 6 above.

12. MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES, U.K. PAYE AND NATIONAL INSURANCE CONTRIBUTIONS AND CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES.

The following is a general summary of the material U.S. federal income tax consequences of the exchange of options pursuant to the Offer to Exchange and of the exercise of Cadence Options. This discussion is based on the Internal Revenue Code, its legislative history, Treasury Regulations and administrative and judicial interpretations as of the date of the offer, all of which may change, possibly on a retroactive basis. This summary does not discuss all of the tax consequences that may be relevant to you in light of your particular circumstances, nor is it intended to apply in all respects to all categories of option holders. IN PARTICULAR, THIS DISCUSSION DOES NOT ADDRESS ANY STATE, LOCAL, OR (OTHER THAN THE BRIEF DISCUSSION OF CERTAIN U.K. AND CANADIAN TAX ISSUES FOLLOWING BELOW), NON-U.S. TAX LAWS, AND THE TAX CONSEQUENCES OF THE OFFER TO EXCHANGE OR THE EXERCISE OF OPTIONS COULD BE SIGNIFICANT UNDER THOSE LAWS.

U.S. FEDERAL INCOME TAX CONSEQUENCES OF EXCHANGE OF OPTIONS. We believe that if you exchange outstanding Tality Options for Cadence options, you will not be required to recognize income for federal income tax purposes at the time of the exchange.

U.S. FEDERAL INCOME TAX CONSEQUENCES OF EXERCISE OF CADENCE OPTIONS. The Cadence Options issued under this Offer to Exchange will be "nonqualified options," meaning that they will not be "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code. Under current U.S. law, you will not realize taxable income upon the exercise of a nonqualified stock option. However, when you exercise the option, the difference between the exercise price of the option and the fair market value of the shares subject to the option on the date of exercise will be treated as taxable ordinary compensation income to you, and you will be subject to withholding of income and employment taxes at that time. The subsequent sale of the shares acquired pursuant to the exercise of the option generally will give rise to capital gain or loss equal to the difference between the sale price and the sum of the exercise price paid for the shares plus the ordinary income recognized with respect to the shares, and this capital gain or loss will be treated as long term capital gain or loss if your holding period for the shares exceeds one year at the time of the sale and alternatively, short term capital gain or loss to the extent shares are held for on year or less. If you are an officer, director or stockholder subject to Section 16 of the Securities Exchange Act of 1933 with respect to the shares acquired upon exercise of the options, you should consult with your tax advisor prior to exercising any options in order to ascertain whether any special rules apply to you.

U.K. PAYE AND NATIONAL INSURANCE CONTRIBUTIONS. If you are within the charge to U.K. income tax in relation to your Cadence Options you should note that any income tax payable on the exercise of your Cadence Options will be collectable through the PAYE system. The terms of your Cadence option agreement will require you to fund this liability. In addition, the Cadence Option agreement will similarly require you to fund any U.K. national insurance contributions (including employer's contributions) chargeable on the exercise of your Cadence Options. You will obtain income tax relief for bearing any such employer's national insurance contributions.

CANADIAN FEDERAL INCOME TAX CONSEQUENCES. The following discussion summarizes certain Canadian federal income tax considerations applicable to persons who are resident in Canada for purposes of the Income Tax Act (Canada) (the "Act"), and who have exchanged options pursuant to the Option to Exchange (a "Canadian Resident Optionholder"). This summary is based on the current provisions of the Act, the regulations thereunder, the current published administrative practices of the Canada Customs and Revenue Agency (the "CCRA") and all specific proposals to amend the Act and the regulations announced by the Minister of Finance prior to the date hereof. This summary does not otherwise take into account or anticipate changes in the law, whether by judicial, governmental, or legislative decisions or action, nor does it take into account tax legislation or considerations of any province or territory of Canada or any jurisdiction other than Canada. THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE INTERPRETED AS, LEGAL OR TAX ADVICE. YOU SHOULD CONSULT YOUR OWN TAX ADVISORS WITH RESPECT TO YOUR OWN PARTICULAR CIRCUMSTANCES.

CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF EXCHANGE OF OPTIONS. If you are a Canadian Resident Optionholder as described above, you will not be required to include any amount in income for Canadian federal income tax purposes as a result of the exchange of Tality Options for Cadence Options.

CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF EXERCISE OF CADENCE OPTIONS. If you are a Canadian Resident Optionholder, as described above, and you exercise a Cadence stock option acquired under the Option to Exchange, you will include in income a taxable benefit in the taxation year in which the Cadence Option is exercised. The benefit will equal the amount by which the value of the Cadence shares at the time of acquisition of the shares exceeds the amount paid by you to acquire the Cadence shares.

You may be entitled to deduct an amount equal to 1/2 of the taxable benefit in computing your taxable income if, among other things, the following conditions are satisfied:

(a) the amount payable to acquire the Tality shares under the Tality Options was not less than the fair market value of the Tality shares at the time the Tality Options were granted;

(b) the Cadence shares acquired on the exercise of the Cadence Options are "prescribed shares" for purposes of the Act at the time of issue; and

(c) immediately after the Tality Option was granted, you dealt at arm's length (for purposes of the Act) with Tality and with your employer.

It is a question of fact as to whether the requirements in (a) to (c) above are satisfied. WE ARE OF THE VIEW THAT EACH OF THESE REQUIREMENTS WILL BE MET IN RESPECT OF THE CADENCE SHARES ISSUED ON THE EXERCISE OF CADENCE OPTIONS ACQUIRED UNDER THE OPTION TO EXCHANGE

YOU ARE STRONGLY ADVISED TO CONSULT YOUR TAX ADVISOR TO DETERMINE

WHETHER THE ONE-HALF DEDUCTION IS AVAILABLE IN YOUR PARTICULAR CIRCUMSTANCES.

It may be possible for you to defer recognition of all or part of the taxable benefit realized on exercise of the Cadence Options. You should consult your tax advisor to determine if the deferral is available to you.

In addition to the taxable benefit discussed above, if you dispose of Cadence shares held as capital property (within the meaning if the Act) you will incur a capital gain (or capital loss) to the extent the proceeds of disposition exceed (or are exceeded by) your tax cost of the Cadence shares disposed of. One-half of any capital gain will constitute a taxable capital gain, will be included in your income and will be subject to tax at your marginal rate of tax. One-half of any capital loss will constitute an allowable capital loss, which may only be applied to reduce or offset taxable capital gains. Any allowable capital loss unused in any particular year can be back for three taxation years or carried forward indefinitely to be applied against taxable capital gains.

WE STRONGLY RECOMMEND THAT YOU CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF PARTICIPATING IN THE OFFER AND THE SPECIFIC TAX CONSEQUENCES TO YOU OF YOUR ACCEPTANCE OF THE OFFER TO EXCHANGE AND THE EXERCISE OF OPTIONS AND THE SALE OF SHARES.

13. EXTENSION OF THE OFFER; TERMINATION; AMENDMENT.

Although we do not currently intend to do so, we may, in our discretion, at any time and from time to time, extend the period of time during which the offer is open and delay accepting any options offered for exchange by publicly announcing the extension and giving oral or written notice of the extension to the option holders.

Prior to the expiration date to terminate or amend the offer we may postpone accepting and canceling any Tality Options if any of the conditions specified in section 6 occur. In order to postpone accepting or canceling, we must publicly announce the postponement and give oral or written notice of the postponement to the option holders. In the event of a delay accepting and canceling Tality Options, we will pay the consideration offered or return the surrendered options promptly after we terminate or withdraw the offer.

As long as we comply with any applicable laws, we may amend the offer in any way, including decreasing or increasing the consideration offered in the offer to option holders or by decreasing or increasing the number of Tality Options to be exchanged or surrendered in the offer.

We may amend the offer at any time by publicly announcing the amendment. If we extend the length of time during which the offer is open, the amendment must be issued no later than 9:00 a.m., California USA time, on the next business day after the last previously scheduled or announced expiration date. Any public announcement relating to the offer will be sent promptly to option holders in a manner reasonably designed to inform option holders of the change, for example, by issuing a press release. If the offer is extended, then the grant date of the Cadence Options will also be extended.

If we materially change the terms of the offer or the information concerning the offer, or if we waive a material condition of the offer, we will extend the offer to the extent required by

the Securities Exchange Act. Under these rules the minimum period an offer must remain open following material changes in the terms of the offer or information concerning the offer, other than a change in price or a change in percentage of securities sought, will depend on the facts and circumstances. We will notify you if we decide to take any of the following actions:

- increasing or decreasing what we will give you in exchange for your options; or

- changing the class of options eligible to be exchanged in the offer.

14. FEES AND EXPENSES.

We will not pay any fees or commissions to any broker, dealer or other person for asking option holders to elect to exchange their Tality Options under this Offer to Exchange.

15. ADDITIONAL INFORMATION.

We recommend that you review the documents attached as Annexes to this Offer to Exchange, and the following materials that we have filed with the SEC, all of which incorporated by reference into this Offer to Exchange, before making a decision on whether to exchange your options:

(a) our Current Report on Form 8-K, filed with the SEC on January 8, 2001;

(b) our Current Report on Form 8-K, filed with the SEC on March 5, 2001;

(d) the description of our common stock included in our Registration Statement on Form 8-A, filed on August 29, 1990; and

(e) the description of our Preferred Share Purchase Rights set forth in Exhibit 1A, 1B and 1C to our Current Report on Form 8-K filed with the Commission on February 16, 1996.

These filings, our other annual, quarterly and current reports, our proxy statements and our other SEC filings may be examined, and copies may be obtained, at the following SEC public reference rooms:

450 Fifth Street, N.W.

Room 1024
Washington, D.C. 20549

You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330.

Our SEC filings are also available to the public on the SEC's web site at http://www.sec.gov.

As you read the documents listed in this Section 15, you may find some inconsistencies in information from one document to another. Should you find inconsistencies between the documents, or between a document and this Offer to Exchange, you should rely on the statements made in the most recent document.

The information contained in this Offer to Exchange about us should be read together with the information contained in the documents to which we have referred you.

16. FORWARD LOOKING STATEMENTS; MISCELLANEOUS.

Certain statements contained in this Offer to Exchange, including, without limitation, statements containing the words "believes," "anticipate," "estimates," "expects," "intends," and words of similar import, constitute forward-looking statements. Actual results could vary materially from those expressed in these statements. Readers are referred to the sections entitled "Marketing and Sales," "Research and Development," "Competition," "Proprietary Technology," "Manufacturing," and "Factors That May Affect Future Results" sections contained in Cadence's 2000 Annual Report on Form 10-K, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements.

We are not aware of any jurisdiction where the making of the offer is not in compliance with applicable law. If at any time, we become aware of any jurisdiction where the making of this offer is not in compliance with any valid applicable law, we will make a good faith effort to comply with such law. If, after such good faith effort, we cannot comply with the law, the offer will not be made to, nor will exchanges be accepted from or on behalf of, the option holders residing in that jurisdiction

Cadence Design Systems, Inc. November 26, 2001

   [CADENCE LOGO]
[CADENCE LETTERHEAD]
 [TALITY LETTERHEAD]
  ----------------

NOVEMBER 26, 2001

Dear Tality Option Holder:

Enclosed are documents explaining our stock option exchange program for Tality option holders. Because we believe in the importance of equity ownership by employees and other service providers, and in light of the withdrawal of the registration statement for Tality Corporation's initial public offering, we decided to make available this option exchange program. This program encourages employee ownership in Cadence and allows option holders greater liquidity by allowing Tality option holders to exchange their current Tality stock options for Cadence stock options, subject to the terms, conditions and consequences described in the documents accompanying this letter.

Please carefully read all the documents and instructions enclosed with this letter. You must return the Election Form to Stock Administration, Cadence Design Systems, Inc., 2655 Seely Avenue, Building 5, San Jose, California 95134, Fax: (408) 944-7835, no later than 12:00 midnight, California USA Time, December 21, 2001, unless the offer is extended.

If you have any questions about the program, please contact Elizabeth Villalobos by phone (408- 944-7813) or by e-mail (lizv@cadence.com) or your group Human Resources representative.

Sincerely,

H. Raymond Bingham President and Chief Executive Officer Cadence Design Systems, Inc.

Brent C. Hudson President Tality Holdings, Inc.

Enclosures

SUMMARY OF TERMS OF OPTION EXCHANGE

RESPONSE NEEDED BY 12:00 MIDNIGHT, CALIFORNIA USA TIME,

ON DECEMBER 21, 2001, UNLESS THE OFFER IS EXTENDED

You must check your election and sign and date the Election Form and return it to Stock Administration, Cadence Design Systems, Inc., 2655 Seely Avenue, Building 5, San Jose, California 95134, Fax: (408) 944-7835, before 12:00 midnight, California USA Time, on December 21, 2001, unless the offer is extended. If you have any questions, please contact Elizabeth Villalobos, whose contact information is set forth below, or your group Human Resources representative.

The following description summarizes some of the terms and conditions of the offer to exchange Tality Holdings, Inc. options ("Tality options"). Please read the Offer to Exchange as well because the information in this summary is not complete.

Are There any Conditions of the Exchange? Any holder of a Tality option must exchange his or her Tality options, on an all-or-nothing basis, for a new Cadence grant of options. Any such holder must also agree to waive any claims against Cadence, Tality Holdings, Inc., Tality Corporation, Tality, LP and their affiliates relating to the offer and his or her ownership of Tality equity. In addition, once a holder of Tality options accepts the offer, this acceptance cannot be revoked.

How Many Cadence Options Will I Receive? If you accept our offer, we will grant you Cadence options to purchase that number of shares of common stock which is EQUAL TO the number of shares of Class A common stock subject to the Tality options multiplied by the ratio of $6.10 divided by the closing price of Cadence common stock on December 21, 2001 multiplied by a factor. If you had unvested Cadence options at the time your Tality options were granted or have been granted Cadence options since receiving your Tality option grant, your factor is 1.0. If you did not have unvested Cadence options at the time your Tality options were granted or have not been granted Cadence options since receiving your Tality option grant, your factor is 1.5. For example, if you hold a Tality Option to purchase 1,000 shares and on December 21, 2001 the closing price of Cadence common stock is $25.00, and you hold unvested Cadence options (or have held unvested Cadence options on or since July 13, 2000), you will receive a Cadence Option to purchase 244 shares of Cadence common stock. If you do

not hold unvested Cadence options (and have not held unvested Cadence options since July 13, 2000), you will receive a Cadence Option to purchase 366 (244 x 1.5) shares of Cadence common stock. The first part of the formula ensures that former Tality option holders hold equity with equivalent value before and after the exchange.

The exact number of shares subject to the Tality options that you have now is set forth in the Election Form. Please look at the Election Form now and contact Elizabeth Villalobos or your group Human Resources representative if you have any questions.

What is the Exercise Price Per Share of the Cadence Options? If you exchange Tality options that were granted on or before April 15, 2001, each Cadence option will have an exercise price equal to the product of 1.025 multiplied by the closing sale price of one share of Cadence common stock as reported by the New York Stock Exchange on December 21, 2001, the expiration of the offer, unless the offer is extended. If you exchange Tality options that were granted after April 15, 2001, each Cadence option will have an exercise price equal to the closing sale price of one share of Cadence common stock as reported by the New York Stock Exchange on December 21, 2001, the expiration of the offer, unless the offer is extended.

What is the Vesting Period of the Cadence Options? Each new Cadence option granted in exchange for Tality options will vest as to 25% after one year from the date of grant of the original Tality option, then ratably over the following thirty-six (36) months. Note that your vesting commencement date will also remain the same for each of your new Cadence options.

What is the Termination Date of the Cadence Options? Each Cadence option will have a term that expires on the same ten year anniversary date as the Tality option for which it was exchanged.

What does the Company Recommend that I Do? Although the Tality board of directors has approved Cadence making this offer, neither Tality nor its board of directors makes any recommendation as to whether you should elect to exchange or refrain from electing to exchange your options. You must make your own decision whether to elect to exchange Tality options. Our board of directors recognizes that the decision to accept the offer is an individual one that should be based on a variety of factors and you should consult with your personal financial and tax advisors if you have questions about your financial or tax situation.

What Happens to My Tality Options if I Accept the Offer? If you accept the offer, all of your Tality options will be cancelled and you will have no further right or interest in those options, whether vested or unvested.

What is the U.S. Tax Treatment of the New Cadence Options? If you accept the offer, you will not recognize income for U.S. federal income tax purposes at the time of the exchange or at the time we grant Cadence options to you. Also note that no Cadence option will qualify as an incentive stock option under the Internal Revenue Code of 1986, as amended, and, therefore, Cadence options will not be eligible for the special tax treatment that applies to incentive stock options. We recommend that you consult with your own tax advisor to determine the specific tax consequences to you of accepting the offer.

What is the Foreign Tax Treatment of the New Cadence Options? The treatment of the exchange and the new Cadence options in Canada and the United Kingdom are discussed in paragraph 12 of the Offer to Exchange. Information regarding the tax treatment of the exchange and the new Cadence options in India will be distributed separately. We recommend that you consult with your own tax advisor to determine the specific tax consequences to you of accepting the offer.

What Happens if I Don't Accept the Offer? If you do not accept the offer to exchange Tality options, you will keep all of your current Tality options and will not receive any Cadence options. All of your Tality options will retain their current exercise price and current vesting schedule. As you are aware and as described in the Tality Equity Holder Report dated September 28, 2001, the Tality entities have recently been reorganized, including the repurchase of all outstanding shares of Class A common stock of Tality, but such reorganization has not, and is not expected to, change the terms of the Tality options. Tality options that are not exchanged will not be registered under the Securities Act of 1933, and therefore will not constitute liquid securities before any initial public offering of Tality Holdings, Inc., the timing of which is uncertain and will depend upon, among other things, existing market conditions.

ELECTION FORM

TO EXCHANGE OPTIONS TO PURCHASE SHARES OF TALITY
CLASS A COMMON STOCK FOR OPTIONS TO PURCHASE SHARES
OF COMMON STOCK OF CADENCE DESIGN SYSTEMS, INC.

PURSUANT TO THE OFFER TO EXCHANGE DATED NOVEMBER 26, 2001, THE OFFER TO EXCHANGE EXPIRES AT 12:00 MIDNIGHT, CALIFORNIA USA TIME, ON FRIDAY, DECEMBER 21, 2001, UNLESS THE OFFER IS EXTENDED.

If you accept the offer to exchange options ("offer"), the options to purchase Class A common stock of Tality Holdings, Inc. (the "Tality Options") described below will be exchanged for options to purchase Cadence Design Systems, Inc. ("Cadence") common stock ("Cadence Options"). If you accept the offer, the total number of options to purchase Cadence Options will be as described in the Offer to Exchange Outstanding Tality Options for Cadence Options included in this packet. Once you accept the offer, your acceptance may not be revoked. If you reject the offer, you may change your election to accept the offer before expiration of the offer but not after such expiration.

If you do not accept the offer, there will be no change to your existing Tality Option grants and you will not receive the Cadence Options set forth below. All of your Tality options will retain their current exercise price and current vesting schedule. As you are aware and as described in the Tality Equity Holder Report for the year ended December 30, 2000 and the quarter ended June 30, 2001, dated September 28, 2001, the Tality entities have recently been reorganized, including the repurchase of all outstanding shares of Class A common stock of Tality, but such reorganization has not, and is not expect to, change the terms of the Tality options. Tality options that are not exchanged will not be registered under the Securities Act of 1933, and therefore will not constitute liquid securities before any initial public offering of Tality Holdings, Inc., the timing of which is uncertain and will depend upon, among other things, existing market conditions.

Questions should be directed to your group Human Resource representative or Elizabeth Villalobos by phone (408-944-7813) or by e-mail (lizv@cadence.com).

Please check one box below, sign and date where indicated, provide your home telephone number, and return this form to Stock Administration, Attn:
Elizabeth Villalobos, 2655 Seely Avenue, Building 5, San Jose, California 95134, Fax: (408) 944-7835. Also, please note that you do not need to include any documents relating to the options that you are electing to exchange, if any. Cadence will exchange and cancel such options electronically and update your option records accordingly.

In addition, if you agree to accept the offer to exchange options, you are also agreeing to the following waiver:

In consideration of the offer, you hereby release, acquit and forever discharge Cadence, Tality Holdings, Inc., Tality Corporation, Tality Transition Corporation, Tality, LP, Tality Canada Corporation, Tality UK, Ltd., Tality India Services Private Limited and their respective

officers, directors, agents, servants, employees, attorneys, stockholders, successors, assigns and other affiliates (the "Releasees") from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys' fees, damages, indemnities and obligations of every kind and nature, in law, equity or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, directly or indirectly arising out of or in any way connected with the grant to you of Tality Options or the offer, the transactions contemplated by the offer, grant or issuance of stock, stock options, or any other ownership interests in Tality Corporation or Tality Holdings, Inc., including but not limited to, all such claims and demands pursuant to any federal, state or local law, statute, or causes of action under securities law, contract law or tort law; or any related events, acts or conduct at any time prior to and including the date of execution of your acceptance of the offer.

In addition, by accepting the offer, you understand and agree that the release of claims described above includes claims which may be unknown to you at present, and that you have read and understand Section 1542 of the California Civil Code, which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." You hereby waive and relinquish any and all rights under Section 1542 with respect to your release of any unknown or unsuspected claims you might have against the Releasees.

SIGNATURE OF OWNER

[ ] I ACCEPT the offer to exchange options and related waiver

[ ] I DO NOT accept the offer to exchange options

X___________________________________ Date:__________________, 2001 Signature

Print Name:_________________________

Home Telephone Number (with area code):________________________________

TALITY OPTIONS
(TO BE EXCHANGED FOR CADENCE OPTIONS IF YOU ACCEPT THE OFFER)

Grant Date Shares Exercise Price

________________________________________________________$6.25___________

Total

Exhibit 10.08

CADENCE DESIGN SYSTEMS, INC.

1994 DEFERRED COMPENSATION PLAN

AMENDED AND RESTATED

EFFECTIVE JANUARY 1, 2001

CADENCE DESIGN SYSTEMS, INC.
1994 DEFERRED COMPENSATION PLAN
AMENDED AND RESTATED
EFFECTIVE JANUARY 1, 2001

CADENCE DESIGN SYSTEMS, INC., a Delaware Corporation (referred to hereafter as the "Employer") established effective October 1, 1994 and amended and restated effective October 1, 1996, this Cadence Design Systems, Inc. 1994 Deferred Compensation Plan (the "Plan"), an unfunded plan for the purpose of providing deferred compensation for a select group of management and highly compensated executives. The Employer hereby amends and restates the Plan in its entirety effective January 1, 2001 to reflect prior and new amendments to the Plan.

RECITALS

WHEREAS, those employees identified by the Compensation Committee of the Board of Directors of the Employer or any other committee designated by the Board of Directors of the Employer to administer this Plan in accordance with
Section 8 hereof (hereinafter referred to as the "Committee") as eligible to participate in this Plan (each of whom are referred to hereafter as the "Employee" or collectively as the "Employees") are employed by Employer;

WHEREAS, Employer previously adopted an unfunded deferred compensation plan and the Employees desire the Employer to continue to pay certain deferred compensation and/or related benefits to or for the benefit of Employees, or a designated Beneficiary or both; and

WHEREAS, Employer believes it is in the best interest of Plan participants and beneficiaries to amend and restate the Plan;

NOW, THEREFORE, the Employer hereby amends and restates the Plan effective as of January 1, 2001.

SECTION 1

DEFINITIONS

1.1 "Account" shall mean the separate account(s) established under this Plan and the Trust for each participating Employee. Employer shall furnish each participant with a statement of his or her account balance at least annually.

1.2 "Beneficiary" shall mean the Beneficiary designated by the Employee to receive Employee's deferred compensation benefits in the event of his or her death.

1.3 "Change in Control" shall have the meaning set forth in Section 5.1 of the Plan.

1.4 "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder.

1.5 "Committee" shall mean the Compensation Committee of the Board of Directors of the Employer or any other committee designated by the Board of Directors of the Employer to administer this Plan in accordance with Section 8 hereof.

1.6 "Compensation" shall, for the period on or before April 1, 1998, mean the base salary and cash bonuses described in Section 3.1. On or after April 1, 1998, "Compensation" shall mean the base salary, cash bonuses, and director fees described in Section 3.1.

1.7 "Effective Date" of the Plan shall mean October 1, 1994, unless otherwise specified by the Employer in a corporate resolution approving and adopting this Plan. The effective date of this amendment and restatement shall be January 1, 2001.

1.8 "Eligible Compensation" shall mean, for the period prior to April 1, 1998, projected annual compensation from the Employer, determined on an annual basis by the Employer at or before the beginning of the Plan Year, which may consist of salary, bonus, and/or incentive payments, determined before any deductions under any qualified plan of the Employer (including a Section 401(k) plan or a Section 125 plan) and excluding any special or non-recurring compensatory payments such as moving or relocation bonuses or automobile allowances. Effective on and after April 1, 1998, the term shall mean projected annual compensation from the Employer determined on an annual basis by the Employer at or before the beginning of the Plan, which may consist of salary, bonus, and, and/or incentive payments, determined before any deductions under any qualified plan of the Employer (including a Section 401(k) plan or a Section 125 plan) and excluding any special or non-recurring compensatory payments such as moving or relocation bonuses or automobile allowances.

1.9 "Employee" shall, for the period before April 1, 1998, mean, each employee of Employer. Effective on or after April 1, 1998, the term shall also include each Non-Employee Director. The term shall also include reference to an Employee's Beneficiary where the context so requires.

1.10 "Employer" shall mean Cadence Design Systems, Inc., a Delaware corporation, and any successor organization thereto, and any Subsidiaries, as defined in Section 7.3, of the Company.

1.11 "Employer Contributions" shall mean the Employer's discretionary contribution, if any, pursuant to Section 3.1(b) of the Plan.

1.12 "Hardship" shall have the meaning set forth in Section 3.5 of the Plan.

1.13 "Non-Employee Director" shall mean a director of the Employer who is not otherwise an employee of the Employer.

1.14 "Plan Year" shall mean the year beginning each January 1 and ending December 31; notwithstanding the foregoing, the initial Plan Year shall mean the period beginning with the Effective Date and ending on December 31, 1994.

1.15 "Plan" shall mean the Cadence Design Systems, Inc. 1994 Deferred Compensation Plan, including any amendments thereto.

1.16 "Permanent Disability" shall mean that the Employee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or otherwise meets the definition of

"Permanent Disability" as set forth in the Employer's Long Term Disability Plan. An Employee will not be considered to have a Permanent Disability unless he or she furnishes proof of such condition sufficient to satisfy the Employer, in its sole discretion.

1.17 "Subsidiary" shall mean any corporation (other than the Employer) in an unbroken chain of corporations or other entities beginning with the Employer, if each of the entities other than the last entity in the unbroken chain owns stock, partnership rights or other ownership interest possessing fifty (50) percent or more of the total combined voting power of all classes of stock, partnership rights or other ownership interest in one of the other entities in such chain.

1.18 "Tality" shall mean the entity formed to own and operate Cadence Design Systems, Inc.'s electronics design services group business under the name "Tality Corporation" or any other name.

1.19 "Trust" or "Trust Agreement" shall mean the Cadence Design Systems, Inc. 1994 Deferred Compensation Plan Rabbi Trust Agreement, including any amendments thereto, entered into between the Employer and the Trustee to carry out the provisions of the Plan.

1.20 "Trust Fund" shall mean the cash and other assets and/or properties held and administered by Trustee pursuant to the Trust to carry out the provisions of the Plan.

1.21 "Trustee" shall mean the designated Trustee acting at any time under the Trust.

SECTION 2

ELIGIBILITY

2.1 ELIGIBILITY. Eligibility to participate in the Plan shall be limited to Employees of the Employer who (a) have Eligible Compensation of at least $150,000 for the Plan Year, (b) are classified as officers, vice-presidents, directors, or an equivalent title, and (c) have been selected by the Committee to participate in the Plan. The Committee shall designate Employees who shall be covered by this Plan in a separate Acknowledgment (in the form attached hereto as Appendix 1) for each such Employee. Participation in the Plan shall commence as of the date such Acknowledgment is signed by the Employee and delivered to the Employer, provided that deferral of compensation under the Plan shall not commence until the Employee has complied with the election procedures set forth in Section 3.3. Nothing in the Plan or in the Acknowledgment should be construed to require any contributions to the Plan on behalf of the Employee by Employer.

Notwithstanding the foregoing, Non-Employee Directors shall be eligible to participate in the Plan and a Non-Employee Director shall commence participation in the Plan as of the later of April 1, 1998 or the date the Non-Employee Director first becomes a Non-Employee Director, provided that deferral of Compensation under the Plan shall not commence until the Non-Employee Director has complied with the election procedures set forth in
Section 3.3.

SECTION 3

DEFERRED COMPENSATION

3.1 DEFERRED COMPENSATION.

(a) Each participating Employee may elect, in accordance with
Section 3.3 of this Plan, to defer semi-annually the receipt of a portion of the Compensation for active service otherwise payable to him or her by Employer during each semi-annual period or portion of a semi-annual period that the Employee shall be employed by the Employer. Any Compensation deferred by Employee pursuant to Section 3.3 shall be recorded by the Employer in an Account, maintained in the name of the Employee, which Account shall be credited with a dollar amount equal to the total amount of Compensation deferred during each semi-annual period under the Plan, together with earnings thereon credited in accordance with Section 3.7. The amount or percentage of Compensation that Employee elects to defer under Section 3.3 will remain constant for the semi-annual period and shall not be subject to change during such semi-annual period. Effective April 1, 1998, each such deferral election as to "base salary" or "director's fees" or discontinuance of a deferral election as to "base salary" or "director's fees" will continue in force for each successive year or semi-annual period, as appropriate, until or unless suspended or modified by the filing of a subsequent election with the Employer by the Employee or Non-Employee Director in accordance with Section 3.3 of the Plan. Each deferral election as to an Employee's "cash bonus" shall continue in force only for the single semi-annual period in which it is paid, regardless of the period of time as to which it is awarded, and shall not apply to any successive semi-annual periods. Any deferral election with respect to a "cash bonus" must be made prior to the time the amount of the bonus is determined, prior to the end of the period of time as to which the bonus is awarded, and at a time that the amount of any such bonus remains substantially uncertain. All deferrals pursuant to this Section 3.1 shall be fully vested at all times. Effective April 1, 1998, deferral elections shall be subject to minimum dollar and maximum percentage amount limits as follows: (i) the minimum semi-annual deferral amount is $2,500 (prior to July 1, 1998, the minimum annual deferral amount was $5,000), which shall be withheld from the Employee's or Non-Employee Director's Compensation, and (ii) the maximum deferral percentage amount is 80% of the Employee's "base salary," 100% of the Employee's "cash bonus," and 100% of the Non-Employee Director's "director's fees." For purposes of the Plan, "base salary" for a given semi-annual period means an "Employee's regular compensation payable during the semi-annual period, excluding bonuses, commissions, overtime, incentive payments, non-monetary awards, compensation deferred pursuant to all
Section 125 (cafeteria) or Section 401(k) (savings) plans of the Employer and other special compensation, and reduced by the tax withholding obligations imposed on the Employer and any other withholding requirements imposed by law with respect to such amounts. For purposes of the Plan, "cash bonus" shall mean amounts (if any) awarded under the bonus policies maintained by the Employer and any commissions earned on sales. For purposes of the Plan, "director's fees" for a given semi-annual period means the annual retainer, per meeting fees, committee meeting fees, and consulting fees payable during the semi-annual period. Except as otherwise expressly provided herein, this Section 3.1(a) is effective as of July 1, 1998.

(b) Employer shall not be obligated to make any other contribution to the Plan on behalf of any Employee at any time. Employer may make Employer Contributions to the

Plan on behalf of one or more Employees. Employer Contributions, if any, made to Accounts of Employees shall be determined in the sole and absolute discretion of the Employer, and may be made without regard to whether the Employee to whose Account such contribution is credited has made, or is making, contributions pursuant to Section 3.1(a). The Employer shall not be bound or obligated to apply any specific formula or basis for calculating the amount of any Employer Contributions and Employer shall have sole and absolute discretion as to the allocation of Employer Contributions among participating Employee Accounts. The use of any particular formula or basis for making an Employer Contribution in one year shall not bind or obligate the Employer to use such formula or basis in any other year. Employer Contributions may be subject to a substantial risk of forfeiture in accordance with the terms of a vesting schedule, which may be selected by the Employer in its sole and absolute discretion.

(c) Amounts deferred under the Plan shall be calculated and withheld from the Employee's base salary and/or cash bonus after such compensation has been reduced to reflect salary reduction contributions to the Employer's Code
Section 125 (cafeteria) and Code Section 401(k) (savings) plans, but before any reductions for contributions to the Code Section 423 (employee stock purchase) plan.

(d) Effective April 1, 2000, the Committee in its sole discretion may direct the Trustee to accept the transfer of funds held in trust under the Cadence Design Systems, Inc. 1996 Deferred Compensation Venture Investment Trust Agreement ("Telos Trust"), for a participant in the Cadence Design Systems, Inc. 1996 Deferred Compensation Venture Investment Plan ("Telos Plan"), which is an unfunded nonqualified deferred compensation plan for a select group of management and highly compensated executives of the Company, in which case the transferred funds shall be held by the Trustee under and be subject to the terms of the Plan and invested and accounted for as directed by the Committee except as otherwise provided in Section 3.2(e). Such amounts transferred from the Telos Trust to the Trust ("Transferred Funds") may not be returned to the Telos Plan or Telos Trust. The transfer of such Transferred Funds shall not cause any of the participant's rights to a distribution under the Plan or the Telos Plan (including the Transferred Funds) to be a secured right to a distribution under either plan.

3.2 PAYMENT OF ACCOUNT BALANCES.

(a) Effective July 1, 1998, the Employee shall elect whether he or she will receive distribution of his or her entire Account, subject to tax withholding requirements, (i) upon reaching a specified age, (ii) upon passage of a specified number of years, (iii) upon termination of employment of Employee with Employer, (iv) upon the earlier to occur of (A) termination of employment of Employee with Employer or (B) passage of a specified number of years or attainment of a specified age, or (v) upon the later to occur of (A) termination of employment of Employee with Employer or (B) passage of a specified number of years or attainment of a specified age, as elected by Employee in accordance with the form established by the Committee. Such form may permit an election among some or all of the alternatives listed in this Section 3.2(a), as determined in the Committee's sole discretion. A designation of the time of distribution shall be required as a condition of participation under this Plan. The Employee shall also elect to receive all amounts payable to him or her in a lump sum or in equal monthly installments over a designated period of five or ten years, pursuant to the provisions of Section 3.2(e). These elections shall be made in accordance with Section 3.4 of this Plan.

(b) Distributions shall be made to the maximum extent allowable under the election made by Employee, except that no distribution shall be made to the extent that the receipt of such distribution, when combined with the receipt of all other "applicable employee remuneration" (as defined in Code
Section 162(m)(4)) would cause any remuneration received by the Employee to be nondeductible by the Employer under Code Section 162(m)(1). The portion of any distributable amount that is not distributed by operation of this Section 3.2(b) shall be distributed in subsequent years in the manner elected by the Employee until the Employee's Account has been fully liquidated. The commencement date of the lump sum payment or the five- or ten-year period (whichever is applicable) shall be automatically extended, when necessary to satisfy the requirements of this subsection, for one-year periods until all Account balances have been distributed in the manner elected by the Employee.

(c) Effective July 1, 1998, upon termination of Employee's employment with Employer by reason of death or Permanent Disability prior to the time when payment of Account balances otherwise would commence under the provisions of Section 3.2(a), Employee or Employee's designated Beneficiary will be entitled to receive all amounts credited to the Account of Employee as of the date of his or her death or Permanent Disability (notwithstanding any contrary election to receive distributions under the first sentence of Section 3.2(a)). Upon termination of Employee's employment with Employer by reason other than death or Permanent Disability prior to the date when payment of Account balances otherwise would commence under the provisions of Section 3.2(a), the Employer may, in the sole discretion of the Committee, distribute to Employee or Employee's designated Beneficiary all amounts credited to the Employee's Account as of the date of such termination (notwithstanding any contrary election to receive distributions under the first sentence of Section 3.2(a)). Said amounts shall be payable in the form determined pursuant to the provisions of Section 3.2(e).

(d) Upon the death of Employee prior to complete distribution to him or her of the entire balance of his or her Account (and after the date of termination of employment with Employer), the balance of his or her Account on the date of death shall be payable to Employee's designated Beneficiary pursuant to Section 3.2(e). Effective July 1, 1998, notwithstanding any other provision of the Plan to the contrary, the Employee's designated Beneficiary may receive the distribution of the remaining portion of such deceased Employee's Account in the form of a lump sum if the Beneficiary requests such a distribution and the Committee, in its sole discretion, consents to such a distribution.

(e) The Employer shall distribute or direct distribution of the balance of amounts previously credited to Employee's Account, in a lump sum, or in monthly installments over a period of five (5) years or ten (10) years as Employee shall designate. A designation of the form of distribution shall be required as a condition of participation under this Plan. Distribution of the lump sum or the first installment shall be made or commence within ninety (90) days following the date specified in the first sentence of Section 3.2(a), or as otherwise provided in 3.2(c). Subsequent installments, if any, shall be made on the first day of each month following the last installment as determined by Employer. The amount of each installment shall be calculated by dividing the Account balance as of the date of the distribution by the number of installments remaining pursuant to the Employee's distribution election. Each such installment, if any, shall take into account earnings credited to the balance of the Account remaining unpaid. The Employee's distribution election shall be made on a form provided by Employer.

Notwithstanding any provision herein to the contrary, effective April 1, 2000, Transferred Funds from the Telos Trust under the Telos Plan to the Trust for the benefit of a participant in the Telos Plan, shall be distributable under the Plan according to the terms of the elections permitted and made by the participant under the Telos Plan unless subsequently modified by the participant as permitted under this Plan.

(f) Effective April 1, 1998, for purposes of this Section 3.2, reference to termination of employment shall also include termination of service as a Non-Employee Director of the Employer (except in the event such termination is due to becoming an Employee).

3.3 ELECTION TO DEFER COMPENSATION. Each election of an Employee to defer compensation as provided in Section 3.1 of this Plan shall be in writing, signed by the Employee, and delivered to Employer, together with all other documents required under the provisions of this Plan, within such time as determined by the Committee and communicated to those Employees who are eligible to participate in the Plan. Such deferral elections must be delivered to Employer prior to the beginning of the Plan Year with respect to which the Compensation to be deferred is otherwise payable to Employee. Provided, however, that effective April 1, 1998, an Employee who is hired or promoted to a position of eligibility for participation in the Plan during a Plan Year (effective January 1, 2001, on or before the first business day of a semi-annual period) or a Non-Employee Director who is elected to become a Non-Employee Director shall have thirty (30) days from the date of notification of eligibility for participation in the Plan in which to submit the required election documents for the then current semi-annual period. Any deferral election made by Employee shall be irrevocable with respect to any Compensation covered by such election, including Compensation payable in the semi-annual period in which the election suspending or modifying the prior deferral election is delivered to Employer. Notwithstanding the foregoing, with respect to cash bonuses payable to an Employee for the year ended December 31, 1996, but which will not be paid to the Employee until after January 1, 1997, the Employee may make a separate deferral election with respect to, or revise a previous deferral election with respect to, such cash bonuses until such time on or before December 31, 1996 as determined by the Committee, so long as at that time the amount of any such bonus has not yet been determined and remains substantially uncertain. The Employer shall withhold the amount or percentage of base salary specified to be deferred in equal amounts for each payroll period and shall withhold the amount or percentage of each cash bonus specified to be deferred at the time or times such bonus is or otherwise would be paid to the Employee. The election to defer Compensation shall be made on the form provided by Employer. Effective April 1, 1998, the Employer shall withhold the amount or percentage of director's fees specified to be deferred at the time or times such director's fees are or otherwise would be paid to the Non-Employee Director. Notwithstanding the foregoing, with respect to Compensation payable to a Non-Employee Director for the Plan Year ending December 31, 1998, but which will not be paid to the Non-Employee Director until after March 31, 1998, the Non-Employee Director may make a deferral election with respect to such Compensation until March 31, 1998. Notwithstanding any other provision of the Plan to the contrary, with respect to base salary and cash bonuses payable to an Employee for the six-month period from July 1, 1998 through December 31, 1998, prior to July 1, 1998, the Employee may revise a previous deferral election with respect to such base salary to increase (but not decrease) the amount or percentage of base salary to be deferred. Except as otherwise expressly provided herein, this Section 3.3 is effective as of July 1, 1998.

3.4 DISTRIBUTION ELECTION. The initial distribution election of an Employee as provided in Section 3.2 of this Plan shall be in writing, signed by the Employee, and delivered to Employer, together with all other documents required under the provisions of this Plan, within such period of time determined by the Committee and communicated to those Employees who are eligible to participate in the Plan. Such deferral elections must be delivered to the Employer prior to the beginning of the first Plan Year in which Employee is eligible to participate in the Plan. Provided however, that effective April 1, 1998, an Employee who is hired or promoted to a position of eligibility for participation in the Plan or a Non-Employee Director who is elected to become a Non-Employee Director during a Plan Year shall have thirty (30) days from the date of notification of eligibility for participation in the Plan in which to submit the required distribution election documents. If permitted by the Committee, an Employee may change the terms of his or her initial distribution election by making a new election, and any such new election will be effective as of the later of the date that is (a) six (6) months following the date the new election is made or (b) the first day of the Plan Year following the Plan Year in which the new election is made and such new election will apply to the Employee's entire account. An Employee may not make a new election once distributions from the Plan have commenced or which would first become effective at a time when distributions from the Plan have commenced. Employee's distribution election shall be in the form established by the Committee in accordance with the terms of the Plan.

3.5 PAYMENT UPON CHANGE IN CONTROL. Notwithstanding any other provisions of this Plan (including without limitation Section 3.2), the aggregate balance credited to and held in the Employees' Accounts shall be distributed to Employees in a lump sum on the thirtieth day following a Change in Control (except that distribution shall be on the sixtieth day in the case of a Change in Control under Section 5.1(a)), as defined in Section 5.1, unless the Committee, the Board of Directors of the Employer, or the 401(k)/NQDC Administrative Committee of the Employer (as each is composed immediately prior to such Change in Control), in the sole discretion of any of the foregoing, decides prior to that date that Employees' Accounts shall remain in the Plan.

3.6 HARDSHIP.

(a) An Employee may apply for distributions from his or her Account to the extent that the Employee demonstrates to the reasonable satisfaction of the Committee that he or she needs the funds due to Hardship. For purposes of this Section 3.6, a distribution is made on account of Hardship only if the distribution is made on account of an unforeseeable immediate and heavy emergency financial need of the Employee and is necessary to satisfy that emergency financial need. Whether an Employee has an immediate and heavy emergency financial need shall be determined by the Committee based on all relevant facts and circumstances, and shall include, but not be limited to: the need to pay funeral expenses of a family member; the need to pay expenses for medical care for Employee, the Employee's spouse or any dependent of Employee resulting from sudden unexpected illness or accident; payments necessary to prevent the eviction of Employee from Employee's principal residence or foreclosure on the mortgage on that residence; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of Employee. A Hardship distribution shall not exceed the amount required to relieve the financial need of the Employee, nor shall a Hardship distribution be made if the need may be satisfied from other resources reasonably available to the Employee. For

purposes of this paragraph, an Employee's resources shall be deemed to include those assets of the Employee's spouse and minor children that are reasonably available to the Employee. Prior to approving a Hardship distribution, Employer shall require the Employee to certify in writing that the Employee's financial need cannot reasonably be relieved:

(i) through reimbursement or compensation by insurance or otherwise; or

(ii) by other distributions or nontaxable (at the time of the loan) from plans maintained by the Employer or by any other employer, or by borrowing from commercial sources on reasonable commercial terms, in an amount sufficient to satisfy the need.

(b) Any Employee receiving a Hardship distribution under this section shall be ineligible to defer any additional compensation under the Plan until the first day of the Plan Year following the second anniversary of the date of the distribution. In addition, a new Election of Deferral must be submitted to the Employer as a condition of participation in the Plan.

3.7 EMPLOYEE'S RIGHT UNSECURED. The right of the Employee or his or her designated Beneficiary to receive a distribution hereunder shall be an unsecured claim against the general assets of the Employer, and neither the Employee nor his or her designated Beneficiary shall have any rights in or against any amount credited to his or her Account or any other specific assets of the Employer, except as otherwise provided in the Trust. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between the Plan and the Employer or any other person.

3.8 INVESTMENT OF CONTRIBUTION.

(a) The investment options available to each Employee shall be determined by the Employer and set forth in a separate written document, a copy of which shall be attached hereto and by this reference is incorporated herein. Each Employee shall have the sole and exclusive right to direct the Trustee as to the investment of his or her Accounts in accordance with policies and procedures implemented by the Trustee. The right of an Employee to direct the investment of his or her Account into one or more of the available investment options shall not in any way be considered to alter the fact that an Account is a bookkeeping account only that measures the Employer's obligation to pay benefits hereunder, that the assets being invested at the direction of an Employee are assets of the Employer and that the Employee's rights under the Plan remain those of an unsecured, general creditor of the Employer.

Employer shall not be liable for any investment decision made by any Employee while such funds are held by the Trustee.

(b) Accounts shall be credited with the actual financial performance or earnings generated by such investments directed by the Employee and made by the Trustee, until the Account has been fully distributed to the Employee or to the Employee's designated Beneficiary.

(c) Notwithstanding any other provision in this Section 3.8 to the contrary, the Committee may determine not to take account of Employee's designated investments and determine to have the Employee's Account invested in any other manner as the Committee shall determine.

SECTION 4

DESIGNATION OF BENEFICIARY

4.1 DESIGNATION OF BENEFICIARY. Employee may designate a Beneficiary or Beneficiaries to receive any amount due hereunder by Employee by written notice thereof to Employer at any time prior to Employee's death and may revoke or change the Beneficiary designated therein without the Beneficiary's consent by written notice delivered to Employer at any time and from time to time prior to Employee's death. If Employee is married and a resident of a community property state, one half of any amount due hereunder which is the result of an amount contributed to the Plan during such marriage is the community property of the Employee's spouse and Employee may designate a Beneficiary or Beneficiaries to receive only the Employee's one-half interest. If Employee shall have failed to designate a Beneficiary, or if no such Beneficiary shall survive him or her, then such amount shall be paid to his or her estate. Designations of Beneficiaries shall be made on the form provided by Employer.

SECTION 5

CHANGE IN CONTROL

5.1 CHANGE IN CONTROL. For the purposes of this Plan, "Change in Control" means, the happening of any of the following:

(a) The first public announcement or public acknowledgment (including without limitation, a report filed pursuant to Section 13(d) of the Securities Exchange Act of 1934 as amended (the "Exchange Act")) by the Employer that a "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Employer, a Subsidiary or an employee benefit plan of the Employer or a Subsidiary, or other controlled affiliate of the Employer, including any trustee of such plan acting as trustee), is or has become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act or comparable successor rule), directly or indirectly, of securities of the Employer representing fifty percent (50%) or more of the combined voting power of the Employer's then outstanding Common Stock entitled to vote in the election of directors, where such person's beneficial ownership of the Employer's Common Stock was not initiated by the Employer or approved by the Employer's Board of Directors;

(b) The sale, lease or other disposition of all or substantially all of the assets of the Employer (but, effective September 15, 2000, not including the formation or any public offering (including but not limited to the initial or any subsequent public offering) of the common stock of Tality;

(c) The merger or consolidation of the Employer with or into another corporation not initiated by the Employer, in which the Employer is not the surviving

corporation and the stockholders of the Employer immediately prior to the merger or consolidation fail to possess direct or indirect beneficial ownership of more than eighty percent (80%) of the voting power of the securities of the surviving corporation (or if the surviving corporation is a controlled affiliate of another entity, then the required beneficial ownership shall be determined with respect to the securities of that entity which controls the surviving corporation and is not itself a controlled affiliate of any other entity) immediately following such transaction, or a reverse merger not initiated by the Employer, in which the Employer is the surviving corporation and the stockholders of the Employer immediately prior to the reverse merger fail to possess direct or indirect beneficial ownership of more than eighty percent (80%) of the securities of the Employer (or if the Employer is a controlled affiliate of another entity, then the required beneficial ownership shall be determined with respect to the securities of that entity which controls the Employer and is not itself a controlled affiliate of any other entity) immediately following the reverse merger. For purposes of this Section 5.1(c), any person who acquired securities of the Employer prior to the occurrence of a merger, reverse merger, or consolidation in contemplation of such transaction and who after such transaction possesses direct or indirect beneficial ownership of at least ten percent (10%) of the Common Stock of the Employer or the surviving corporation (or if the Employer or the surviving corporation is a controlled affiliate, then of the appropriate entity as determined above) immediately following such transaction shall not be included in the group of stockholders of the Employer immediately prior to such transaction;

(d) A change in the composition of the Board of Directors of the Employer, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (i) are directors of the Employer as of the date hereof, or (ii) are elected, or nominated for election, to the Board of Directors of the Employer with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Employer); or

(e) Any liquidation or dissolution of the Employer.

SECTION 6

TRUST PROVISIONS

6.1 TRUST AGREEMENT. The Employer may establish the Trust for the purpose of retaining assets set aside by Employer pursuant to the Trust Agreement for payment of all or a portion of the amounts payable pursuant to the Plan. Any benefits not paid from the Trust shall be paid solely from Employer's general funds, and any benefits paid from the Trust shall be credited against and reduce by a corresponding amount the Employer's liability to Employees under the Plan. No special or separate fund, other than the Trust Agreement, shall be established and no other segregation of assets shall be made to assure the payment of any benefits hereunder. All Trust Funds shall be subject to the claims of general creditors of the Employer in the event the Employer is Insolvent as defined in Section 3 of the Trust Agreement. The obligations of the

Employer to pay benefits under the Plan constitute an unfunded, unsecured promise to pay and Employees shall have no greater rights than general creditors of the Employer.

SECTION 7

AMENDMENT, TERMINATION AND TRANSFERS BY COMMITTEE

7.1 AMENDMENT. The Committee shall have the right to amend this Plan at any time and from time to time, including a retroactive amendment. Any such amendment shall come effective upon the date stated therein, and shall be binding on all Employees, except as otherwise provided in such amendment; provided, however, that said amendment shall not affect adversely benefits payable to an affected Employee without the Employee's written approval.

7.2 TERMINATION. The Committee shall have the right to terminate this Plan at any time and direct the lump sum payments of all assets held by the Trust if the Employer is not Insolvent (as defined in Article 3 of the Trust Agreement) at that time.

7.3 TRANSFERS BY COMMITTEE.

(a) In the event that an Employee transfers employment from the Employer to a Subsidiary, the Committee shall have the right, but no obligation, to direct the Trustee to transfer funds in an amount equal to the amount credited to such Employee's Account (the "Transferred Account") to a trust established under a Transferee Plan maintained by such Subsidiary. The Committee shall determine, in its sole discretion, whether such transfer shall be made and the timing of such transfer. Such transfer shall be made only if, and to the extent, approval of such transfer is obtained from the Trustee. No transfer shall be made unless the Subsidiary meets the requirements of subsection 7.3(b)(i) as of the date of the transfer.

(b) DEFINITIONS.

(i) For purposes of this Section 7.3, "Subsidiary" shall mean any corporation (other than the Employer) in an unbroken chain of corporations beginning with the Employer, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty (50) percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

(ii) For purposes of this Section 7.3, "Transferee Plan" shall mean an unfunded, nonqualified deferred compensation plan described in Section 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA").

(c) No transfer shall be made under this Section 7.3 unless the Employee for whose benefit the Transferred Account is held executes a written waiver of all of such Employee's rights and benefits under this Plan in such form as shall be acceptable to the Committee.

SECTION 8

ADMINISTRATION

8.1 ADMINISTRATION. The Committee shall administer and interpret this Plan in accordance with the provisions of the Plan and the Trust Agreement. Any determination or decision by the Committee shall be conclusive and binding on all persons who at any time have or claim to have any interest whatever under this Plan. The Committee may employ legal counsel, consultants, actuaries and agents as it may deem desirable in the administration of the Plan and may rely on the opinion of such counsel or the computations of such consultant or other agent. The Committee shall have the authority to delegate some or all of the powers and responsibilities under the Plan and the Trust Agreement to such person or persons as it shall deem necessary, desirable or appropriate for administration of the Plan.

8.2 LIABILITY OF COMMITTEE; INDEMNIFICATION. To the maximum extent not prohibited by law, no member of the Committee shall be liable to any person and in any event shall be indemnified by the Employer for any action taken or omitted in connection with the interpretation and administration of this Plan unless attributable to his or her own bad faith or willful misconduct.

8.3 EXPENSES. The costs of the establishment of the Plan and the adoption of the Plan by Employer, including but not limited to legal and accounting fees, shall be borne by Employer. The expenses of administering the Plan and the Trust shall be borne by the Trust unless the Employer elects in its sole discretion to pay some or all of those expenses; provided, however, that Employer shall bear, and shall not be reimbursed by, the Trust for any tax liability of Employer associated with the investment of assets by the Trust.

SECTION 9

GENERAL AND MISCELLANEOUS

9.1 RIGHTS AGAINST EMPLOYER. Except as expressly provided by the Plan, the establishment of this Plan shall not be construed as giving to any Employee or to any person whomsoever, any legal, equitable or other rights against the Employer, or against its officers, directors, agents or shareholders, or as giving to any Employee or Beneficiary any equity or other interest in the assets, business or shares of Employer stock or giving any Employee the right to be retained in the employment of the Employer. Neither this plan nor any action taken hereunder shall be construed as giving to any Employee the right to be retained in the employ of the Employer or as affecting the right of the Employer to dismiss any Employee. Any benefit payable under the Plan shall not be deemed salary or other compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Employer for the benefit of its Employees. Nothing in the Plan or in any instrument executed pursuant thereto shall confer upon any Non-Employee Director any right to continue in the service of the Employer in any capacity or shall affect any right of the Employer, its Board of Directors or stockholders to remove any Non-Employee Director pursuant to the Employer's By-Laws and the provisions of the Delaware General Corporation Law.

the Employee or Beneficiary. Any attempt to alienate, anticipate, encumber, sell, transfer, assign, pledge, garnish, attach or otherwise subject to legal or equitable process or encumber or dispose of any interest in the Plan shall be void.

9.3 SEVERABILITY. If any provision of this Plan shall be declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of this Plan but shall be fully severable, and this Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein.

9.4 CONSTRUCTION. The article and section headings and numbers are included only for convenience of reference and are not to be taken as limiting or extending the meaning of any of the terms and provisions of this Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. When used herein, the masculine gender includes the feminine gender.

9.5 GOVERNING LAW. The validity and effect of this Plan and the rights and obligations of all persons affected hereby shall be construed and determined in accordance with the laws of the State of California unless superseded by federal law.

9.6 PAYMENT DUE TO INCOMPETENCE. If the Committee receives evidence that an Employee or Beneficiary entitled to receive any payment under the Plan is physically or mentally incompetent to receive such payment, the Committee may, in its sole and absolute discretion, direct the payment to any other person or Trust which has been legally appointed by the courts or to any other person determined by the Employer to be a proper recipient on behalf of such person otherwise entitled to payment, or any of them, in such manner and proportion as the Employer may deem proper. Any such payment shall be in complete discharge of the Employer's obligations under this Plan.

9.7 TAX. The Employer may withhold from any benefits payable under this Plan, all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling.

9.8 ATTORNEY'S FEES. Employer shall pay the reasonable attorney's fees incurred by any Employee in an action brought against Employer to enforce Employee's rights under the Plan, provided that such fees shall only be payable in the event that the Employee prevails in. such action.

9.9 PLAN BINDING ON SUCCESSORS/ASSIGNEES. This Plan shall be binding upon and inure to the benefit of the Employer and its successor and assigns and the Employee and the Employee's designee and estate.

The Employer has caused its authorized officer to execute this amended and restated Plan this ____ day of ________________, 2001.

CADENCE DESIGN SYSTEMS, INC.

By: ___________________________

APPENDIX 1

ACKNOWLEDGMENT

The undersigned Employee hereby acknowledges that Employer has selected him or her as a participant in the Cadence Design Systems, Inc. 1994 Deferred Compensation Plan, subject to all terms and conditions of the Plan, a copy of which has been received, read, and understood by the Employee in conjunction with executing this Acknowledgment. Employee acknowledges that he or she has had satisfactory opportunity to ask questions regarding his or her participation in the Plan and has received satisfactory answers to any questions asked. Employee also acknowledges that he or she has sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of participation in the Plan. Employee understands that his or her participation in the Plan shall not begin until this Acknowledgment has been signed by Employee and returned to Employer.

Dated:

Signed:
Employee

Dated:

CADENCE DESIGN SYSTEMS, INC.

Signed:

[Officer]

Exhibit 10.09

CADENCE DESIGN SYSTEMS, INC.

1996 DEFERRED COMPENSATION VENTURE INVESTMENT PLAN

AMENDED AND RESTATED

EFFECTIVE JANUARY 1, 2001

CADENCE DESIGN SYSTEMS, INC.

1996 DEFERRED COMPENSATION VENTURE INVESTMENT PLAN

AMENDED AND RESTATED
EFFECTIVE JANUARY 1, 2001

CADENCE DESIGN SYSTEMS, INC. a Delaware corporation (referred to hereafter as the "Employer") established effective January 1, 1996, and amended and restated effective January 1, 2000, the Cadence Design Systems, Inc. 1996 Deferred Compensation Venture Investment Plan (the "Plan"), an unfunded plan for the purpose of providing deferred compensation for a select group of management and highly compensated executives. The Employer hereby amends and restates the Plan in its entirety effective January 1, 2001, to reflect prior and new amendments to the Plan.

RECITALS

WHEREAS, those employees and directors identified by the Compensation Committee of the Board of Directors of the Employer or any other committee designated by the Board of Directors of the Employer to administer this plan in accordance with Section 8 hereof (hereinafter referred to as the "Committee") as eligible to participate in this Plan (each of whom is referred to hereafter as the "Employee" or collectively as the "Employees") are employed by Employer; and

WHEREAS, Employer adopted, effective January 1, 1996, an unfunded deferred compensation plan (the "Plan" as defined below) to pay certain deferred compensation and/or related benefits to or for the benefit of Employees, or a designated Beneficiary, or both;

WHEREAS, Employer desires to amend and restate the Plan to clarify the circumstances surrounding the timing and form of distributions and to incorporate prior amendments into a single document.

NOW, THEREFORE, the Employer hereby amends and restates the Plan effective January 1, 2001.

SECTION 1

DEFINITIONS

1.1 "ACCOUNT" shall mean the separate account(s) established under this Plan and the Trust for each participating Employee. Employer shall furnish each participant with a statement of his or her account balance at least annually.

1.2 "BENEFICIARY" shall mean a person designated by the Employee to receive Employee's deferred compensation benefits in the event of his or her death.

1.3 "CHANGE IN CONTROL" shall have the meaning set forth in Section 5.1 of the Plan.

1.4 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder.

1.5 "COMMITTEE" shall mean the Compensation Committee of the Board of Directors of the Employer or any other committee designated by the Board of Directors of the Employer, or the Compensation Committee of the Board of Directors of the Employer, to administer this Plan in accordance with Section 8 hereof.

1.6 "COMPENSATION" shall mean, for the period beginning on the Effective Date through March 31, 1998, the base salary and cash bonuses described in
Section 3.1. Effective April 1, 1998, the term shall also include director's fees described in Section 3.1.

1.7 "EFFECTIVE DATE" shall mean January 1, 1996. The effective date of this amendment and restatement of the Plan shall be January 1, 2001.

1.8 "ELIGIBLE COMPENSATION" shall mean projected annual compensation from the Employer determined on an annual basis by the Employer at or before the beginning of the Plan, which may consist of salary, bonus, and, and/or incentive payments, determined before any deductions under any qualified plan of the Employer (including a Section 401(k) plan or a Section 125 plan) and excluding any special or non-recurring compensatory payments such as moving or relocation bonuses or automobile allowances.

1.9 "EMPLOYEE" shall mean each employee of Employer who (a) is a U.S. citizen or is a lawful permanent resident of the U.S., within the meaning of Code Section 7701(b)(1)(A)(i), (b) earns solely U.S. source income from Employer, and (c) is exclusively on Employer's U.S. payroll system, or a Beneficiary of such individual where the context so requires. Effective April 1, 1998, the term shall also include each Non-Employee Director or a Beneficiary of a Non-Employee Director where the context so requires.

1.10 "EMPLOYER" shall mean Cadence Design Systems, Inc., a Delaware corporation, and any successor organization thereto. This term shall also include any subsidiaries or affiliates of the Employer.

1.11 "EMPLOYER CONTRIBUTIONS" shall mean the Employer's discretionary contribution, if any, pursuant to Section 3.1(b) of the Plan.

1.12 "NON-EMPLOYEE DIRECTOR" shall mean, effective April 1, 1998, a director of the Employer who is not otherwise an employee of the Employer.

1.13 "PLAN YEAR" shall mean the calendar year beginning each January 1 and ending December 31.

1.14 "PLAN" shall mean the Cadence Design Systems, Inc. 1996 Deferred Compensation Venture Investment Plan.

1.15 "PERMANENT DISABILITY" shall mean that the Employee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or otherwise meets the definition of "Permanent Disability" as set forth in the Employer's Long Term Disability Plan. An Employee will not be considered to have a Permanent Disability unless he or she furnishes proof of such condition sufficient to satisfy the Employer, in its sole discretion.

1.16 "SUBSIDIARY" shall mean any corporation (other than the Employer) in an unbroken chain of corporations or other entities beginning with the Employer, if each of the entities other than the last entity in the unbroken chain owns stock, partnership rights or other ownership interest possessing fifty (50) percent or more of the total combined voting power of all classes of stock, partnership rights or other ownership interest in one of the other entities in such chain.

1.17 "TALITY" shall mean the entity formed to own and operate Cadence Design Systems, Inc.'s electronics design services group business under the name "Tality Corporation" or any other name.

1.18 "TRUST" or TRUST AGREEMENT" shall mean the Cadence Design Systems, Inc. 1996 Deferred Compensation Venture Investment Trust Agreement, including any amendments thereto, entered into between the Employer and the Trustee to carry out the provisions of the Plan.

1.19 "TRUST FUND" shall mean the cash and other assets and/or properties held and administered by Trustee pursuant to the Trust to carry out the provisions of the Plan.

1.20 "TRUSTEE" shall mean the designated Trustee acting at any time under the Trust.

SECTION 2

ELIGIBILITY

2.1 ELIGIBILITY. Eligibility to participate in the Plan shall be limited to Employees of the Employer who (a) have Eligible Compensation of at least $150,000 for the Plan Year, (b) are classified as officers, vice-presidents, directors, or an equivalent title, and (c) have been selected by the Committee to participate in the Plan. Participation in the Plan shall commence as of the effective date of the Employee's enrollment form, which shall be completed and submitted to the Employer in accordance with the provisions of Section 3.3. Nothing in the Plan or in any administrative form used to administer the Plan or Trust shall be construed to require any contributions to the Plan on behalf of the Employee by Employer. The Committee has the discretion to end the eligibility of one or more participating Employees at any time in the sole discretion of the Committee.

Notwithstanding the foregoing and effective April 1, 1998, Non-Employee Directors shall be eligible to participate in the Plan and a Non-Employee Director shall commence participation in the Plan as of the later of April 1, 1998 or the date the Non-Employee Director first becomes a Non-Employee Director, provided that deferral of Compensation under the Plan shall not commence until the Non-Employee Director has complied with the election procedures set forth in Section 3.3.

SECTION 3

DEFERRED COMPENSATION

3.1 DEFERRED COMPENSATION. (a) Each participating Employee may elect, in accordance with Section 3.3 of this Plan, to defer annually the receipt of a portion of the Compensation for active service otherwise payable to him or her by Employer during each Plan Year or portion of a Plan Year that the Employee shall be employed by the Employer. Any Compensation deferred by Employee pursuant to Section 3.3 shall be recorded by the Employer in an Account, maintained in the name of the Employee, which Account shall be credited with a dollar amount equal to the total amount of Compensation deferred during each Plan Year under the Plan, together with earnings thereon credited in accordance with Section 3.7 and expenses allocated thereto in accordance with Section 3.8. The amount or percentage of Compensation that Employee elects to defer under
Section 3.3 will remain constant for the year of the election and shall not be subject to change during such year. Effective April 1, 1998, each such deferral election as to "base salary" or "director's fees" or discontinuance of a deferral election as to "base salary" or "director's fees" will continue in force for each successive year until or unless suspended or modified by the filing of a subsequent election with the Employer by the Employee or Non-Employee Director in accordance with Section 3.3 of the Plan. Each deferral election as to an Employee's "cash bonus" shall continue in force only for the single year with respect to which it was made and shall not apply to any successive years. Any deferral election with respect to a "cash bonus" must be made prior to the time the amount of the bonus is determined, prior to the end of the period of time as to which the bonus is awarded, and at a time that the amount of any such bonus remains substantially uncertain. All deferrals pursuant to this Section 3.1 shall be fully vested at all times. Effective April 1, 1998, deferral elections shall be subject to a minimum dollar and maximum percentage amounts as follows: (i) the minimum annual deferral amount is $10,000 which shall be withheld from the Employee's or Non-Employee Director's Compensation, and (ii) the maximum deferral percentage amount is 80% of the Employee's "base salary," 100% of the Employee's "cash bonus," and 100% of the Non-Employee Director's "director's fees." For purposes of the Plan, "base salary" for a given Plan Year means an Employee's regular annual compensation payable during the Plan Year, excluding bonuses, commissions, overtime, incentive payments, non-monetary awards, compensation deferred pursuant to all Section 125 (cafeteria) or Section 401(k) (savings) plans of the Employer and other special compensation, and reduced by the tax withholding obligations imposed on the Employer and any other withholding requirements imposed by law with respect to such amounts. For purposes of the Plan, "cash bonus" shall mean amounts (if any) awarded

under the bonus policies maintained by the Employer and any commissions earned on sales. Effective April 1, 1998, for purposes of the Plan, "director's fees" for a given Plan Year means the annual retainer, meeting fees, committee meeting fees, and consulting fees payable during the Plan Year.

(b) Employer shall not be obligated to make any other contribution to the Plan on behalf of any Employee at any time. Employer may make Employer Contributions to the Plan on behalf of one or more Employees. Employer Contributions, if any, made to Accounts of Employees shall be determined in the sole and absolute discretion of the Employer, and may be made without regard to whether the Employee to whose account such contribution is credited has made, or is making, contributions pursuant to Section 3.1(a). The Employer shall not be bound or obligated to apply any specific formula or basis for calculating the amount of any Employer Contributions and Employer shall have sole and absolute discretion as to the allocation of Employer Contributions among participating Employee Accounts. The use of any particular formula or basis for making an Employer Contribution in one Plan Year shall not bind or obligate the Employer to use such formula or basis in any other Plan Year. Employer Contributions may be subject to a substantial risk of forfeiture in accordance with the terms of a vesting schedule, which may be selected by the Employer in its sole and absolute discretion.

(c) Amounts deferred under the Plan shall be calculated and withheld from the Employee's base salary and/or cash bonus after such compensation has been reduced to reflect any tax withholding obligations imposed on the Employer, any other withholding requirements imposed by law, salary reduction contributions to the Employer's Code Section 125 (cafeteria) and Code
Section 401(k) (savings) plans, but before any reductions for contributions to the Employer's Code Section 423 (employee stock purchase) plan or the Cadence Design Systems, Inc. 1994 Deferred Compensation Plan.

3.2 PAYMENT OF ACCOUNT BALANCES. (a) The Employee shall elect whether he or she will receive distribution of his or her entire Account, subject to tax withholding requirements, (i) upon reaching a specified age, (ii) upon passage of a specified number of years, (iii) upon termination of employment of Employee with Employer, (iv) upon the earlier to occur of (A) termination of employment of Employee with Employer or (B) passage of a specified number of years or attainment of a specified age, or (v) upon the later to occur of (A) termination of employment of Employee with Employer or (B) passage of a specified number of years or attainment of a specified age, as elected by Employee in accordance with the form established by the Committee. Such form may permit an election among some or all of the alternatives listed in this Section 3.2, as determined in the Committee's sole discretion. A designation of the time of distribution shall be required as a condition of participation under this Plan. The Employee shall also elect to receive all amounts payable to him or her in a lump sum or in equal monthly installments over a designated period of five or ten years, pursuant to the provisions of Section 3.2(e). These elections shall be made in accordance with Section 3.4 of this Plan. References to "termination of employment" in this Section 3.2 shall include references to "termination of service as a Non-Employee Director of the Employer (except in the event such termination is due to becoming an Employee)" where the context so requires. All payments shall be made in the form of cash.

(b) Distribution shall be made to the maximum extent allowable under the election made by Employee, except that no distribution shall be made to the extent that the receipt of such distribution, when combined with the receipt of all other "applicable employee remuneration" (as defined in Code
Section 162(m)(4)), would cause any remuneration received by the Employee to be nondeductible by the Employer under Code Section 162(m)(1). The portion of any distributable amount that is not distributed by operation of this Section 3.2(b) shall be distributed in subsequent years in the manner elected by the Employee until the Employee's Account has been fully liquidated. For Employees who have elected to receive payment in a lump sum or over five or ten years, the commencement date of the lump sum payment or the five or ten-year period (whichever is applicable) shall be automatically extended, when necessary to satisfy the requirements of this subsection, for one-year periods until all Account balances have been distributed in the manner elected by the Employee.

(c) Upon termination of Employee's employment with Employer by reason of death or Permanent Disability prior to the time when payment of Account balances otherwise would commence under the provisions of Section 3.2(a), Employee or Employee's designated Beneficiary will be entitled to receive all amounts credited to the Account of Employee as of the date of his or her death or Permanent Disability (notwithstanding any contrary election to receive distributions under the first sentence of Section 3.2(a)). Upon termination of Employee's employment with Employer by reason other than death or Permanent Disability prior to the date when payment of Account balances otherwise would commence under the provisions of Section 3.2(a), the Employer may, in the sole discretion of the Committee, distribute to Employee or Employee's designated Beneficiary all amounts credited to the Employee's Account as of the date of such termination (notwithstanding any contrary election to receive distributions under the first sentence of Section 3.2(a)). Said amounts shall be payable in the form determined pursuant to the provisions of Section 3.2(e).

(d) Upon the death of Employee prior to complete distribution to him or her of the entire balance of his or her Account (and after the date of termination of employment with Employer), the balance of his or her Account on the date of death shall be payable to Employee's designated Beneficiary pursuant to Section 3.2(e). Notwithstanding any other provision of the Plan to the contrary, except for Section 3.2(f), the Employee's designated Beneficiary may receive the distribution of the remaining portion of such deceased Employee's Account in the form of a lump sum if the Beneficiary requests such a distribution and the Committee, in its sole discretion, consents to such a distribution.

(e) The Employer shall distribute or direct distribution of the balance of amounts previously credited to Employee's Account, in a lump sum, or in monthly installments over a period of five (5) years or ten (10) years, as Employee shall designate pursuant to a distribution election. The Employee's distribution election shall be in the form established by the Committee in accordance with the terms of the Plan. A designation of the form of distribution shall be required as a condition of participation under this Plan. Subject to the other provisions of this Section 3.2, distribution of the lump sum or the first installment generally shall be made or commence within ninety (90) days following the date specified in the first sentence of Section 3.2(a). Subsequent installments, if any, shall be made on the first day of each month

following the first installment as determined by Employer. The amount of each installment shall be calculated by dividing the Account balance as of the date of the distribution by the number of installments remaining pursuant to the Employee's distribution election. Each such installment, if any, shall take into account earnings (or losses) allocated to the balance of the Account remaining unpaid. If at the time for a distribution of an installment payment, the balance in an Employee's Account that may be distributed is less than the amount of the distribution calculated in accordance with the prior two sentences, then at such time only that lesser amount that may be distributed shall be distributed to the Employee. The remaining amount (subject to any necessary adjustments as determined by the Committee) that should have been distributed with such installment shall be distributed at the earliest administratively convenient time following the time that additional assets that may be distributed have been allocated to the Employee's Account. If the balance in an Employee's Account cannot be distributed in its entirety on the date for final distribution of the Employee's Account under such Employee's last effective distribution election, then as that balance becomes distributable, it shall be distributed to such Employee as soon as reasonably administratively convenient.

(f) Notwithstanding any other provisions of the Plan or the Trust to the contrary, no distribution will be made pursuant to the terms of the Plan if the distribution would require either the transfer of a limited partnership interest in Telos Venture Partners, L.P. or any other venture capital investment partnership in which some or all of the assets of the Trust might be invested (the "Partnership") or a distribution of assets from the Partnership. In addition, no distribution will be made if the Committee determines in its sole discretion that the Plan's assets would be insufficient to satisfy any future capital calls anticipated to be made by the General Partner of the Partnership, or if the Employee's Account has any amounts relating to unpaid debt or expenses thereon allocated to such Account. The terms of an Employee's election shall be followed to the fullest extent possible upon the distribution of assets from the Partnership to the Trust as determined in accordance with the terms of the Partnership Agreement. No provision of this Plan or the Trust Agreement (except for those provisions relating to the Insolvency of the Employer as set forth in Article 7 of the Trust Agreement) shall have any impact on the operation of the Partnership.

(g) Effective April 1, 1998, for purposes of this Section 3.2, reference to termination of employment shall also include termination of service as a Non-Employee Director of the Employer (except in the event such termination is due to becoming an Employee).

3.3 ELECTION TO DEFER COMPENSATION. Each election of an Employee to defer Compensation as provided in Section 3.1 of the Plan shall be in writing, signed by the Employee, and delivered to Employer, together with all other documents required under the provisions of this Plan, at least twenty (20) days (or such other period of time determined by the Committee and communicated to those Employees who are eligible to participate in the Plan) prior to the beginning of the Plan Year with respect to which the Compensation to be deferred is otherwise payable to Employee; provided, however, that an Employee who is hired or promoted during a Plan Year to a position of eligibility for participation in the Plan or a Non-Employee Director who is elected to become a Non-Employee Director during a Plan Year shall have thirty (30) days from the date of notification of eligibility for participation in the Plan in which to submit

the required election documents for the then current Plan Year. Any deferral election made by Employee shall be irrevocable with respect to any Compensation covered by such election, including Compensation payable in the Plan Year in which an election suspending or modifying the prior deferral election for the subsequent Plan Year is delivered to the Employer. The Employer shall withhold the amount or percentage of base salary specified to be deferred in equal amounts for each payroll period and shall withhold the amount or percentage of cash bonus specified to be deferred at the time or times such bonus is or otherwise would be paid to the Employee. The election to defer Compensation shall be in the form established by the Committee in accordance with the terms of the Plan. Effective April 1, 1998, the Employer shall withhold the amount or percentage of director's fees specified to be deferred at the time or times such director's fees are or otherwise would be paid to the Non-Employee Director. Notwithstanding the foregoing and effective April 1, 1998, with respect to Compensation payable to a Non-Employee Director for the Plan Year ending December 31, 1998, but which will not be paid to the Non-Employee Director until after March 31, 1998, the Non-Employee Director may make a deferral election with respect to such Compensation until March 31, 1998.

3.4 DISTRIBUTION ELECTION. The initial distribution election of an Employee as provided in Section 3.2 of this Plan shall be in writing, signed by the Employee, and delivered to Employer, together with all other documents required under the provisions of this Plan, at least twenty (20) days (or such other period of time determined by the Committee and communicated to those Employees who are eligible to participate in the Plan) prior to the beginning of the Plan Year with respect to which the distribution election is to apply; provided however, that an Employee who is hired or promoted during a Plan Year to a position of eligibility for participation in the Plan or, effective April 1, 1998, a Non-Employee Director who is elected to become a Non-Employee Director during a Plan Year shall have thirty (30) days from the date of notification of eligibility for participation in the Plan in which to submit the required distribution election documents. If permitted by the Committee, an Employee may change the terms of his or her initial distribution election by making a new election, and any such new election will be effective as of the later of the date that is (a) six (6) months following the date the new election is made or (b) the first day of the Plan Year following the Plan Year in which the new election is made and will apply to the Employee's entire Account. An Employee may not make a new election once distributions from the Plan have commenced or which would first become effective at a time when distributions from the Plan have commenced. Employee's distribution election shall be in the form established by the Committee in accordance with the terms of the Plan.

3.5 PAYMENT UPON CHANGE IN CONTROL. Notwithstanding any other provisions of this Plan (including without limitation Section 3.2), the aggregate balance credited to and held in the Employees' Accounts shall be distributed to Employees in a lump sum on the thirtieth day following a Change in Control (except that distribution shall be on the sixtieth day in the case of a Change in Control under Section 5.1(a)(1)), as defined in Section 5.1, unless the Committee, the Board of Directors of the Employer, or the 401(k)/NQDC Administrative Committee of the Employer (as each is composed immediately prior to such Change in Control), in the sole discretion of any of the foregoing, decides prior to that date that Employees' Accounts shall remain in the Plan.

3.6 EMPLOYEE'S RIGHTS UNSECURED. The right of the Employee or his or her designated Beneficiary to receive a distribution hereunder shall be an unsecured claim against the general assets of the Employer, and neither the Employee nor his or her designated Beneficiary shall have any rights in or against any amount credited to his or her Account or any specific assets of the Employer, except as otherwise provided in the Trust. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between the Plan and the Employer or any other person.

3.7 INVESTMENT OF CONTRIBUTIONS. (a) The investment options available to each Employee shall be determined by the Employer and described in a separate written document, a copy of which shall be attached hereto and by this reference is incorporated herein. Initially the Employer intends to invest all of the assets of the Trust to acquire a limited partnership interest in the Partnership, and investment in the Partnership shall be the sole investment option available to Employees. In the event that the Employer makes more than one investment option available to Employees, each Employee shall have the sole and exclusive right to direct the Trustee as to the investment of the portion of his or her Account attributable to distributions from the Partnership among those investment options in accordance with policies and procedures implemented by the Trustee and the terms and conditions of those investment options. An Employee whose service with the Employer has terminated also shall be permitted to direct the Trustee as to the investment of the distributable balance in their Accounts among those investment options in accordance with policies and procedures implemented by the Trustee and the terms and conditions of those investment options. Notwithstanding the preceding sentence, investment in the Partnership, however, shall only be available to Employees of the Employer. Employer shall not be liable for any investment decision made by any Employee while such funds are held by the Trustee. Employer may provide in its sole discretion for the transfer of some or all of the Plan's assets from the Trust to another trust established under the terms of a non-qualified deferred compensation plan sponsored by the Employer in order to provide additional investment options to Employees; provided, however, that prior to any such transfer, Employer shall have determined (after consulting with legal counsel for Employer with respect to the Plan) that such transfer shall not cause any participating Employee to incur any income tax liability with respect to his or her benefits under the Plan and shall not impair the rights of any Employee to accrue and/or receive benefits under the Plan.

(b) Accounts shall be credited with the actual financial performance or earnings generated by such investments made by the Trustee in accordance with the terms of the Plan and Trust, until the Account has been fully distributed to the Employee or to the Employee's designated Beneficiary. Notwithstanding the foregoing, Accounts shall be maintained, credited and debited with respect to an investment in the Partnership as provided under the terms of the Partnership Agreement. Furthermore, the Trust's limited partnership interest in the Partnership for a given Plan Year which is acquired with deferrals of Compensation from participating Employees shall be allocated to the Accounts of those participating Employees in the same proportion as the deferred amounts invested in the Partnership for such Plan Year are allocated to those Accounts. Effective January 1, 1997, gains (losses) generated by the Partnership for a Plan Year (excluding gains (losses) generated by

investments in portfolio securities) are to be allocated to participating Employees' Accounts in the same proportion that the sum of each such Employee's Account balance at the beginning of the Plan Year plus his or her deferrals of Compensation for such Plan Year bears to the total sum of the Account balances of all such Employees at the beginning of the Plan Year plus the deferrals of Compensation for all such Employees for such Plan Year. Subject to the provisions of Section 3.8(c) below, the Trust's limited partnership interest in the Partnership for a given Plan Year which is acquired with loan proceeds shall be allocated to the Accounts of those participating Employees who remain employed by the Employer (or a subsidiary or affiliate of the Employer) at the end of such Plan Year in the same proportion as the deferred amounts invested in the Partnership for such Plan Year are allocated to the Accounts of those remaining Employees.

(c) Notwithstanding any provision in this Section 3.7 to the contrary, the Committee may determine not to take account of Employee's designated investments, if any, and determine to have the Employee's Account invested in any other manner as the Committee shall determine. The Committee may also designate how the Plan's assets shall be invested for interim short-term periods of time pending investment in the Partnership or following distribution from the Partnership but prior to distribution from the Plan or re-investment in the Plan (or a similar non-qualified deferred compensation plan) in another investment option.

3.8 ALLOCATION OF EXPENSES

(a) Expenses of administering the Plan and the Trust which are paid out of the Trust Fund shall be allocated to the Accounts of participating Employees on a periodic basis determined by the Committee using any method which the Committee determines is fair and equitable to participating Employees. The selection of a given method of allocating expenses among participating Employees' Accounts shall not be deemed to restrict the Committee in any manner whatsoever from selecting a different method for future allocations or to imply that a different method would not be fair and equitable to participating Employees.

(b) From time to time the Trustee may borrow funds to satisfy the obligations of the Trust, whether to meet capital calls issued by the General Partner of the Partnership or otherwise. The principal amount of any such loan shall be allocated to the Accounts of participating Employees in a manner which the Committee determines is fair and equitable, and for loan principal used to acquire an interest in the Partnership, is also consistent with the allocation of interests in the Partnership acquired with loan proceeds as described in
Section 3.7. The costs associated with interest expenses on that principal amount (and any interest expenses incurred with respect to previously accrued but unpaid interest), any other expenses incurred with respect to that principal amount, as well as the costs associated with repayment of principal, shall be allocated to the same Accounts to which the principal amounts were allocated initially in proportion to the principal amounts allocated to the Accounts at such time. Once additional interest or other expenses are allocated to an Account, such expenses shall be treated as principal with respect to future allocations of expenses related to that debt. Notwithstanding the foregoing, the Committee shall have the authority to establish a different method for allocating costs, expenses, and/or repayment of principal which it concludes is fair and equitable to

participating Employees. The selection of a given method of allocating expenses among participating Employees' Accounts shall not be deemed to restrict the Committee in any manner whatsoever from selecting a different method for future allocations or to imply that a different method would not be fair and equitable to participating Employees.

(c) Notwithstanding any other provisions in this Plan, effective January 1, 2000, and subject to the approval of any affected participating Employee as to such Employee's account, any outstanding loans obtained by the Trustee from the Employer on or before July 1, 2001, as permitted in the immediately preceding Section 3.8(b), to cover capital calls issued by the General Partner of the Partnership or otherwise, shall be repaid in full by the transfer by the Trustee to the Employer of the limited partnership units in the Partnership purchased with such loan proceeds. With such repayment, the Accounts of the affected participating Employees shall not reflect the investment in such transferred limited partnership units effective as of January 1, 2000.

3.9 DISTRIBUTIONS OF PARTNERSHIP INTEREST WITH RESPECT TO ACTIVE EMPLOYEES AND NON-EMPLOYEE DIRECTORS

The following provisions of this Section 3.9 are effective April 1, 2000.

(a) In the event of a distribution of partnership assets from the Partnership (as defined in Section 3.2(f)) for the benefit of an Employee who is currently in employment with the Employer or a Non-Employee Director who continues to serve on the Board of Directors of the Employer, then such distribution of the assets shall at the discretion of the Committee be (i) liquidated and retained for pending capital calls required under the Partnership or to satisfy any unpaid debt or expenses thereon allocated to the Employee's or Non-Employee Director's account, or (ii) at the election of the Employee or Non-Employee Director be (A) liquidated and retained in this Plan and re-invested in the Partnership according to the terms of the Plan, the Trust, and the Partnership, or (B) transferred to the Cadence Design Systems, Inc. 1994 Deferred Compensation Plan ("1994 Plan") for the benefit of the Employee or Non-Employee Director if such individual is a participant under the 1994 Plan; provided, however, that such transferred assets shall continue to be subject to the Employee's or Non-Employee Director's distribution election for such individual's benefit under this Plan unless such distribution election is revised as permitted by the plan administrator of the 1994 Plan as authorized under the 1994 Plan. If the Employee or Non-Employee Director is permitted but does not make any election as to the disposition of the Partnership assets, then such Partnership assets shall be transferred to the 1994 Plan as provided above.

(b) In the event a distribution of partnership assets is transferred to the 1994 Plan for the benefit of an Employee or Non-Employee Director as provided above, then such assets shall be transferred (subject to the approval of the plan administrator of the 1994 Plan in its sole discretion) to the trust established under the 1994 Plan ("1994 Plan Trust") for the benefit of such Employee or Non-Employee Director. Such transferred assets ("Transferred Assets") shall be subject to the terms and conditions of the 1994 Plan Trust provided that such Transferred Assets shall continue to be subject to the Employee's or Non-Employee Director's distribution

election for the Transferred Assets under this Plan unless such distribution election is revised as permitted by the 1994 Plan. Such amounts transferred from the Trust to the 1994 Plan Trust may not be returned to this Plan or the Trust. The transfer of such Transferred Funds shall not cause any of the individual's rights to a distribution under the 1994 Plan or this Plan (including the Transferred Funds) to be a secured right to a distribution under either plan.

SECTION 4

DESIGNATION OF BENEFICIARY

4.1 DESIGNATION OF BENEFICIARY. Employee may designate a Beneficiary or Beneficiaries to receive any amount due hereunder by Employee by written notice thereof to Employer at any time prior to his or her death and may revoke or change the Beneficiary designated therein without the Beneficiary's consent by written notice delivered to Employer at any time and from time to time prior to Employee's death. If Employee is married and a resident of a community property state, one half of any amount due hereunder which is the result of an amount contributed to the Plan during such marriage while residing in a community property state is the community property of the Employee's spouse and Employee may designate a Beneficiary or Beneficiaries to receive only the Employee's one-half interest. If Employee shall have failed to designate a Beneficiary, or if no such Beneficiary shall survive him or her, then such amount shall be paid to his or her estate. Designations of Beneficiaries shall be in the form determined by the Committee.

SECTION 5

CHANGE IN CONTROL

5.1 CHANGE IN CONTROL. For the purposes of this Plan, "Change in Control" means the happening of any of the following:

(c) The merger or consolidation of the Employer with or into another corporation not initiated by the Employer, in which the Employer is not the surviving corporation and the stockholders of the Employer immediately prior to the merger or consolidation fail to possess direct or indirect beneficial ownership of more than eighty percent (80%) of the voting power of the securities of the surviving corporation (or if the surviving corporation is a controlled affiliate of another entity, then the required beneficial ownership shall be determined with respect to the securities of that entity which controls the surviving corporation and is not itself a controlled affiliate of any other entity) immediately following such transaction, or a reverse merger not initiated by the Employer, in which the Employer is the surviving corporation and the stockholders of the Employer immediately prior to the reverse merger fail to possess direct or indirect beneficial ownership of more than eighty percent (80%) of the securities of the Employer (or if the Employer is a controlled affiliate of another entity, then the required beneficial ownership shall be determined with respect to the securities of that entity which controls the Employer and is not itself a controlled affiliate of any other entity) immediately following the reverse merger. For purposes of this Section 5.1(c), any person who acquired securities of the Employer prior to the occurrence of a merger, reverse merger, or consolidation in contemplation of such transaction and who after such transaction possesses direct or indirect beneficial ownership of at least ten percent (10%) of the Common Stock of the Employer or the surviving corporation (or if the Employer or the surviving corporation is a controlled affiliate, then of the appropriate entity as determined above) immediately following such transaction shall not be included in the group of stockholders of the Employer immediately prior to such transaction;

(e) Any liquidation or dissolution of the Employer.

SECTION 6

TRUST PROVISIONS

6.1 TRUST AGREEMENT. The Employer shall establish the Trust within an administratively reasonable period of time following the adoption of the Plan for the purpose of retaining assets set aside by Employer pursuant to the Trust Agreement for payment of amounts payable pursuant to the Plan. Any benefits not paid from the Trust shall be paid solely from Employer's general funds, and any benefits paid from the Trust shall be credited against and reduce by a corresponding amount the Employer's liability to Employees under the Plan. No special or separate fund, other than the Trust Agreement, shall be required to be established and no other segregation of assets shall be required to be made to assure the payment of any benefits hereunder. All Trust Funds shall be subject to the claims of general creditors of the Employer in the event the Employer is Insolvent as defined in Article 7 of the Trust Agreement. The obligations of the Employer to pay benefits under the Plan constitute an unfunded, unsecured promise to pay and Employee shall have no greater rights than general creditors of the Employer.

SECTION 7

AMENDMENT AND TERMINATION

7.1 AMENDMENT. The Committee shall have the right to amend this Plan at any time and from time to time, including a retroactive amendment. Any such amendment shall become effective upon the date stated therein, and shall be binding on all Employees, except as otherwise provided in such amendment; provided, however, that any such amendment shall not affect adversely benefits payable to an affected Employee without the Employee's written approval.

7.2 TERMINATION. The Committee shall have the right to terminate this Plan at any time and direct the lump sum payments of all assets held by the Trust if the Employer is not Insolvent at that time (as defined in Article 7 of the Trust Agreement), notwithstanding any other provision of the Plan to the contrary (except for Section 3.2(f)).

SECTION 8

ADMINISTRATION

SECTION 9

GENERAL AND MISCELLANEOUS

9.1 RIGHTS AGAINST EMPLOYER. Except as expressly provided by the Plan, the establishment of this Plan shall not be construed as giving to any Employee or to any person whomsoever, any legal, equitable or other rights against the Employer, or against its officers, directors, agents or stockholders, or as giving to any Employee or Beneficiary any equitable or other interest in the assets, business or shares of Employer stock or giving any Employee the right to be retained in the employment of the Employer. Neither this Plan or any action taken hereunder shall be construed as giving to any Employee the right to be retained in the employ of the Employer or as affecting the right of the Employer to dismiss any Employee. Any benefit paid or payable under the Plan shall not be deemed salary or other compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Employer for the benefit of its Employees, but deferrals under the Plan shall be deemed salary or other compensation for the purpose of computing benefits under other employee benefit plans or other arrangements of the Employer for the benefit of its Employees to the extent provided under the terms of such other plans or arrangements. Effective April 1, 1998, nothing in the Plan or in any instrument executed pursuant thereto shall confer upon any Non-Employee Director any right to continue in the service of the Employer in any capacity or shall affect any right of the Employer, its Board of Directors or stockholders to remove any Non-Employee Director pursuant to the Employer's By-Laws and the provisions of the Delaware General Corporation Law.

9.2 ASSIGNMENT OR TRANSFER. No right, title or interest of any kind in the Plan shall be transferable or assignable by any Employee or Beneficiary or be subject to alienation, anticipation, encumbrance, garnishment, attachment, execution or levy of any kind, whether voluntary or involuntary, or be subject to the debts, contracts, liabilities, engagements, or torts of the Employee or Beneficiary. Any attempt to alienate, anticipate, encumber, sell, transfer, assign, pledge, garnish, attach or otherwise subject to legal or equitable process or encumber or dispose of any interest in the Plan shall be void.

9.4 CONSTRUCTION. The article and section headings and numbers are included only for convenience of reference and are not be taken as limiting or extending the meaning of any of the terms and provisions of this Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. When used herein, the masculine gender includes the feminine gender.

9.6 PAYMENT DUE TO INCOMPETENCE. If the Committee receives evidence that an Employee or Beneficiary entitled to receive any payment under the Plan is physically or mentally incompetent to receive such payment, the Committee may, in its sole and absolute discretion, direct the payment to any other person or trust which has been legally appointed by the courts or to any other person determined by the Employer to be a proper recipient on behalf of such person otherwise entitled to payment, or any of them, in such manner and proportion as the Employer may deem proper. Any such payment shall be in complete discharge of the Employer's obligations under this Plan to the extent of such payment.

9.7 TAXES. The Employer may withhold from any benefits payable under this Plan, all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling.

The Employer has caused its authorized officer to execute this document this ______ day of _______ , 2001.

CADENCE DESIGN SYSTEMS, INC.

Signature:___________________________

By:__________________________________

Title:_______________________________

Exhibit 10.10

CADENCE DESIGN SYSTEMS, INC.

1993 NONSTATUTORY STOCK OPTION PLAN

ADOPTED SEPTEMBER 17, 1993
AMENDED JULY 27, 1995
AMENDED MAY 3, 1996
AMENDED AND RESTATED MAY 15, 2000
STOCKHOLDER APPROVAL NOT REQUIRED
TERMINATION DATE: NONE

1. PURPOSES.

(a) AMENDMENT AND RESTATEMENT. The Plan initially was established as the 1993 Non-Statutory Stock Option Plan, effective as of September 17, 1993 (the "Initial Plan"). The Initial Plan hereby is amended and restated in its entirety, effective upon adoption.

(b) SPECIFIC PURPOSE. The purpose of the Plan is to provide a means by which eligible recipients of Options may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Options.

(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Options, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates.

2. DEFINITIONS.

(a) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code.

(b) "BOARD" means the Board of Directors of the Company.

(d) "COMMITTEE" means a committee of one or more members of the Board appointed by the Board in accordance with subsection 3(c).

(e) "COMMON STOCK" means the common stock of the Company.

(f) "COMPANY" means Cadence Design Systems, Inc., a Delaware corporation.

(g) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such

services. However, the term "Consultant" shall not include Directors or members of the Board of Directors of an Affiliate.

(h) "CONTINUOUS SERVICE" means that the Optionholder's service with the Company or an Affiliate is not interrupted or terminated. The Optionholder's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionholder renders service to the Company or an Affiliate, provided that there is no interruption or termination of the Optionholder's Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of the Company will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of (i) any leave of absence approved by that party, including sick leave, military leave or any other personal leave or (ii) transfers between the Company, Affiliates or their successors.

(i) "DIRECTOR" means a member of the Board of Directors of the Company.

(j) "EMPLOYEE" means any person employed by the Company or an Affiliate.

(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

(l) "FAIR MARKET VALUE" means, as of any date, the average of the high and low prices of the Common Stock, as reported on the New York Stock Exchange. In the absence of such market for the Common Stock, the Fair Market Value shall be determined in good faith by the Board.

(m) "OPTION" means a nonstatutory stock option granted pursuant to the Plan not intended to qualify as an incentive stock option within the meaning of
Section 422 of the Code and the regulations promulgated thereunder.

(n) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.

(o) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.

(p) "PLAN" means this Cadence Design Systems, Inc. 1993 Nonstatutory Stock Option Plan.

(q) "SECURITIES ACT" means the Securities Act of 1933, as amended.

3. ADMINISTRATION.

(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c).

(b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

(i) To determine from time to time which of the persons eligible under the Plan shall be granted Options; when and how each Option shall be granted; what type or combination of types of Option shall be granted; the provisions of each Option granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to an Option; and the number of shares of Common Stock with respect to which an Option shall be granted to each such person.

(ii) To construe and interpret the Plan and Options granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Option Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.

(iii) To amend the Plan or an Option as provided in Section 11.

(iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company that are not in conflict with the provisions of the Plan.

(i) GENERAL. The Board may delegate administration of the Plan to a Committee or Committees of one (1) or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.

(d) EFFECT OF BOARD'S DECISION. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons.

4. SHARES SUBJECT TO THE PLAN.

(a) SHARE RESERVE. Subject to the provisions of Section 10 relating to adjustments upon changes in Common Stock, the Common Stock that may be issued pursuant to Options shall not exceed in the aggregate Twenty-Four Million Seven Hundred Fifty Thousand (24,750,000) shares of Common Stock.

(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such Option shall revert to and again become available for issuance under the Plan. If the Company repurchases any unvested shares of Common Stock acquired pursuant to an Award, such repurchased shares of Common Stock shall revert to and again become available for issuance under the Plan.

(c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.

5. ELIGIBILITY.

(a) ELIGIBILITY FOR OPTIONS. The Board may grant Options only to Employees or Consultants as defined in Section 2 hereof. The Board may grant an additional Option or Options to an Employee or a Consultant who has been granted an Option if he or she is otherwise eligible. Notwithstanding the foregoing, the Board may not grant an Option to an Employee or Consultant who is an executive officer of the Company within the meaning of Section 16 of the Exchange Act, who is a Director or who beneficially owns ten percent (10%) or more of the Company's Common Stock unless the Option will be granted to a person not previously employed by the Company as a material inducement to such person's entering into an employment contract with the Company.

(b) CONSULTANTS.

(i) A Consultant shall not be eligible for the grant of an Option if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("Form S-8") is not available to register either the offer or the sale of the Company's securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not a natural person, or as otherwise provided by the rules governing the use of Form S-8, unless the Company determines both (i) that such grant (A) shall be registered in another manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or (B) does not require registration under the Securities Act in order to comply with the requirements of the Securities Act, if applicable, and (ii) that such grant complies with the securities laws of all other relevant jurisdictions.

(ii) Form S-8 generally is available to consultants and advisors only if (i) they are natural persons; (ii) they provide bona fide services to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer's parent; and (iii) the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer's securities.

6. OPTION PROVISIONS.

Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:

(a) TERM. The Board shall determine the term of each Option.

(b) EXERCISE PRICE. The exercise price of each Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.

(c) CONSIDERATION. The purchase price of Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option or subsequently (1) by delivery to the Company of other Common Stock, (2) according to a deferred payment or other similar arrangement with the Optionholder or (3) in any other form of legal consideration that may be acceptable to the Board. Unless otherwise specifically provided in the Option, the purchase price of Common Stock acquired pursuant to an Option that is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Common Stock of the Company that have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company.

In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement.

(d) TRANSFERABILITY. An Option shall be transferable to the extent provided in the Option Agreement. If the Option does not provide for transferability, then the Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.

(e) VESTING GENERALLY. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised.

(f) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate.

(g) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements.

(h) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement) or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate.

(i) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the Option upon the Optionholder's death, but only within the period ending on the earlier of (1) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement) or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate.

(j) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate.

(k) RE-LOAD OPTIONS.

(i) Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionholder to a further Option (a "Re-Load Option") in the event the Optionholder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Unless otherwise specifically provided in the Option, the Optionholder shall not surrender shares of Common Stock acquired, directly or indirectly from the Company, unless such shares have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes).

(ii) Any such Re-Load Option shall (1) provide for a number of shares of Common Stock equal to the number of shares of Common Stock surrendered as part or all of the exercise price of such Option; (2) have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (3) have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option shall be subject to the same exercise price and term provisions heretofore described for Options under the Plan.

(iii) There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares of Common Stock under subsection 4(a) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options.

7. COVENANTS OF THE COMPANY.

(a) AVAILABILITY OF SHARES. During the terms of the Options, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Options.

(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Options and to issue and sell shares of Common Stock upon exercise of the Options; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Option or any Common Stock issued or issuable pursuant to any such Option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Options unless and until such authority is obtained.

8. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of Common Stock pursuant to Options shall constitute general funds of the Company.

9. MISCELLANEOUS.

(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the power to accelerate the time at which an Option may first be exercised or the time during which an Option or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Option stating the time at which it may first be exercised or the time during which it will vest.

(b) STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Option unless and until such Optionholder has satisfied all requirements for exercise of the Option pursuant to its terms.

(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Option granted pursuant thereto shall confer upon any Optionholder any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Option was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, or (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate.

(d) INVESTMENT ASSURANCES. The Company may require an Optionholder, as a condition of exercising or acquiring Common Stock under any Option, (i) to give written assurances satisfactory to the Company as to the Optionholder's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option; and (ii) to give written assurances satisfactory to the Company stating that the Optionholder is acquiring Common Stock subject to the Option for the Optionholder's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Option has been registered under a then currently effective registration statement under the Securities Act or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.

(e) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of an Option Agreement, the Optionholder may satisfy any federal, state or local tax withholding obligation

relating to the exercise or acquisition of Common Stock under an Option by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Optionholder by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Optionholder as a result of the exercise or acquisition of Common Stock under the Option, provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering to the Company owned and unencumbered shares of Common Stock.

10. ADJUSTMENTS UPON CHANGES IN STOCK.

(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common Stock subject to the Plan, or subject to any Option, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to subsection 4(a), and outstanding Options will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Options. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.)

(b) CHANGE IN CONTROL.

(i) A "Change in Control" shall be deemed to occur upon the consummation of any one of the following events: (a) a sale of all or substantially all of the assets of the Company; (b) a merger or consolidation in which the Company is not the surviving corporation (other than a transaction the principal purpose of which is to change the state of the Company's incorporation or a transaction in which the voting securities of the Company are exchanged for beneficial ownership of at least fifty percent (50%) of the voting securities of the controlling acquiring corporation); (c) a merger or consolidation in which the Company is the surviving corporation and less than fifty percent (50%) of the voting securities of the Company that are outstanding immediately after the consummation of such transaction are beneficially owned, directly or indirectly, by the persons who owned such voting securities immediately prior to such transaction; (d) any transaction or series of related transactions after which any person (as such term is used in Section 13(d)(3) of the Exchange Act), other than any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliate, becomes the beneficial owner of voting securities of the Company representing forty percent (40%) or more of the combined voting power of all of the voting securities of the Company; (e) during any period of two consecutive years, individuals who at the beginning of such period constitute the membership of the Company's Board of Directors ("Incumbent Directors") cease for any reason to have authority to cast at least a majority of the votes which all Directors are entitled to cast, unless the election, or the nomination for election by the Company's stockholders, of a new Director was approved by a vote of at least two-thirds of the votes entitled to be cast by the

Incumbent Directors, in which case such director shall also be treated as an Incumbent Director in the future; or (f) the liquidation or dissolution of the Company.

(ii) In the event of a Change in Control, then: (a) any surviving or acquiring corporation shall assume Options outstanding under the Plan or shall substitute similar Options (including an option to acquire the same consideration paid to stockholders in the transaction described in this subsection 10(b) for those outstanding under the Plan), or (b) in the event any surviving or acquiring corporation refuses to assume such Options or to substitute similar Options for those outstanding under the Plan, (i) with respect to Options held by persons whose Continuous Service has not terminated, the vesting both of such Options and of any shares of Common Stock acquired pursuant to an Option as well as the time during which such Options may be exercised shall be accelerated prior to such event and the Options terminated if not exercised after such acceleration and at or prior to such event, and (ii) with respect to any other Options outstanding under the Plan, if there is a successor corporation, such Options shall be terminated if not exercised prior to such event.

11. AMENDMENT OF THE PLAN AND OPTIONS.

(a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may amend the Plan.

(b) NO IMPAIRMENT OF RIGHTS. Rights under any Option granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing.

(c) AMENDMENT OF OPTIONS. The Board at any time, and from time to time, may amend the terms of any one or more Options; provided, however, that the rights under any Option shall not be impaired by any such amendment unless (i) the Company requests the consent of the Optionholder and (ii) the Optionholder consents in writing.

12. TERMINATION OR SUSPENSION OF THE PLAN.

(a) PLAN TERM. The Board may suspend or terminate the Plan at any time.

(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Option granted while the Plan is in effect except with the written consent of the Optionholder.

13. EFFECTIVE DATE OF PLAN.

The Plan shall become effective upon adoption.

14. CHOICE OF LAW.

The law of the State of Delaware shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules.

Exhibit 10.65

CADENCE DESIGN SYSTEMS, INC.

THE SPC PLAN

EFFECTIVE DECEMBER 20, 2001
STOCKHOLDER APPROVAL NOT REQUIRED

TABLE OF CONTENTS

1.      Purposes............................................................................1
2.      Definitions.........................................................................1
3.      Administration......................................................................3
4.      Shares Subject to the Plan; Award Pools.............................................3
5.      Eligibility.........................................................................4
6.      Provisions of Incentive Awards......................................................4
7.      Covenants of the Company............................................................7
8.      Miscellaneous.......................................................................7
9.      Adjustments upon Changes in Stock...................................................8
10.     Corporate Transactions..............................................................9
11.     Amendment of Plan and Incentive Awards..............................................9
12.     Termination or Suspension of the Plan...............................................9
13.     Effective Date of Plan..............................................................9
14.     Choice of Law.......................................................................9

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CADENCE DESIGN SYSTEMS, INC.

THE SPC PLAN

1. PURPOSES.

(a) INCENTIVE AWARDS. The purpose of the Plan is to provide a means by which employees are given an opportunity to receive Shares upon the satisfaction of certain performance-based criteria.

(b) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to participate in the Plan and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates.

2. DEFINITIONS.

(a) "AFFILIATE" means any parent or subsidiary entity whose employees qualify as "employees" with respect to the Securities and Exchange Commission's Registration Statement on Form S-8 or any successor form.

(b) "ALTERNATIVE CASH AMOUNT" has the meaning set forth in Section 4(a) of the Plan.

(d) "COMMITTEE" means a committee of one or more senior executives of the Company appointed by the Board, but in all events will include Ping Chao if he wishes to serve on the Committee. In addition to Mr. Chao, the Committee shall initially consist of Ray Bingham and Ron Kirchenbauer. Decisions of the Committee shall be taken in good faith.

(e) "COMMON STOCK" means the common stock of the Company.

(f) "COMPANY" means Cadence Design Systems, Inc., a Delaware corporation, and its successors and assigns.

(g) "CONTINUOUS SERVICE" means that an Employee's employment with the Company or an Affiliate is not interrupted or terminated. The Employee's Continuous Service shall not be deemed to have terminated because of a change in the entity which employees Employee, provided that there is no interruption or termination of the Employee's Continuous Service with the Company or an Affiliate of the Company. The Board or the chief executive officer of the Company, in that party's sole discretion, may in good faith determine to the extent permitted by applicable law whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave.

(h) "DIRECTOR" means a member of the Board of Directors of the Company.

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(i) "EMPLOYEES" means the persons listed on Exhibit A hereto; provided, however, that, except as set forth in Section 6(d) of the Plan, if the Continuous Service of any of such persons is interrupted or terminated for any reason, such person shall no longer be an Employee for purposes of the Plan.

(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

(k) "FIRST ISSUE DATE" means as soon as reasonably practicable after the Company has determined the amount of the First Year Incentive Amount, but in all events on or before February 15, 2003.

(l) "FIRST YEAR AWARD" has the meaning set forth in Section 6(a)(i) of the Plan.

(m) "FIRST YEAR INCENTIVE AMOUNT" has the meaning set forth in Section 4(b) of the Plan.

(n) "INCENTIVE AWARD" means any Shares issued under the Plan.

(o) "INCENTIVE AWARD AGREEMENT" means a written agreement between the Company and a Participant who has received unvested Shares pursuant to Section 6(a)(ii)(2) of the Plan, substantially in the form attached hereto as Exhibit B. Each Incentive Award Agreement shall be subject to the terms and conditions of the Plan.

(p) "MERGER AGREEMENT" means the Agreement and Plan of Merger, dated as of November 7, 2001, among the Company, Silicon Perspective Corporation, Nile Acquisition, Inc., and Ping Chao, as Shareholder Agent.

(q) "PARTICIPANT" means a person to whom an Incentive Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Incentive Award.

(r) "PARTICIPATION PERCENTAGE" means the percentage set forth opposite each Employee's name on Exhibit A hereto. In the event the Continuous Service of a person listed on Exhibit A is interrupted or terminated for any reason, the Participation Percentages of the other persons listed on Exhibit A shall not change.

(s) "PLAN" means this Cadence Design Systems, Inc. SPC Plan.

(t) "POOL PERCENTAGE" has the meaning set forth in Section 4(b) of the Plan.

(u) "SECOND ISSUE DATE" means as soon as reasonably practicable after the Company has determined the amount of the Second Year Incentive Amount, but in all events on or before February 15, 2004.

(v) "SECOND YEAR AWARD" has the meaning set forth in Section 6(b)(i) of the Plan.

(w) "SECOND YEAR INCENTIVE AMOUNT" has the meaning set forth in Section 4(c) of the Plan.

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(x) "SECURITIES ACT" means the Securities Act of 1933, as amended.

(y) "SHARES" means shares of Common Stock.

3. ADMINISTRATION.

(a) ADMINISTRATION BY THE COMMITTEE. The Committee shall administer the Plan.

(b) POWERS OF COMMITTEE. The Committee shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

(i) To construe and interpret the Plan and Incentive Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Committee, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Incentive Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.

(ii) To amend the Plan or an Incentive Award as provided in
Section 10.

(iii) Generally, to exercise such powers and to perform such acts as the Committee deems necessary or expedient to promote the best interests of the Company that are not in conflict with the provisions of the Plan.

(c) EFFECT OF COMMITTEE'S DECISION. All determinations, interpretations and constructions made by the Committee in good faith shall not be subject to review by any person other than the Board, and any such determination, interpretation or construction as ratified by the Board shall be final, binding and conclusive on all persons.

4. SHARES SUBJECT TO THE PLAN; AWARD POOLS.

(a) SHARE RESERVE. The aggregate number of Shares that are issuable as Incentive Awards hereunder shall be limited to an amount that would not require approval of the Company's stockholders, whether pursuant to applicable law or the requirements of any securities exchange or automated quotation system on which the Shares are listed, unless and until the Company has obtained its stockholders' approval of the Plan. In the event Employees would be eligible to receive Incentive Awards but for the fact that any such required stockholder approval has not been obtained, the Company may, at its option, either seek such stockholder approval or pay to such Employees an amount in cash equal to the fair market value (as determined by the Committee) of the Shares that the Company would otherwise have issued to such Employees under the Plan if such stockholder approval were obtained, with such value determined as of the date such issuance would have occurred (the "ALTERNATIVE CASH AMOUNT").

(b) SHARES AVAILABLE ON FIRST ISSUE DATE. Subject to Section 4(a) of the Plan, the aggregate number of Shares available under the Plan for issuance as Incentive Awards on the First Issue Date (the "FIRST YEAR INCENTIVE AMOUNT") shall be equal to the product of (i) the total number of Shares issuable to Shareholders (as defined in the Merger Agreement) as of that date,

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without regard to any set-off pursuant to the Merger Agreement, upon achieving the Technology Targets and/or exceeding the Bookings Targets for fiscal 2002, determined in accordance with Article 8 of the Merger Agreement as if no shares were issuable under the Plan, multiplied by (ii) 11.08% (the "POOL PERCENTAGE"). If no Shares would be issued with respect to achieving the Technology Targets or exceeding the Booking Targets for fiscal 2002 in accordance with Article 8 of the Merger Agreement, then the First Year Incentive Amount and the First Year Award shall be zero.

(c) SHARES AVAILABLE ON SECOND ISSUE DATE. Subject to Section 4(a) of the Plan, the aggregate number of Shares available under the Plan for issuance as Incentive Awards on the Second Issue Date (the "SECOND YEAR INCENTIVE AMOUNT") shall be a number equal to the product of (i) the total number of Shares issuable to Shareholders as of that date, without regard to any set-off pursuant to the Merger Agreement, upon achieving the Technology Targets and/or exceeding the Bookings Targets for fiscal 2003, determined in accordance with Article 8 of the Merger Agreement as if no shares were issuable under the Plan, multiplied by (ii) the Pool Percentage. If no Shares would be issued with respect to achieving the Technology Targets or exceeding the Booking Targets for fiscal 2003 in accordance with Article 8 of the Merger Agreement, then the Second Year Incentive Amount and the Second Year Award shall be zero.

(d) REVERSION OF SHARES TO THE SHARE RESERVE. If any Incentive Award shall for any reason be forfeited, in whole or in part, the Shares forfeited to the Company under such Incentive Award shall revert to and again become available for issuance under the Plan.

(e) SOURCE OF SHARES. The Shares subject to the Plan may be unissued shares or reacquired shares, repurchased in the public markets or otherwise.

5. ELIGIBILITY.

Only Employees are eligible to receive Incentive Awards under the Plan. Notwithstanding the foregoing, none of the following persons shall be eligible to receive an Incentive Award under the Plan: (i) any executive officer of the Company within the meaning of Section 16 of the Exchange Act, (ii) any Director or (iii) any person who beneficially owns ten percent (10%) or more of the outstanding shares of Common Stock.

6. PROVISIONS OF INCENTIVE AWARDS.

(a) FIRST YEAR AWARD.

(i) Subject to Section 6(d) of the Plan, on the First Issue Date each eligible Employee shall receive that number of Shares equal to the product of (i) the First Year Incentive Amount, if any, multiplied by (ii) such Employee's Participation Percentage (the "FIRST YEAR AWARD").

(ii) Each First Year Award shall vest as follows:

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(1) 50% of such First Year Award shall be immediately vested, and shall be issued to such Employee without restriction (other than restrictions under applicable law and under Company trading policies); and

(2) 50% of such First Year Award shall vest in 12 equal monthly installments beginning in January 2003 (and shall be released by the Company on a monthly basis when vested), with such 50% being fully vested as of the close of business on December 31, 2003.

(b) SECOND YEAR AWARD.

(i) Subject to Section 6(d) of the Plan, on the Second Issue Date each eligible Employee shall receive an Incentive Award in an amount equal to the product of (i) the Second Year Incentive Amount, if any, multiplied by (ii) such Employee's Participation Percentage (the "SECOND YEAR AWARD").

(ii) Each Second Year Award shall be 100% vested as of the close of business on December 31, 2003, and shall be issued to such Employees without restriction (other than restrictions under applicable law and Company trading policies).

(c) NO FRACTIONAL SHARES. No fraction of a Share shall be issued as part of an Incentive Award, and in the event a Participant would otherwise be entitled to a fraction of a share of Common Stock pursuant to Section 6(a), 6(b) or 6(d) of the Plan, the number of Shares to be awarded to such Participant shall be rounded to the nearest whole Share.

(d) TERMINATION OF CONTINUOUS SERVICE; FORFEITURE OF INCENTIVE AWARD.

(i) If an Employee's Continuous Service has not been terminated as of December 31, 2002, with respect to the First Year Award, or as of December 31, 2003, with respect to the Second Year Award, such Employee shall be entitled to receive such Incentive Award, subject to applicable vesting requirements. Notwithstanding anything herein to the contrary, unless otherwise provided in a written agreement between the Employee and the Company, if an Employee's Continuous Service terminates prior to December 31, 2002, with respect to the First Year Award, or December 31, 2003, with respect to the Second Year Award, for any reason other than death or disability of the Employee, such Employee shall not receive such Incentive Award, and if such termination occurs prior to December 31, 2003, any unvested portion of such Employee's First Year Award shall automatically be forfeited to the Company without any consideration to the Employee and without additional notice to or action on the part of the Employee. Whether an Employee's termination of Continuous Service is due to disability shall be determined by the Committee.

(ii) Notwithstanding anything herein to the contrary, unless otherwise provided in a written agreement between the Employee and the Company, if an Employee's Continuous Service terminates as a result of such Employee's death or disability:

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(1) prior to July 1, 2002, such Employee shall receive no Incentive Awards hereunder;

(2) on or after July 1, 2002, but prior to December 31, 2002, such Employee (or such Employee's estate or beneficiary, as the case may be) shall receive the Incentive Award described in Section 6(a)(ii)(1) of the Plan, and shall not receive any other Incentive Awards hereunder;

(3) on or after January 1, 2003, but prior to July 1, 2003, the portion of the First Year Award subject to vesting shall continue to vest in accordance with its terms as if the Employee's Continuous Service had not terminated, and such Employee (or such Employee's estate or beneficiary, as the case may be) shall receive 50% of the Second Year Award that would have been issued to Employee if Employee's Continuous Service had not been terminated prior to December 31, 2003, and shall not receive any other Incentive Awards hereunder; or

(4) on or after July 1, 2003, but prior to December 31, 2003, the portion of the First Year Award subject to vesting shall continue to vest in accordance with its terms as if the Employee's Continuous Service had not terminated, and such Employee (or such Employee's estate or beneficiary, as the case may be) shall receive 100% of the Second Year Award that would have been issued to Employee if Employee's Continuous Service had not been terminated prior to December 31, 2003.

(e) TRANSFERABILITY. Rights to acquire Shares under the Plan and the Incentive Award Agreement shall be transferable by the Participant only upon the death of the Participant, and only to a beneficiary identified by Participant to the Company in writing, or by will or the laws of descent or distribution, or upon such other terms and conditions as the Committee shall determine in its discretion. Any such transfer shall be made subject to the Incentive Award Agreement, if any, between such Participant and the Company.

(f) INCENTIVE AWARD AGREEMENT. The portion of each Incentive Award granted pursuant to Section 6(a)(ii)(2) of the Plan shall be subject to an Incentive Award Agreement. Execution and delivery by each Participant of such an Incentive Award Agreement shall be a condition to the issuance of such Participant's First Year Award.

(g) BLACKOUT PERIODS. Notwithstanding anything to the contrary herein:

(i) if the First Issue Date or the Second Issue Date falls, with respect to any Employee, into a period of time when such Employee is unable to sell the Shares as a result of restrictions imposed by the Company's insider trading policy (a "Blackout Period"), the Company will delay the First Issue Date and/or the Second Issue Date, as the case may be, for such Employee such that the First Issue Date and/or the Second Issue Date, as the case may be, with respect to such Employee occurs on the first business day immediately subsequent to such Blackout Period;

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(ii) if the monthly vesting of the First Year Award for any month falls into a Blackout Period, such vesting shall be delayed, and shall not occur until the first business day immediately subsequent to such Blackout Period; and

(iii) if the First Issue Date, the Second Issue Date or vesting of the First Year Award has been delayed pursuant to this Section 6(g), and Employee's Continuous Service is terminated by the Company subsequent to any such delay, but prior to the first business day immediately subsequent to the applicable Blackout Period, such Employee shall receive the delayed Incentive Award, or such delayed monthly vesting shall occur, as if such Employee's Continuous Service had not been terminated; provided, that such Employee shall not receive any other Incentive Awards hereunder, and no additional vesting shall occur, unless such Employee is otherwise eligible to receive such awards or continue such vesting.

7. COVENANTS OF THE COMPANY.

(a) AVAILABILITY OF SHARES. The Company shall keep available at all times the number of Shares required to satisfy Incentive Awards awarded under the Plan.

(b) SECURITIES LAW COMPLIANCE. The Company shall file a Registration Statement on Form S-8 covering the Shares estimated to be required for issuance under the Plan. In the event the actual number of Shares to be issued under Sections 4(b) and 4(c) of the Plan exceeds the number of Shares so registered, the Company shall file a new Registration Statement on Form S-8 to register such excess Shares. Notwithstanding any other provision of the Plan, no Shares shall be required to be issued or granted under the Plan if the Company determines on advice of legal counsel that such issuance or grant will not be in compliance with all applicable federal and state securities laws and regulations and any other applicable laws or regulations (in which case the Company shall distribute cash in lieu of Shares).

8. MISCELLANEOUS.

(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Committee shall have the power to accelerate the time during which an Incentive Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Incentive Award stating the time during which it will vest.

(b) STOCKHOLDER RIGHTS. Subject to the provisions of the Plan and the Incentive Award Agreement, a Participant shall have all of the powers, preferences, and rights of a holder of Common Stock with respect to the Shares comprising the unvested portion of an Incentive Award, other than such rights with respect to unvested Shares as specified in an Incentive Award Agreement. In the event any unvested portion of an Incentive Award is forfeited to the Company, the Participant shall no longer have any rights of a holder of Shares with respect to such forfeited portion.

(c) NO EMPLOYMENT RIGHTS. Nothing in the Plan or any Incentive Award granted pursuant thereto shall confer upon any Participant any right to continue in the employ of the Company or an Affiliate in the capacity in effect at the time the Incentive Award was granted (or

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in any other capacity), or shall affect the right of the Company or an Affiliate to terminate the employment of a Participant with or without notice and with or without cause.

(d) WITHHOLDING OBLIGATIONS. The Participant shall indemnify and hold the Company harmless for all federal, state, local or other taxes relating to the acquisition and vesting of Shares pursuant to the Plan that the Company is legally obligated to withhold ("Tax Withholding"). The Company may satisfy its legal obligation for Tax Withholding by any method it deems appropriate, including but not limited to: (i) causing the Participant to tender, as a condition to the receipt or release of Shares, (A) a cash payment equal to the amount of such Tax Withholding, and/or (B) fully vested, unencumbered Shares having a fair market value, as determined by the Company, equal to the amount of such Tax Withholding; (ii) withholding Shares otherwise issuable to the Participant, or returning unvested Shares to the Company, with the number of Shares withheld or returned having a fair market value, as determined by the Company, on the date the Shares would have been issued to the Participant or released from vesting restrictions, equal to the amount of such Tax Withholding,
(iii) to the extent allowed by law, withholding from any compensation or other amounts payable to the Participant by the Company or any Affiliate, or (iv) causing the sale of any Shares issued to a Participant and the payment of the proceeds to the Company to the extent necessary to satisfy such Tax Withholding. The Company may select any method or combination of methods for satisfying its legal obligation for Tax Withholding. By entering into an Incentive Award Agreement, each Participant shall consent to the Company utilizing any such methods to satisfy its obligation for Tax Withholding and shall agree to cooperate as requested by the Company to satisfy such obligation. Any Shares withheld from a Participant, sold or returned to the Company to satisfy the Withholding Tax obligation shall be treated as having been issued to the Participant for purposes of determining whether the Participant has received the Shares to which it is entitled under the Plan, and the payment of any Tax Withholding by a Participant shall not be deemed a reduction of benefits paid to such Participant under the Plan. To the extent a Participant has made an effective election under Section 83(b) of the Internal Revenue Code of 1986, as amended, with respect to Shares that are part of an Incentive Award, the Company shall satisfy the Tax Withholding requirements with respect to the issuance of such Shares, rather than with respect to the vesting of such Shares.

9. ADJUSTMENTS UPON CHANGES IN STOCK.

If any change is made in the Common Stock subject to the Plan, or subject to any Incentive Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and number of securities subject to the Plan pursuant to Sections
4(a), 4(b) and 4(c) of the Plan, and outstanding unvested Incentive Awards will be appropriately adjusted in the class(es) and number of securities subject to such outstanding unvested Incentive Awards. The Committee shall make such adjustments, and its determination shall be final, binding and conclusive. (The

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conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.)

10. CORPORATE TRANSACTIONS.

In the event of (i) a dissolution or liquidation of the Company, (ii) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings and this Plan and the Incentive Awards granted hereunder are assumed by the successor or acquiring corporation, (iii) a merger in which the Company is the surviving corporation but after which the shareholders of the Company immediately prior to such merger (other than any shareholder which merges with the Company in such merger, or which owns or controls another corporation which merges with the Company in such merger) cease to own their shares or other equity interests in the Company or a majority of the voting power of the Company, or (iv) the sale of all or substantially all of the assets of the Company, this Plan shall be assumed by the successor or acquiring corporation (if any).

11. AMENDMENT OF PLAN AND INCENTIVE AWARDS.

The Committee may, at any time, and from time to time, amend the terms of the Plan or any one or more Incentive Awards; provided, however, that the rights of an Employee under the Plan or of a Participant under any Incentive Award shall not be impaired by any such amendment unless (i) the Company requests the consent of such Employee or Participant, as the case may be, and
(ii) such Employee or Participant, as the case may be, consents in writing.

12. TERMINATION OR SUSPENSION OF THE PLAN.

(a) PLAN TERM. The Plan will automatically terminate immediately after
(i) the vesting or forfeiture of all Shares issued, if any, pursuant to First Year Awards, or a final determination that no such award will be made, and (ii) the issuance, if any, of all Second Year Awards, or a final determination that no such awards will be made.

(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Incentive Award granted while the Plan is in effect except with the written consent of the Participant.

13. EFFECTIVE DATE OF PLAN.

The Plan shall become effective immediately and automatically at the Effective Time (as defined in the Merger Agreement).

14. CHOICE OF LAW.

The law of the State of Delaware shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules.

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EXHIBIT A

EMPLOYEES AND PARTICIPATION PERCENTAGE

EXHIBIT B

FORM OF

CADENCE DESIGN SYSTEMS, INC.
THE SPC PLAN

STOCK INCENTIVE AGREEMENT

To:_____________ Date of Grant:_______________ Number of Shares: ________

Cadence Design Systems, Inc., a Delaware corporation (the "Company"), is pleased to make a conditional grant to you of an aggregate of _________ shares (the "Restricted Shares") of the Company's common stock ("Common Stock"). Any additional shares or other property issued to you as owner of the Restricted Shares as a result of a stock or other in-kind dividend or distribution, or other adjustment in the Shares subject to the Plan pursuant to Section 9 of the Plan, shall also constitute Restricted Shares and shall be subject to this Agreement in the same manner as the underlying Restricted Shares. This grant is conditioned upon your delivery to the Company of a counterpart of this Stock Incentive Agreement (this "Agreement"), together with an Acknowledgement and Statement of Decision Regarding 83(b) Election in the form attached hereto as Exhibit A, duly executed by you and your spouse, if applicable, no later than ________, 200__. The Restricted Stock is granted under Section 6(a)(ii)(2) of the Company's SPC Plan (the "Plan"), a copy of which is attached hereto as Exhibit B, and which Plan is expressly incorporated herein for all purposes. All terms of this Agreement are governed by the Plan. If any provision of this Agreement conflicts with the expressly applicable terms of the Plan, the provisions of the Plan shall control. Capitalized terms used in this Agreement shall have the meanings given to them in the Plan unless otherwise defined in this Agreement or unless the context requires otherwise.

1. ESCROW OF RESTRICTED SHARES. The Company shall issue in your name a certificate or certificates for the Restricted Shares, and retain that certificate or those certificates during the restriction period, which began on ____, 200_ and will end on ________, 200_. You hereby agree that the Company shall hold the certificate or certificates representing the Restricted Shares and the related stock powers pursuant to the terms of this Agreement until such time as such certificate or certificates are either delivered to you, sold to pay Tax Withholding (as hereinafter defined), or canceled or forfeited pursuant to the Plan or this Agreement.

2. OWNERSHIP OF RESTRICTED SHARES. You are entitled to all the rights of ownership of the Restricted Shares, including the right to vote those shares and to receive dividends thereon if, as, and when declared by the Board of Directors of the Company, subject, however, to the terms, conditions and restrictions described in the Plan and in this Agreement.

3. RESTRICTIONS; FORFEITURE. The Restricted Shares are restricted in that they may not be sold, transferred or otherwise pledged, alienated or hypothecated until such restrictions are removed or expire as described in
Section 4 of this Agreement, or as otherwise permitted by the Plan. In addition, the Restricted Shares shall be forfeit and revert back to the Company if your

Continuous Service with the Company is terminated for any reason other than your death or disability prior to the expiration of the restrictions for such Restricted Shares pursuant to Section 4 hereof.

4. EXPIRATION OF RESTRICTIONS. Subject to the requirements of Section 6(g) of the Plan, the restrictions on the Restricted Shares, to the extent not forfeited pursuant to Section 3 of this Agreement, shall expire in equal monthly installments, with restrictions expiring as to all Restricted Shares on December 31, 2003. In the event of your death or disability, the restrictions on your Restricted Shares shall not be forfeited and shall continue to lapse in accordance with this Section 4.

5. TAX MATTERS. The Acknowledgment and Statement of Decision Regarding
Section 83(b) Election attached as Exhibit A hereto contains certain information and warnings concerning the income tax consequences of the receipt and vesting of Restricted Shares. YOU SHOULD READ AND UNDERSTAND THAT ACKNOWLEDGMENT AND STATEMENT OF DECISION REGARDING SECTION 83(b) ELECTION FULLY, AND DISCUSS THE RELEVANT ISSUES WITH YOUR TAX ADVISOR, BEFORE SIGNING THAT DOCUMENT AND THIS AGREEMENT.

6. TAX WITHHOLDING. You shall indemnify and hold the Company harmless for all federal, state, local or other taxes relating to the acquisition and vesting of Restricted Shares that the Company is legally obligated to withhold ("Tax Withholding"). You agree that the Company may satisfy its obligation for Tax Withholding by any method it deems appropriate, including but not limited to: (i) causing you to tender, as a condition to the release of the Restricted Shares, (A) a cash payment equal to the amount of such Tax Withholding, and/or (B) fully vested, unencumbered Shares having a fair market value, as determined by the Company, equal to the amount of such Tax Withholding; (ii) withholding Shares otherwise issuable to you, or returning Shares to the Company, with the number of Shares withheld or returned having a fair market value, as determined by the Company, on the date the Shares would have been issued to you or released from vesting restrictions, equal to the amount of such Tax Withholding, (iii) to the extent allowed by law, withholding from any compensation or other amounts payable to you by the Company or any Affiliate, or (iv) causing the sale of any Shares issued to you and the payment of the proceeds to the Company to the extent necessary to satisfy such Tax Withholding. The Company may select any method or combination of methods for satisfying its obligation for Tax Withholding. By entering into this Agreement, you consent to the Company utilizing any such methods to satisfy the obligation for Tax Withholding and agree to cooperate as requested by the Company to satisfy such obligation. You hereby agree that the Company may cause the sale of Shares issued in your name and the payment of the proceeds to the Company as necessary to satisfy your obligation for Tax Withholding. You hereby acknowledge that the amount of such Tax Withholding may not cover your entire tax liability arising from the issuance or vesting of the Restricted Shares, and the payment of any Tax Withholding by you shall not be deemed to be a reduction of benefits paid to you under the Plan. To the extent you have made an effective election under Section 83(b) of the Internal Revenue Code of 1986, as amended, with respect to Restricted Shares, the Company shall satisfy the Tax Withholding requirements with respect to the issuance of such Restricted Shares, rather than with respect to the vesting of such Restricted Shares.

7. ACKNOWLEDGMENT. By executing this Agreement in the appropriate space below, you acknowledge that you have been provided a copy of the Plan, and that your rights under and with respect to the Restricted Shares are and will continue to be subject to all of the terms and provisions of the Plan and this Agreement.

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK]

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer as of the Date of Grant first above written.

CADENCE DESIGN SYSTEMS, INC.

By:

Name:
Title:

ACKNOWLEDGED AND AGREED:

(Spouse)

Exhibit 10.66

This offer given to Executive on November 30, 2001 This offer is valid until December 21, 2001.

EXECUTIVE SEPARATION, RELEASE AND CONSULTING AGREEMENT

This Executive Separation, Release and Consulting Agreement (the "Agreement") is entered into between Ronald R. Barris (the "Executive"), on the one hand, and Cadence Design Systems, Inc., a Delaware corporation (the "Company"), on the other hand, as of this 3rd day of December, 2001.

WHEREAS, the Executive desires to resign his employment as Senior Vice President, Worldwide Services; and

WHEREAS, the Executive and the Company desire to reach an agreement concerning the circumstances under which the Executive's full-time employment relationship with the Company will terminate; and

WHEREAS, the Company desires to be relieved of any and all duties, obligations, and/or liabilities, if any exist, with respect to Executive, other than those obligations and duties that are expressly stated in herein;

NOW THEREFORE, in consideration of the foregoing recitals, the mutual promises contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Executive and the Company agree as follows:

1. Full-Time Employment.

Executive will cease his full-time employment as Senior Vice President, Worldwide Services of the Company on November 16, 2001, at the close of business. All employee benefits, including but not limited to the life, dependent life and disability insurance as well as Midwest Legal Services will terminate at the end of Executive's full-time employment, except that Executive will be eligible to participate in the Employee Stock Purchase Plan and 401k contribution through the end of the Part-Time Employment Period. Executive's funds invested in the Company's Non Qualified Deferred Compensation Plan (the "Plan"), if any, shall be treated in accordance with the terms of the Plan.

2. Part-Time Employment Period.

a. From November 17, 2001 through November 16, 2002 (the "Part-Time Employment Period"), Executive shall be employed by the Company as a part-time employee of the Company as Senior Advisor to the President and Chief Executive Officer of the Company. Employee's employment with the Company shall terminate at the end of the Part-Time Employment Period. Executive shall not be eligible to receive any bonus related to his work during the Part-Time Employment Period.

b. During the Part-Time Employment Period, Executive shall be available to consult to the Company, and/or the Board of Directors of Cadence as necessary. During the

Part-Time Employment Period, Executive shall report to Ray Bingham (or his successor(s)) and shall provide general advice and consultation. Executive's performance of his duties during this period shall not require him to work more than a maximum of twenty (20) hours per week.

c. In consideration for such employment:

(i) Executive shall be paid a monthly salary of $2,000.00, less taxes and standard withholdings required by law to be withheld, and deductions requested by Executive. Such compensation will be paid in accordance with the Company's normal payroll schedule.

(ii) Executive shall receive continued vesting during the Part-Time Employment Period of Executive's Company stock options that were previously granted to Executive in accordance with the Stock Option Plan(s) and Stock Option Agreement(s) under which the options granted, so long as Executive has executed all necessary stock option agreements on or before November 16, 2001. Those options will cease vesting at the end of the Part-Time Employment Period, and Executive will have the period of time following his Termination Date that is provided in the applicable stock option agreement(s) to exercise the vested portions, if any.

(iii) Executive shall be eligible to participate in the Company's Employee Stock Purchase Plan and 401(k) contribution plan through the end of the Part-Time Employment Period.

(iv) Executive shall have certain rights to the real property located at 849 College Avenue, Menlo Park, California as more particularly set forth in Exhibit B attached hereto.

3. In consideration for the covenants and releases given by Executive in this Agreement (other than his part-time employment), the Company shall provide Executive with:

a. $376,000.00, less taxes and standard withholding required by law to be withheld, and deductions requested by Executive, to be paid out in twelve equal payments on the fifteenth of each month, beginning December 15, 2001; and a bonus in the amount of $403,146.23, less taxes and withholdings required by law to be withheld, and amounts requested by him to be deducted, including
(i) $21,855.00, representing the depreciated cost of the Halcon Agenda Race Track Desk, Halcon Elliptical Conference Table and
(5) Harrington leather chairs (which are currently located in Executive's former office at the Company's Chelmsford, Massachusetts campus and which the Company agrees to move, at the Company's cost, to Executive's property located at 8 Winterberry Path, Acton, Massachusetts); and (ii) $53,146.23, representing the remaining principal and accrued interest (as of February 15, 2002) due under the promissory note delivered by the Executive to the Company dated as of July 15, 2000, on or about February 15, 2002, so long as

Executive continues in his part-time employment capacity with the Company through that date and has not in any way breached this Agreement;

b. career transition assistance for a period of one year from the end of the Part-Time Employment Period provided by a vendor chosen by the Company;

c. reimbursement for reasonable (as determined by Ron Kirchenbauer) costs associated with three trips to Chelmsford, Massachusetts for Executive and his wife to be taken by May 30, 2002, provided that Executive submits all receipts and appropriate documentation to Ron Kirchenbauer by June 15, 2002;

d. an audit of Executive's investments in the Telos Venture Plan;

e. continuation through December 31, 2001 of Executive's voice mailbox and electronic mail address on the Company's systems.

4. Executive will be free to accept other employment or consulting engagements during the Part-Time Employment Period, so long as such other employment or consulting engagement does not violate Section 10 herein.

5. Executive acknowledges and agrees that except as expressly stated in this Agreement he is not entitled to any of the benefits provided in that certain offer letter (including attached Employment Terms) dated September 7, 1999 or the Cadence Design Systems, Inc. Executive Retention Agreement that was entered into on January 17, 2001, and that this Agreement supersedes the aforementioned prior agreements and any other employment agreements between the parties.

6. During the Part-Time Employment Period, and following his termination of employment, Executive shall fully cooperate with the Company in all matters relating to his employment, the winding up of his pending work on behalf of the Company and the orderly transfer of any such pending work to other employees of the Company as may be designated by the Company.

7. The Executive agrees not to make any statement, written or oral, or otherwise engage in any communication that disparages the Company or any of the Company's employees, directors, or representatives, products, or business practices.

8. General Release by Executive

(a) The Executive agrees that the Company has already fully satisfied all of its obligations to the Executive arising out of or in connection with the Executive's employment including, without limitation, all salary, bonuses, accrued vacation, sick pay, and two weeks salary as standard termination notice period, and that the benefits provided to Executive in this Agreement constitute consideration for the covenants and releases of the Executive as set forth herein. The Executive acknowledges that the Executive has no claims against the Company based on the Executive's employment by the Company or the Executive's separation therefrom and irrevocably, fully and finally releases the Company, its parent, subsidiaries and affiliates, its current and former

directors, officers, agents, attorneys, and employees ("Releasees") from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, that Executive ever had, nor now has, including but not limited to, any claims that may be alleged to arise out of or in connection with the Executive's employment with the Company, or separation therefrom, including, not by way of limitation, any claims for wages, bonuses, and any claims that any terms of the Executive's employment with the Company or any circumstances of the Executive's separation were wrongful, in breach of any obligation of the Company or in violation of any rights, contractual, statutory or otherwise, of the Executive, including but not limited to rights arising under Title VII of the Civil Rights Act of 1964, as amended, the California Fair Employment and Housing Act, as amended, the California Labor Code, the Age Discrimination in Employment Act of 1967, as amended, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, as amended, the Employee Retirement Income and Security Act of 1974, as amended, (except for Executive's rights under COBRA and any right of Executive to the money in Executive's 401(k) plan account and/or deferred compensation plan account(s)), and any other local, state, or federal law, or law of any country, governing discrimination in employment, the payment of wages or benefits, or any other aspect of employment (collectively, "Claims").

IN THIS REGARD THE EXECUTIVE WAIVES ANY RIGHTS CONFERRED BY CALIFORNIA
CIVIL CODE SECTION 1542 WHICH PROVIDES AS FOLLOWS:

"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."

(b) The Executive acknowledges that he understands that he may take twenty-one (21) days to consider this Agreement and that he has been advised that he should consult with an attorney, if he desires to do so, prior to executing this Agreement. The Executive further acknowledges that he understands that he may revoke this Agreement within seven (7) days of his execution of this document and that the consideration to be paid to the Executive pursuant to this Agreement will be paid only after that seven (7) day revocation period.

9. Executive acknowledges and incorporates herein by reference his continuing obligations under the Employee Proprietary Information and Inventions Agreement executed by Executive on September 21, 1999, a copy of which is attached hereto as Exhibit A.

10. As Senior Vice President, World Wide Services and as a Senior Executive and Officer of Cadence, Executive has obtained extensive and valuable knowledge and information concerning the business of the Company (including confidential information relating to the Company and its operations, assets, contracts, customers, personnel, plans, marketing plans, research and development plans and prospects). The Executive and the Company agree that it would be virtually impossible for Executive to work as an employee, consultant or advisor to a company in the electronic design automation industry without inevitably disclosing confidential and proprietary information belonging to the Company. Accordingly, the Executive agrees that, during the Part-Time Employment Period he will

not, directly or indirectly, provide services on behalf of any competing corporation, limited liability company, partnership, or other competing entity or person, specifically including but not limited to Avant! Corporation, Synopsys Inc., Mentor Graphics Corporation, Simplex Solutions, Inc., Magma Design Automation, Inc., or any subsidiary, affiliate, division, distributor or partial or complete successor thereof, whether as an employee, consultant, independent contractor, agent, sole proprietor, partner, joint venture, corporate officer or director. For purposes of this Section 10, a "competing" entity is one that is engaged in the research, design, development, marketing and/or sale of electronic design automation software and related products, including products containing hardware, software and both hardware and/or software.

11. Executive agrees that during his employment with the Company, he will not, except with the written advance approval of Ron Kirchenbauer (or his successor(s)), voluntarily or involuntarily, for any reason whatsoever, directly or indirectly, individually or on behalf of persons or entities not now parties to this Agreement: (a) encourage, induce, attempt to induce, solicit or attempt to solicit for employment, contractor or consulting opportunities anyone who is employed at that time, or was employed during the previous one (1) year, by the Company or any affiliate; or (b) interfere or attempt to interfere with the relationship or prospective relationship of the Company or any affiliate with any former, present or future client, customer, joint venture partner, financial or tax advisor or attorney, or financial backer of the Company or any affiliate; or (c) solicit, divert or accept business, in any line or area of business engaged in by the Company or any affiliate, from any former or present client, customer or joint venture partner of the Company or any affiliate (other than on behalf of the Company), except that Executive may solicit or accept business, in a line of business engaged in by the Company or an affiliate, from a former or present client, if and only if Executive had previously provided consulting services in such line of business, to such client, prior to ever being employed by the Company, but in no event may Executive violate Section 10 above. This Section 11, together with
Section 12, shall supersede paragraph five (5) of the Employee Proprietary Information and Inventions Agreement, attached hereto as Exhibit A.

12. During the six (6) months following Executive's employment wit the Company, Executive agrees that he will not, except with the written advance approval of Ron Kirchenbauer (or his successor(s)), voluntarily or involuntarily, for any reason whatsoever, directly or indirectly, individually or on behalf of persons or entities not now parties to this Agreement: (a) encourage, induce, attempt to induce, solicit or attempt to solicit for employment, contractor or consulting opportunities anyone who is employed at that time, or was employed during the previous one
(1) year, by the Company or any affiliate; or (b) interfere or attempt to interfere with the relationship or prospective relationship of the Company or any affiliate with any former, present or future client, customer, joint venture partner, financial or tax advisor or attorney, or financial backer of the Company or any affiliate; or (c) solicit, divert or accept business, in any line or area of business engaged in by the Company or any affiliate, from any former or present client, customer or joint venture partner of the Company or any affiliate (other than on behalf of the Company), except that Executive may solicit or accept business, in a line of business engaged in by the Company or an affiliate, from a former or present client, if and only if Executive had previously provided consulting services in such line of

business, to such client, prior to ever being employed by the Company. This Section 12, together with Section 11 above, shall supersede paragraph five (5) of the Employee Proprietary Information and Inventions Agreement, attached hereto as Exhibit A.

13. Notwithstanding the language in Section 22 herein, the parties hereto agree that damages would be an inadequate remedy for the Company in the event of a breach or threatened breach of Section 10, 11 or 12 of this Agreement by Executive, and in the event of any such breach or threatened breach, the Company may, either with or without pursuing any potential damage remedies, obtain and enforce an injunction prohibiting Executive from violating this Agreement and requiring Executive to comply with the terms of this Agreement.

14. Executive represents and acknowledges that the Executive's decision to enter into this Agreement has been made voluntarily, knowingly, and without coercion of any kind.

15. Executive represents and warrants that there has been no assignment or other transfer of any interest in any Claim, which Executive may have against the Releasees.

16. Executive agrees that if the Executive hereafter commences, joins in, or in any manner seeks relief through any suit, claim, demand, charge, complaint or otherwise, arising out of, based upon, or relating to any of the Claims released hereunder or in any manner asserts against the Releasees any of the Claims released hereunder, then the Executive will pay to the Releasees, in addition to any other damages caused thereby, all reasonable attorneys' fees incurred by the Releasees in defending or otherwise responding to said suit or Claim.

17. Executive acknowledges that he has returned to the Company all copies and records of any and all confidential and/or proprietary information in his possession or control, as well as all other Company property (including but not limited to computers, phones, fax machines, and printers) to Ron Kirchenbauer, except as provided for in Section 3.

18. This Agreement shall be governed and enforced in accordance with the laws of the State of California, excluding its conflict of waiver laws rules.

19. In the event that any part of this Agreement is found to be void or unenforceable then (a) such provision or part thereof shall, with respect to such circumstance and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) such invalidity or enforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement as each provision is separable from every other provision. If for any reason a court of competent jurisdiction or arbitrator finds any provision of this Agreement to be unenforceable, the provision shall be deemed amended as necessary to conform to applicable laws or regulations, or if it cannot be so amended without materially altering

the intention of the parties, the remainder of the Agreement shall continue in full force and effect as if the offending provision were not contained herein.

20. Neither party shall, by mere lapse of time, without giving notice or taking other action hereunder be deemed to have waived any breach by the other party of any of the provisions of this Agreement. Further, the waiver by either party of a particular breach of this Agreement by the other shall neither be construed as, nor constitute, a continuing waiver of such breach or of other breaches by the same or any other provision of this Agreement.

21. The Company shall have the right to assign its rights and obligations under this Agreement to an entity that acquires substantially all of the assets of the Company. The rights and obligations of the Company under this Agreement shall inure to the benefit and shall be binding upon the successors and assigns of the Company. Executive shall not have any right to assign his obligations under this Agreement and shall only be entitled to assign his rights under this Agreement by will or the laws of descent and distribution.

22. The Company and Executive agree that any dispute regarding the interpretation or enforcement of this Agreement or any dispute arising out of Executive's employment or the termination of that employment with the Company, except for disputes regarding the interpretation of those section referred to in Section 13 and disputes involving the protection of the Company's intellectual property, shall be decided by confidential, final and binding arbitration conducted by Judicial Arbitration and Mediation Services ("JAMS") under the then-existing JAMS rules, rather than by litigation in court, trial by jury, administrative proceeding, or in any other forum.

23. The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement, including the agreements referenced herein and attached as Exhibits hereto, constitute the complete and exclusive statement of the agreement between the parties and supersedes any and all prior or contemporaneous understandings, agreements, representations, conditions, covenants, proposals, and all other communications between the parties, whether written or oral, relating to the subject matter hereof.

24. Agreement and the terms and conditions of the matters addressed in this Agreement may only be amended in writing executed both by the Executive and a duly authorized representative of the Company.

In witness whereof, the parties hereto have executed this Executive Termination and Release Agreement, effective eight (8) days after the date it is signed by both parties below (the "Effective Date").

RONALD R. BARRIS CADENCE DESIGN SYSTEMS, INC.

By:   /s/ Ronald R. Barris                   By:  /s/ Ron Kirchenbauer
      --------------------------                  --------------------------
                                                  Ron Kirchenbauer
                                                  Senior Vice President
                                                  Organizational Development

Date: 12/3/01                                Date: 11/30/01

EXHIBIT B

EXERCISE OF PUT/CALL OPTION AGREEMENT

This Exercise of Put/Call Option Agreement (this "Exercise Agreement") is made and entered into as of the 21st day of December, 2001, by and between RONALD R. BARRIS AND SUSAN E. BARRIS, AS HUSBAND AND WIFE ("Barris") and 849
COLLEGE AVENUE, INC. (the "Company").

W I T N E S S E T H

WHEREAS, Barris and the Company have entered into that certain Put/Call Option Agreement dated as of September 18, 2000 (the "Option Agreement"); and

WHEREAS, Barris and the Company desire to confirm Barris' exercise of the Put Right (as defined in the Option Agreement) as more particularly set forth herein.

NOW, THEREFORE, for and in consideration of the premises, the mutual covenants and agreements herein set forth, and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby expressly acknowledged by the parties hereto, the parties hereto do hereby covenant and agree as follows:

1. Definitions. All capitalized terms not defined herein shall have the meanings ascribed thereto in the Option Agreement.

2. Exercise of Put Option. Barris hereby exercises the Put Right effective May 30, 2002, and, effective July 1, 2002 ("Listing Date"), agrees to cooperate with the Company in taking any and all actions the Company deems necessary to list the Property on the Company's behalf; provided, however, that notwithstanding the provisions of Section 2 of the Option Agreement regarding timing of the Closing Date, Barris and the Company hereby agree that the Closing Date shall be the earlier of (i) 30 days after the Contingency Notice Date, or
(ii) October 31, 2002. As used herein, the "Contingency Notice Date" means the date on which the Company notifies Barris that all contingencies have been removed from the contract of sale for the Property; provided, however, that if such notice is delivered at any time before July 1, 2002, the Contingency Notice Date shall be deemed to be July 1, 2002.

3. Possession. On the Closing Date, Barris shall deliver to the Company possession of the Property in the condition in which Barris occupied the Property, ordinary wear and tear excepted.

4. Modifications. Barris shall make no substantial modifications or improvements to the Property without the prior written consent of the Company. On the Closing Date, the Company shall pay Barris $47,233.60 to reimburse Barris for the cost of modifications and/or improvements made prior to the date of this Exercise Agreement.

5. Access. From and after the Access Date (as hereinafter defined), the Company's agents and designees shall have the right, but not the obligation, to enter upon the Property at

all reasonable times after reasonable notice to Barris to examine the condition of same and to exhibit the Property to the Company's listing agent. As used herein, the term "Access Date" means the earlier of (i) the date that is fifteen
(15) days before the Listing Date agreed by Barris and the Company pursuant to
Section 2 of this Exercise Agreement, if any, or (ii) June 14, 2002. The listing agent shall ensure that the Property is locked and that the security system is armed after showing the Property to potential purchasers.

6. Insurance. From the date hereof through the Closing Date, Barris shall keep all buildings and improvements on the Property time insured for the benefit of the Company and Barris against loss or damage by fire and customary extended coverage in a minimum amount equal to the full insurable value of such buildings and improvements. In the event that, at any time before the conveyance of the Property to the Company on the Closing Date, the buildings and improvements on the Property shall be destroyed or damaged in whole or in part by fire or other cause, Barris shall assign to the Company all insurance proceeds collected in connection with such damage and destruction. Any proceeds paid directly to Barris shall be held in trust by Barris for the benefit of the Company and shall be immediately paid over to the Company in accordance with this Section 6.

7. Further Assurances. Barris and the Company shall execute and deliver such further instruments confirming the agreements set forth in this Exercise Agreement as may be reasonably necessary to effect the purposes set forth herein, including without limitation a recordable form of this Exercise Agreement and the documents described in Section 4 of the Option Agreement.

8. Ratification. The Option Agreement, as modified by this Exercise Agreement, is hereby ratified and confirmed by Barris and the Company.

IN WITNESS WHEREOF, the undersigned have caused this Exercise Agreement to be executed and delivered as of the date first above written.

the "Company":

849 COLLEGE AVENUE, INC.

By:            R.L. Smith McKeithen
   --------------------------------
Name:          R.L. Smith McKeithen
     ------------------------------
Title:         Secretary
      ------------------

"Barris":

/s/ Ronald R. Barris
-----------------------------------
Ronald R. Barris

/s/ Susan E. Barris
-----------------------------------
Susan E. Barris

EXHIBIT 21.1

CADENCE DESIGN SYSTEMS, INC.
SUBSIDIARIES OF THE REGISTRANT

The Registrant's subsidiaries and the state or country in which each is incorporated or organized, are as follows:

1Chip Silicon Systems, Inc. ..............................  U.S.A.
849 College Ave, Inc. ....................................  U.S.A.
Accent S.r.l.(1)..........................................  Italy
Ambit Design Systems, Inc. ...............................  U.S.A.
Arkansas Acquisition, Inc. ...............................  U.S.A.
Arkos Design Systems, Inc. ...............................  U.S.A.
Beijing Cadence Electronics Technology Co., Ltd. .........  China
Cadence (Barbados) FSC Inc. ..............................  Barbados
Cadence China Ltd. .......................................  Hong Kong
Cadence Credit Corporation, Inc. .........................  U.S.A.
Cadence Design Service Y.K. ..............................  Japan
Cadence Design Systems (Canada) Limited ..................  Canada
Cadence Design Systems (Cyprus) Limited ..................  Cyprus
Cadence Design Systems (India) Private Ltd. ..............  India
Cadence Design Systems (Ireland) Limited .................  Ireland
Cadence Design Systems (Israel) Limited ..................  Israel
Cadence Design Systems (Japan) B.V. ......................  Netherlands
Cadence Design Systems (S) Pte Ltd. ......................  Singapore
Cadence Design Systems (Taiwan) B.V. .....................  Netherlands
Cadence Design Systems AB ................................  Sweden
Cadence Design Systems Asia Ltd. .........................  Hong Kong
Cadence Design Systems B.V. ..............................  Netherlands
Cadence Design Systems GmbH ..............................  Germany
Cadence Design Systems I B.V. ............................  Netherlands
Cadence Design Systems Limited ...........................  Hungary
Cadence Design Systems S.A.S. ............................  France
Cadence Design Systems S.r.l. ............................  Italy
Cadence Design Systems, Ltd ..............................  United Kingdom
Cadence Design Technologies PTE Limited(2)................  Singapore
Cadence International Sales Corporation...................  U.S. Virgin Islands
Cadence Korea Ltd. .......................................  Korea
Cadence Methodology Service Company Ltd. .................  Taiwan
Cadence Netherlands B.V. .................................  Netherlands
Cadence Receivables Consolidation Corporation ............  U.S.A.
Cadence Receivables Corporation ..........................  U.S.A.
Cadence Taiwan, Inc. .....................................  Taiwan
Cadence Technology Inc. ..................................  U.S.A.
Cadence Technology Limited ...............................  Ireland
CadMOS Design Technology, Inc. ...........................  U.S.A.
Castlewilder .............................................  Ireland
Cooper & Chyan Technology GmbH............................  Germany

Cooper & Chyan Technology, Inc. ..........................  U.S.A.
Daffodil Acquisition II, Inc. ............................  U.S.A.
Daffodil Acquisition LLC .................................  U.S.A.
Daffodil Acquisition, Inc. ...............................  U.S.A.
Design Acceleration, Inc. ................................  U.S.A.
Detente Technology, Inc. .................................  U.S.A.
Diablo Lighting, Inc. ....................................  U.S.A.
Diablo Research Company LLC...............................  Canada
DSM Technologies, Inc. ...................................  U.S.A.
Esperan Limited ..........................................  United Kingdom
Innotech Company(3).......................................  Japan
Microsim Corporation .....................................  U.S.A.
Orcad Europe S.A.R.L. ....................................  France
Orcad Japan K.K. .........................................  Japan
Orcad UK Limited .........................................  United Kingdom
Orcad, Inc. ..............................................  U.S.A.
PiE S.A.R.L. .............................................  France
Quickturn Design Systems FSC Limited......................  Barbados
Quickturn Design Systems GmbH ............................  Germany
Quickturn Design Systems International, Inc. .............  U.S.A.
Quickturn Design Systems Israel Ltd. .....................  Israel
Quickturn Design Systems, Asia, Inc. .....................  U.S.A.
Quickturn Design Systems, Inc. ...........................  U.S.A.
River Oaks Place Association .............................  U.S.A.
Seely Properties, Inc. ...................................  U.S.A.
Silicon Perspective Corporation ..........................  Canada
Silicon Perspective Corporation ..........................  U.S.A.
Silicon Perspective Holding Corporation ..................  U.S.A.
Silicon Perspective Ltd. (Israel) ........................  Israel
Silicon Perspective S.A.R.L. (France) ....................  France
Simon Software, Inc. .....................................  U.S.A.
Speedsim, Inc. ...........................................  U.S.A.
Spincircuit, Inc. ........................................  U.S.A.
Symbionics Group Limited .................................  United Kingdom
Symbionics Limited .......................................  United Kingdom
Synthesia AB .............................................  Sweden
Tality Canada B.V. .......................................  Netherlands
Tality Canada Corporation ................................  Nova Scotia
Tality Corporation .......................................  U.S.A.
Tality Holdings BV .......................................  Netherlands
Tality Holdings Inc. .....................................  U.S.A.
Tality India Services Private ............................  India
Tality Japan YK ..........................................  Japan
Tality LP ................................................  U.S.A.
Tality Transition Corporation ............................  U.S.A.
Telos Venture Partners ...................................  U.S.A.
Unicad, Inc. .............................................  U.S.A.

(1) Cadence has 49% ownership.
(2) Cadence Design Systems (Ireland) Limited owns 19% of this entity.
(3) Cadence has 14.64% of ownership.

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements (File Nos. 33-43025, 33-48371, 33-53913, 333-18963, 333-27109, 333-34599, 333-40047, 333-61029, 333-65529, 333-71717, 333-85591, 333-93609, 333-69589, 333-56898, 333-33330, 333-65116, 333-75874, and 333-82044) on Form S-8.

/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
March 11, 2002


	*predict and may cause its operating results to fluctuate unexpectedly*


	•	Customers’ budgetary constraints and internal acceptance review procedures;
	•	The timing of customers’ budget cycles; or
	•	The timing of customers’ competitive evaluation processes.


	•	Migration to Deep SubMicron: The size of features such as wires, transistors and contacts on ICs is shrinking due to advances in semiconductor manufacturing processes. Process feature sizes refer to the width of the transistors and the width and spacing of the interconnect on the IC. Feature size is normally identified by the headline transistor length, which is shrinking from 0.25 microns to 0.13 microns and smaller. This is commonly referred to in the semiconductor industry as the migration to deep submicron. It represents a major challenge for all levels of the semiconductor industry, from IC design and design automation to design of manufacturing equipment and the manufacturing process itself. Shrinkage of transistor length to such infinitesimal proportions (for reference, the diameter of the period at the end of this sentence is approximately 400 microns) is challenging fundamental laws of physics and chemistry.
	•	The ability to design very large ICs, in particular integration of entire electronic systems onto a single chip instead of a circuit board (a process that is referred to in the industry as “SoC”), increases the complexity of managing a design that at the lowest level is represented by billions of shapes on the fabrication mask. In addition, systems typically incorporate microprocessors and digital signal processors that are programmed with software, requiring simultaneous design of the silicon chip and the related embedded software on the chip.


	•	Cadence’s cost of services personnel is high and reduces gross margin. Gross margin represents the difference between the amount of revenue from the sale of services and Cadence’s cost of providing those services. Cadence must pay high salaries to attract and retain professional services personnel. This results in a lower gross margin than the gross margin in Cadence’s software business. In addition, the high cost of training new services personnel or not fully utilizing these personnel can significantly lower gross margin, and it is difficult to adjust staffing levels quickly to reflect customer demand for services.
	•	A substantial portion of these services contracts is fixed-price contracts. This means that the customer pays a fixed price that has been agreed upon ahead of time, no matter how much time or how many resources Cadence must devote to perform the contract. If Cadence’s cost in performing the services consistently and significantly exceeds the amount the customer has agreed to pay, it could seriously harm Cadence’s business, operating results and financial condition.


	•	The development of competitive EDA products and design and methodology services could result in a shift of customer preferences away from Cadence’s products and services and significantly decrease revenue;
	•	The electronics design and methodology services industries are relatively new and electronics design companies and manufacturers are only beginning to purchase these services from outside vendors;
	•	Due to budgeting constraints or excess engineering capacity, electronics manufacturers often choose to perform design and methodology services internally, rather than purchase these services from outside vendors;
	•	The pace of technology change demands continuous technological development to meet the requirements of next-generation design challenges; and
	•	There are a significant number of current and potential competitors in the EDA industry and the cost of entry is low.


	•	Pay damages to the party claiming infringement;
	•	Stop licensing, or providing services that use, the challenged intellectual property;
	•	Obtain a license from the owner of the infringed intellectual property to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or
	•	Redesign the challenged technology, which could be time-consuming and costly.


	•	Difficulties in combining previously separate businesses into a single unit;
	•	The substantial diversion of management’s attention from day-to-day business when evaluating and negotiating these transactions and then integrating an acquired business;
	•	The discovery after the acquisition has been completed of liabilities assumed from the acquired business;
	•	The failure to realize anticipated benefits such as cost savings and revenue enhancements;
	•	The failure to retain key personnel of the acquired business;
	•	Difficulties related to assimilating the products of an acquired business in, for example, distribution, engineering and customer support areas;
	•	Unanticipated costs;
	•	Adverse effects on existing relationships with suppliers and customers; and
	•	Failure to understand and compete effectively in markets in which Cadence has limited previous experience.


	•	The adoption and expansion of government trade restrictions;
	•	Volatile foreign exchange rates and currency conversion risks;
	•	Limitations on repatriation of earnings;
	•	Reduced protection of intellectual property rights in some countries;
	•	Recessions in foreign economies;
	•	Longer receivables collection periods and greater difficulty in collecting accounts receivable;
	•	Difficulties in managing foreign operations;
	•	Political and economic instability;
	•	Business interruptions from terrorism, military operations and war;
	•	Unexpected changes in regulatory requirements;
	•	Tariffs and other trade barriers; and
	•	U.S. government licensing requirements for exports which make licenses difficult to obtain.


	•	Loss of current customers and loss of or delay in revenue and loss of market share;
	•	Failure to attract new customers or achieve market acceptance;
	•	Diversion of development resources to resolving the problem;
	•	Increased service costs; and
	•	Liability for damages.


	•	Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from engaging in any business combination with a person owning 15% or more of its voting stock, or who is affiliated with the corporation and owned 15% or more of its voting stock at any time within three years prior to the proposed business combination, for a period of three years from the date the person became a 15% owner, unless specified conditions are met.
	•	Cadence’s Certificate of Incorporation allows Cadence’s Board of Directors to issue, at any time and without stockholder approval, preferred stock with such terms as it may determine. No shares of preferred stock are currently outstanding. However, the rights of holders of any Cadence preferred stock that may be issued in the future may be superior to the rights of holders of its common stock.
	•	Cadence has a rights plan, commonly known as a “poison pill,” which would make it difficult for someone to acquire Cadence without the approval of Cadence’s Board of Directors.


	•	revenue recognition for its various business units;
	•	estimating valuation allowances and accrued liabilities;
	•	accounting for income taxes; and
	•	valuation of long-lived and intangible assets and goodwill.


	•	Term licenses — software licensed for a specific time period, generally two to three years, with no rights to return or exchange the licensed software;
	•	Subscription licenses — software licensed for a specific time period, generally two to three years, with no rights to return and limited rights to exchange the licensed software for unspecified future technology; and
	•	Perpetual licenses — software licensed on a perpetual basis with no right to return or exchange the licensed software.


	•	Term licenses and Perpetual licenses — revenue associated with licensed software is recognized upon the effective date of the license; and
	•	Subscription licenses — revenue associated with licensed software is recognized ratably over the term of the license commencing upon the effective date of the license.


	•	Call options allow Cadence to buy shares of its common stock on a specified day at a specified price. If the market price of the stock is greater than the exercise price of a call option, Cadence will typically exercise the option and receive shares of its stock. If the market price of the common stock is less than the exercise price of a call option, Cadence typically will not exercise the option.
	•	Call option issuers may accumulate a substantial number of shares of Cadence common stock in anticipation of Cadence’s exercising its call option and may dispose of these shares if and when Cadence fails to exercise its call option. This could cause the market price of Cadence common stock to fall.


	•	Depending on the exercise price of the put warrants and the market price of Cadence common stock at the time of exercise, “net share settlement” of the put warrants with Cadence common stock could cause Cadence to issue a substantial number of shares to the holder of the put warrant. The holder may sell these shares in the open market, which could cause the price of Cadence common stock to fall.
	•	Put warrant holders may accumulate a substantial number of shares of Cadence common stock in anticipation of exercising their put warrants and may dispose of these shares if and when they exercise their put warrants and Cadence issues shares in settlement of their put warrants. This could also cause the market price of Cadence common stock to fall.


(1)	Sales returns allowance, offset against revenue.

(2)	Uncollectible accounts written-off, net of recoveries, and sales returns.


*	Includes $3.3 million in Long-Term Installment Contract Receivables.