CADENCE DESIGN SYSTEMS INC (Form: 10-K405, Received: 03/27/2000 16:33:39)

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 JANUARY 1, 2000
OR

/ /     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                                   77-0148231
(State or Other Jurisdiction of                      (IRS Employer
 Incorporation or Organization)                   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                      NEW YORK STOCK EXCHANGE
         (Title of Each Class)                    (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 / /

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. / /

Aggregate market value of the voting stock held on March 3, 2000 by non-affiliates of the registrant: $5,014,367,568

Number of shares of common stock outstanding at March 3, 2000: 244,603,296

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the 2000 Annual Meeting to be held on May 24, 2000, are incorporated by reference into Part III hereof.

CADENCE DESIGN SYSTEMS, INC.

1999 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PAGE
--------
PART I

Item 1. Business.................................................... 3

Item 2. Properties.................................................. 15

Item 3. Legal Proceedings........................................... 15

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

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 18

Item 6 Selected Financial Data..................................... 19

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20

Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 41

Item 8. Financial Statements and Supplementary Data................. 41

Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure...................................... 41

PART III

Item 10. Directors and Executive Officers of the Registrant.......... 42

Item 11. Executive Compensation...................................... 43

Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 43

Item 13. Certain Relationships and Related Transactions.............. 43

PART IV

Item 14. Exhibits, Financial Statements, Schedules, and Reports on
Form 8-K.................................................. 44

Signatures.................................................. 88

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 Private Securities Reform Act of 1995. 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 "Factors That May Affect Future Results" sections contained herein, 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., or 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 electronic design automation, or EDA, software and hardware technology and provides a range of services to companies throughout the world to help its customers 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.

Cadence was formed as a Delaware corporation as a result of the merger of SDA Systems, Inc. into ECAD, Inc. in May 1988. Cadence's executive offices are located at 2655 Seely Avenue, Building 5, San Jose, California 95134, and its telephone number at that location is (408) 943-1234.

ELECTRONIC DESIGN AUTOMATION

The worldwide electronics industry is experiencing rapid growth in both the business-to-business and consumer products segments. The cost of producing complex chips have decreased, and these lower prices have accelerated growth of the consumer products segment due to the increased use in consumer products, such as home appliances and personal computers, automotive products, entertainment products and games, and personal communication and organization devices, which include complex chips and electronics components, once only contained in business-to-business products. This industry development presents challenges for developers of electronic products, where time-to-market, cost, performance, quality, reliability, size, and the need for product diversity become critical in a fast-paced and volatile industry.

The electronics industry is faced with a continuing escalation in complexity of electronic devices. The major trends responsible for the increasing complexity of designing and manufacturing electronic devices are as follows:

- The size of features such as wires, transistors, and contacts on chips 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 chip. Feature size is normally identified by the headline transistor length, which is shrinking from 0.35 microns to 0.18 microns and below. This is commonly referred to in the semiconductor industry as the migration to deep submicron and represents a major challenge for all levels of the semiconductor industry from 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 chips, 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 system-on-a-chip, or 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.

These trends are posing major new challenges for electronics designers. The shift to deep sub-micron means that many physical effects that could previously be ignored by designers must now be considered during the design process. The challenge of formulating extremely large chip designs means that new approaches to managing complexity and abstraction are required. These challenges are being addressed in a number of ways, including revamping old design methodologies, introducing new EDA tools and technologies to design environments, and adopting a SOC style of design to take advantage of silicon manufacturing capabilities.

THE COMPLEX CHIP AND ELECTRONICS SYSTEM DESIGN AND DEVELOPMENT PROCESS

The electronic design process involves describing the behavioral, architectural, functional, and structural attributes of an integrated circuit or electronic system. The process commences with the designer describing the product's overall system architecture on a very general level. This general description is then refined into a series of increasingly detailed descriptions to meet predetermined design specifications, simulating the design at each level to identify defects. The refinements are generally made using automated tools that read one description represented by a computer file and write another more detailed computer file, guided by input from the designer. The lowest level of description provides the manufacturing data required by the semiconductor foundry to create the masks and test programs needed to build functioning chips.

In practice, problems may be found at one level that can only be resolved by revising a higher level description. This process, often referred to as iteration, slows the overall design process.

BEHAVIORAL AND ARCHITECTURAL DEFINITION--THE SYSTEM LEVEL

A natural evolution of EDA is a top-down design approach known as electronic systems design automation. The highest level of description of the electronic system is referred to as the system level. Increasingly the complexity of the system design and the need to start embedded software development before the chip design is complete. This level consists of two components, the behavioral definition and the architectural definition. The behavioral definition is a description of what the system should do, without any determination as to how it is to be implemented. The architectural definition is a detailed description of the particular implementation of the behavior for the chip that is being designed.

THE DESIGN DESCRIPTION--THE RTL LEVEL

Based on overall system architecture, the designer creates a design description using a variety of techniques, including block diagrams, equations and special design description languages referred to as hardware description languages. The key description of a chip in current methodology is the register- transfer level, known as the RTL level. RTL level designs are described in hardware description languages, almost always VHDL or Verilog-Registered Trademark- languages. If the system design is done informally, then this is the level at which the designer first enters the design manually. If the system design is done more formally then some or all of the RTL may be automatically generated by a design tool from the system level description.

The RTL level is verified for correctness by reading the RTL description into a simulation program and making changes to the inputs to the system. The simulator then automatically calculates the effect of those input changes on the entire system and writes out the output changes from the system. The designer

can then manually inspect these output changes, or use more automated approaches, to verify that the system behaves as intended. This process is known as functional verification.

STRUCTURAL DESIGN AND SIMULATION--GATE LEVEL

The next lower level of electronics system design has historically been the gate level. Before an integrated circuit or printed circuit board can be manufactured, general design descriptions must be reduced to detailed structural plans in which the engineer specifically defines components, their interconnections, and associated physical properties. At this stage in the process, the design is further described as a network of interconnected standard cells, the small building blocks of silicon from a library, along with larger cells such as memories and microprocessors. Structural designs may be created manually or generated from the RTL level description using an automated process called logic synthesis. A database containing the design's electrical characteristics, interconnections, and specific design rules is automatically created and used as the foundation for subsequent design steps.

In order to identify design errors before manufacturing, the gate level is verified to match the RTL level description either using simulation, or increasingly by static techniques such as equivalence checking and static timing analysis used in large designs, that prove that the various circuits in the design are adequately fast. Simulation enables electronic product designers to quickly explore design alternatives, which can be performed at different levels of design abstraction. A designer is then able to verify the conceptual, structural, and performance aspects of the design.

PHYSICAL DESIGN AND VERIFICATION--LAYOUT LEVEL

When the design is determined to be functionally correct, the designer generates a non-graphical description, called a netlist, that details the design components and interconnections. This netlist becomes the blueprint for the physical design of the electronic system or chip. After development of the netlist, the physical design team determines the layout of the system or chip. At this stage of the process, the design is further described in terms of where each standard cell or larger cell is to be placed on the chip, along with the patterns of metal interconnect to be used on the chip to join them together electrically. The process by which this description is created from the netlist is known as place and route. The ideal layout will yield the optimum combination of performance, size, and cost.

Once this process is completed, physical verification tools are used to provide a final check of the design implementation before products are released to manufacturing. Accuracy in this process is essential for avoiding costly production runs of faulty parts. This step-by-step process has now evolved into a concurrent process as the next generation of physical design and verification products have entered the EDA market. In the latest design flows, synthesis, where the RTL description is transformed into a netlist, and place and route, where the netlist is transformed into layout, are done at the same time, reflecting an evolution of EDA into a more concurrent process.

CADENCE'S ELECTRONIC DESIGN AUTOMATION TOOLS

Cadence offers a broad spectrum of EDA software tools and hardware that apply to one or more steps in the complex chip and electronics system design process described above. These tools provide a variety of functions, including system-level design; logic design, simulation, emulation, and verification; physical implementation, verification, and analysis; and printed circuit board design.

SYSTEM-LEVEL DESIGN--BEHAVIORAL AND ARCHITECTURAL DEFINITION

System-level design allows the system architect to design at the highest levels of abstraction, allows customers to test their designs early in the design process, and enables customers to automate interactions between the architect and the chip designer. Cadence's Cierto-TM- virtual component co-design toolset, or

VCC, analyzes behavioral and architectural definitions. Specifically, VCC analyzes a particular architecture for implementation of a behavioral definition, such as desired electronic functions, and provides feedback on design performance. Once a particular architecture is chosen, VCC output can be used to create or verify the RTL level of the design, and the embedded software within it. The Cadence Cierto signal processing worksystem toolset provides system-level design for a number of specific application areas, including wired and wireless communications and multimedia. Virtual component co-design and signal processing worksystem are part of the Cadence Cierto product line.

PHYSICAL IMPLEMENTATION, VERIFICATION, AND ANALYSIS

LAYOUT LEVEL

The Envisia Silicon Ensemble-TM- ultra place and route tools are one of Cadence's most successful product lines. During 1999, Cadence released Envisia Silicon Ensemble tools with signal integrity, a tool designed to eliminate signal and reliability problems as process feature sizes get smaller. These chip components get smaller as the electronics industry evolves from .25 micron to .18 micron geometries.

Cadence's custom layout portfolio is anchored by the Virtuoso-Registered Trademark- product family, which includes tools for basic layout editing, design compaction, layout synthesis, and device-level editing. The Virtuoso automated custom physical design flow significantly increases customer productivity of custom design layout by automating some of the process.

Cadence's analog and mixed-signal design solutions consist of the Spectre-Registered Trademark- circuit simulation family and the Affirma-TM- analog circuit design environment. These products are used for creating the complex transistor interconnect structures required for mixed-signal design and verifying through simulation that the structures provide the correct behavior and performance.

The Cadence Dracula-Registered Trademark-, Diva-Registered Trademark-, and Vampire-Registered Trademark- verification tools, which comprise the Cadence Assura-TM- product line, provide integral solutions for automated and interactive physical and batch verification, meaning the running of a program over a period of time. This product line enables electronic product designers to perform a final check of their designs before products are released to manufacturing.

DEEP SUBMICRON IMPLEMENTATION

The Cadence Envisia product line provides a broad solution for design planning, synthesis and placement and routing of deep submicron design. The Envisia product line includes specialized technology to deal with complex challenges such as timing convergence, crosstalk, and signal integrity. Envisia Silicon Ensemble is a place and route tool that takes gate-level descriptions, or gate-level descriptions plus placement information, and produces the layout level description. The latest version of Envisia, Silicon Ensemble signal integrity, takes account of various problems with deep submicron process technology by altering the description to avoid potential signal integrity issues.

PRINTED CIRCUIT BOARD DESIGN AND PACKAGING

The Cadence Allegro-Registered Trademark- and SPECCTRA-Registered Trademark- product lines offer broad capability for the layout of standard printed circuit boards and advanced component packaging. In 1999, Cadence acquired OrCAD, Inc., a printed circuit board designer that focused on the shrink-wrap segment of the market.

LOGIC DESIGN, SIMULATION, AND VERIFICATION

RTL LEVEL DESIGN

Some of Cadence's most successful products are its simulation tools. NC-simulator, NC-Verilog, and NC-VHDL comprise Cadence's family of digital simulators that are used for the functional verification of designs described in Verilog, VHDL or both. They can operate at the behavioral level, RTL level, and

gate-level. The older Verilog-XL product is still available. The Cadence Spectre-Registered Trademark- circuit simulator is used to verify designs at the transistor level, particularly for analog design. The Affirma analog circuit design environment is often used in conjunction with the Spectre products. These simulators provide customers with the high simulation performance needed for functional verification of today's most complex designs.

In 1999, Cadence acquired Quickturn Design Systems, Inc. Cadence's product line obtained with the Quickturn acquisition consists of CoBALT-TM- and Mercury-TM- products, which provide high-performance hardware-emulation, and SpeedSim-TM- simulator, which provides high-performance cycle-based simulation compatible with the CoBALT design-style. Through custom hardware implementations, these products provided extremely high-performance emulation of a design.

GATE LEVEL

Cadence's products for formally verifying correctness of circuits include the Affirma equivalence checker and Affirma Formalcheck for model-checking. The equivalence checker can verify representations of the same design at different levels, in particular the RTL level versus gate level. The Cadence Affirma design and verification product line include logic, analog, and mixed-signal design analysis and verification. Affirma products can predict the behavior of designs in a short cycle time. Affirma products are used by numerous application-specific integrated circuit, or ASIC, vendors and support more than 185 ASIC libraries.

In 1999, Cadence acquired Design Acceleration Inc., or DAI. DAI's transaction-based verification and debugging environment is integrated with Affirma simulators and offered as Cadence's verification cockpit suite of tools.

The Cadence Envisia Ambit-Registered Trademark- synthesis tool is a high-performance high-capacity synthesis tool that enables users to synthesize an RTL-level description to a netlist that produces lower level gate-level descriptions optimized to meet the timing required by the designer. The physically knowledgeable synthesis, or PKS, feature to Envisia synthesis concurrently performs synthesis, placement, and estimated routing, enabling one-pass timing closure. One-pass timing closure refers to the ability of the product not to require a loop back between the place and route tool, such as the Silicon Ensemble tools, and the synthesis tool, such as Envisia Ambit synthesis, once the timing is determined to be accurate. Envisia synthesis tools also include a high-performance static timing analyzer.

ALANZA GROUP

Cadence partners with other design automation vendors to deliver technology to Cadence's customers. Through the Alanza Group programs, customers, including other EDA companies, can more easily integrate their products and technologies with those of other EDA vendors. This enables customers to mix and match third-party and proprietary tools to specifically meet a customer's EDA needs. Today, more than 125 companies have integrated their tools with Cadence software.

SERVICES

Cadence offers to electronic product developers a portfolio of services within the categories of Methodology Services, which are consulting services, and Design Services.

METHODOLOGY SERVICES

The Cadence Methodology Services group offers a variety of services to help customers solve their electronic design challenges. The Methodology Services group assists customers in developing and deploying world-class design methodologies. The Methodology Services team works to improve a customer's overall design productivity by leveraging Cadence's cumulative experience and knowledge of industry "best practices." This is accomplished in a variety of ways, from training customers on the full range of features available in each software tool to custom methodology implementations that ensure that

customers have optimized the deployment of Cadence tools within their unique environments. Additionally, Methodology Services provides more comprehensive services, such as complete design process re-engineering services and the creation, maintenance, and management of a customer's complete design environment.

DESIGN SERVICES

Through its Design Services group, Cadence designs for its customers complete electronic devices, or assists its customers in their design of electronic system components, such as chips, or complete electronic systems. When developers of electronic content lack the resources, desire, or experience to do all of their own design work, where time to market is critical and they lack the capability to meet their timelines or when they need to keep their internal engineers focused on other higher-priority design activities, the Cadence Design Services group helps customers by doing design work for them.

Cadence offers a variety of design services for projects across all aspects of analog/mixed signal integrated circuit and block design realization, including foundry/process selection and testing from prototype to production. Design Services focuses on four major high growth areas: wireless communications, wired communications, information appliances, and industrial electronics.

SUPPORT SERVICES

Cadence's Maintenance group offers standard product support services, including product updates, telephone, and Internet-based 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. Through the metrics reporting service purchased by customers, Cadence measures how well Cadence is responding to, and resolving, customer inquiries and problems associated with the use of Cadence products.

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 the software products. Cadence's Methodology Services group provides on-site capabilities to assist customers in improving their productivity with Cadence's and other EDA suppliers' products, and Cadence's Design Services team performs actual design work on behalf of or in conjunction with customers. Due to the complexity of EDA products and the electronic design process in general, the selling cycle is generally long, with three to six months or longer being typical. During the sales cycle, Cadence's 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 (except in Japan) primarily through its subsidiaries and various distributors. Following a reorganization of Cadence's distribution channel in Japan in 1997, Cadence licenses its products through Innotech Corporation, in which Cadence is approximately a 16% stockholder as of March 1, 2000. Cadence markets its consulting and design services in Japan through a wholly-owned subsidiary.

Revenue from international sources, including Japan, was $566.5 million for 1999, $643.6 million for 1998, and $527.2 million for 1997, or approximately 52%, 49%, and 51%, respectively, of total revenue. See "Notes to Consolidated Financial Statements" for a summary of revenue by geographic area. Prices for international customers are quoted from a local currency international price list. The list is prepared based on the U.S. dollar price list but reflects the higher cost of doing business outside the U.S. International customers are invoiced in the local currency or U.S. dollars using current exchange rates.

Recent economic uncertainty and the weakening of foreign currencies in certain parts of the Asia-Pacific region has 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 countries other than the U.S. 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;

- Unexpected changes in regulatory requirements;

- Tariffs and other trade barriers; and

- U.S. government licensing requirements for export, as licenses can be 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 and reflected losses of $2.5 million in 1999, $1.4 million in 1998, and $6 million in 1997.

On January 1, 1999, 11 member countries of the European Union adopted the Euro as their common legal currency and established fixed conversion rates between their sovereign currencies and the Euro. Transactions can be made in either the sovereign currencies or the Euro until January 1, 2002, when the Euro must be used exclusively. Currently, only electronic transactions may be conducted using the Euro. Cadence believes that its internal systems and financial institution vendors are capable of handling the Euro conversion and Cadence is in the process of examining current marketing and pricing policies and strategies that may be affected by conversion to the Euro. The cost of this effort is not expected to materially harm Cadence's results of operations or financial condition. However, Cadence cannot assure you that all issues related to the Euro conversion have been identified and that any additional issues would not materially harm Cadence's results of operations or financial condition. For example, the conversion to the Euro may have competitive implications on Cadence's pricing and marketing strategies and Cadence may be at risk to the extent its principal European suppliers and customers are unable to deal effectively with the impact of the Euro conversion. Cadence has not yet completed its evaluation of the impact of the Euro conversion on its functional currency designations.

RESEARCH AND DEVELOPMENT

Cadence's investment in research and development was $244.9 million in 1999, $224.5 million in 1998, and $182.3 million in 1997, prior to capitalizing software development costs of $25.7 million, $21.7 million, and $15.1 million, respectively. See "Notes to Consolidated Financial Statements" for a more complete description of Cadence's capitalization of certain software development costs.

Among the primary areas that Cadence's research addresses are 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. 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. If Cadence is unable to respond quickly and successfully to these developments and changes, Cadence may lose its competitive position and its products or technologies may become uncompetitive or obsolete. In order 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 regard.

Cadence's advanced research and development group, Cadence Laboratories, is committed to new technological development. 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

The electronic design automation product market and the commercial electronic design and methodology services industries are highly competitive. If Cadence is 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. 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;

- 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 electronic design automation products industry, Cadence currently competes with a number of large companies, including Avant! Corporation, Mentor Graphics Corporation, Synopsys, Inc., and Zuken-Redac, and numerous small 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 electronics design and methodology services industries.

PROPRIETARY TECHNOLOGY

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 this software and other intellectual property in the future. Cadence's design services business also requires it to license the software or other intellectual property of third parties. 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, and trade secret laws 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 patents. 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 U.S.

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

MANUFACTURING

Cadence's 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. 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 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.

Cadence has generally been able to obtain adequate manufacturing supplies in a timely manner from existing sources or, where necessary, from alternative sources of supply. However, a reduction or interruption in supply or a significant increase in the price of one or more components would adversely affect Cadence's business, operating results, and financial condition and could damage customer relationships.

EMPLOYEES

As of February 29, 2000, Cadence employed approximately 5,000 persons, with approximately 2,850 in sales, services, marketing, support and manufacturing activities, 1,400 in product development and 750 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 we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, operating results, and financial condition could be materially negatively affected.

CADENCE LACKS LONG-TERM EXPERIENCE IN ITS ELECTRONICS DESIGN AND METHODOLOGY
SERVICES BUSINESS

Cadence has no long-term experience in offering electronics design and methodology services and therefore may not be as experienced in this business as others. The market for these services is relatively new and rapidly evolving. Cadence's failure to succeed in these services businesses may seriously harm Cadence's business, operating results, and financial condition.

THE SUCCESS OF CADENCE'S ELECTRONIC DESIGN AND METHODOLOGY SERVICES
BUSINESSES DEPENDS ON MANY FACTORS THAT ARE BEYOND ITS CONTROL

In order to be successful with its electronics design and methodology services, Cadence must overcome several factors that are beyond its control, including the following:

- MANY SERVICE CONTRACTS GENERALLY REPRESENT LARGE AMOUNTS OF REVENUE. Cadence's electronics design and methodology services contracts generally represent a relatively large amount of revenue per order. Therefore, the loss of individual orders could seriously hurt Cadence's revenue and operating results.

- CADENCE'S COST OF SERVICE 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 professional services personnel to attract and retain them. 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.

Additionally, a substantial portion of these service contracts are 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 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 emulation 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 Xilinx, Inc. and Taiwan Semiconductor Manufacturing Corporation for the supply of key integrated circuits and on IBM for the hardware components for both Cadence's CoBALT-TM- product and Mercury Design Verification System-TM-. With regard to the Mercury Design Verification System-TM-, IBM recently replaced Cadence's previous supplier. IBM is currently providing the assembly services for several Mercury components on a contractual basis. 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 would result in Cadence's ability to deliver products.

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 within Cadence's control, including the mix of products and services sold, the mix of licenses used to sell products and the timing of significant orders for its software products by customers. Quarterly operating results are affected by the mix of products sold because there are significant differences in margins from the sale of hardware and software products and products and services. For example, based on a three-year average in 1998 Cadence had realized gross margins on software product sales of approximately 90% but realized gross margins of approximately 60% on hardware product sales and 30% on its performance of services. In 1999, realized gross margins decreased to approximately 87% for software products and increased to approximately 72% for hardware products and to 35% for services. In addition, Cadence's quarterly operating results are affected by the mix of licenses entered into in connection with the sale of software products. Cadence has three basic licensing models: perpetual, fixed-term, and subscription. Perpetual and fixed-term licenses recognize a larger portion of the revenue at the beginning of the license period and subscription licenses recognize revenue ratably over each quarter of the term of the license. If Cadence customers purchase more software products pursuant to a subscription agreement in any one quarter, the operating results for that quarter may be lower than that of comparable quarters in which perpetual and fixed-term licenses were used for more software product transactions. Finally, 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 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 hardware products typically have a lengthy sales cycle, during which Cadence may expend substantial funds and management effort without any assurance that a sale will result. 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 computer chips and systems. Such 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 inventory obsolescence 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. 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. 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.

Because Cadence has no long-term experience providing services, it 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.

CADENCE EXPECTS TO ACQUIRE OTHER COMPANIES AND MAY NOT SUCCESSFULLY
INTEGRATE THEM OR THE COMPANIES IT RECENTLY ACQUIRED

Cadence has acquired other businesses before and may do so again. 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 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; and

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

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 U.S. 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 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. Cadence's failure to attract, train, motivate, and retain such 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.

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 and land in India and 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 U.S. and various foreign countries, and its research and development and design services facilities in California and other states and in foreign countries including Scotland, India, Canada, the United Kingdom, and Japan.

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, 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 for misappropriation of trade secrets, copyright infringement, conspiracy, and other illegal acts.

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 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.

By an order dated July 22, 1997, the District Court stayed most activity in the case pending in that court and ordered Avant! to post a $5 million bond in light of related criminal proceedings pending against Avant! and several of its executives.

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 of Cadence's Design Framework II source code is barred by the release. The Ninth Circuit has agreed to hear both parties' appeal from the District Court's order. The trial date has been vacated pending a decision on the appeal. Cadence intends to pursue its claims against Avant! vigorously.

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 alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The lawsuit arises out of Cadence's announcement of its first quarter 1999 financial results. Management intends to vigorously defend these claims.

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. In this lawsuit, entitled Aptix Corporation and Meta Systems, Inc. v. Quickturn Design Systems, Aptix and Meta Systems allege infringement by Quickturn of a U.S. patent owned by Aptix and licensed to Meta. Quickturn named Mentor Graphics Corporation as a party to this suit and filed a counterclaim requesting the District Court to declare the Aptix patent to be unenforceable based on inequitable conduct during the prosecution of the patent. The case is set for trial in late 2000.

On July 21, 1999, Mentor filed suit against Quickturn in the U.S. District Court for the District of Delaware, alleging patent infringement involving Quickturn's Mercury hardware emulation systems. The complaint seeks a permanent injunction and unspecified damages. Cadence intends to vigorously defend these claims. On July 22, 1999, Quickturn and Cadence filed a complaint against Mentor and Meta asking for declaratory relief in the U.S. District Court for the Northern District of California. The action brought by Mentor in Delaware has been transferred to California for consolidation with Quickturn's declaratory judgment action.

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, as amended, and Rule 14d-10 thereunder. The lawsuit arises out of Cadence's acquisition of OrCAD, which was completed in August 1999. Management believes the action is without merit and intends to vigorously defend it.

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.

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

None

EXECUTIVE OFFICERS OF CADENCE DESIGN SYSTEMS, INC.

The executive officers of Cadence are as follows:

NAME                               AGE                     POSITIONS AND OFFICES
----                             --------   ----------------------------------------------------
H. Raymond Bingham.............     54      President, Chief Executive Officer, and Director

Adriaan Ligtenberg.............     44      Senior Vice President, Methodology Services

R.L. Smith McKeithen...........     56      Senior Vice President, General Counsel, and
                                            Secretary

William Porter.................     45      Senior Vice President and Chief Financial Officer

Matthew Thompson...............     41      Senior Vice President, Worldwide Strategic Sales

Robert Wiederhold..............     40      Senior Vice President, Worldwide Design Services
                                            Group

Robert A. Promm................     48      Vice President and Corporate Controller

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 of Cadence 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 and Inns, an owner operator of a chain of hotels, for eight years. Mr. Bingham is a director of Legato Systems, Inc., Onyx Software Corporation, TenFold Corporation, and Chairman of Integrated Measurement Systems, Inc.

ADRIAAN LIGTENBERG joined Cadence in September 1999 as Senior Vice President, Methodology Services. He was the CEO of A3Ventures, a strategic consulting and investment company from 1997 to 1999. Prior to that, he was at AT&T Bell Laboratories from 1984 to 1989 where he led the image system group. From 1990 to 1997, he was the founder of Storm Technology Limited, a software company specializing in the client/server and inter/intranet development environments. From 1989 to 1990, he was a co-founder of C-Cube Microsystems, Inc. He was also an associate professor of Electrical Engineering at Princeton University and was the holder of the Computer Architecture Chair of the University of Amsterdam.

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.

MATTHEW THOMPSON joined Cadence in 1994 as Vice President, Strategic Sales and became Senior Vice President, Worldwide Strategic Sales in 1998. Mr. Thompson has more than 10 years of sales and management experience. Prior to joining Cadence in 1994, he held various positions with Electronic Data Systems Corporation, most recently as Vice President of Sales for the EDS High Tech Business Unit.

ROBERT WIEDERHOLD joined Cadence in 1996 as Vice President and General Manager of the Deep Submicron Business Unit and became Senior Vice President of Cadence Worldwide Design Services Group in July 1998. From 1994 to 1996, he served as Executive Vice President, Chief Operating Officer, and Director of High Level Design Systems, Inc. From 1985 to 1994, he held various positions with Cadence, most recently as Vice President, Marketing for the Systems Divisions.

ROBERT A. PROMM joined Cadence in December 1999 as Vice President, Corporate Controller. From November 1997 to December 1999, Mr. Promm served as Vice President, Corporate Controller of Kaiser Foundation Health Plan, Inc. Prior to November 1997, Mr. Promm held several positions with Apple Computer, Inc., most recently as Vice President, Financial Controller.

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 14, 2000, Cadence had approximately 1,990 registered stockholders and estimates that it had approximately 43,466 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 January 1, 2000:

                                                                HIGH       LOW
                                                              --------   --------
1999:
  First Quarter.............................................   $34.13     $21.63
  Second Quarter............................................   $26.63     $10.63
  Third Quarter.............................................   $16.75     $ 9.19
  Fourth Quarter............................................   $24.06     $13.31

1998:
  First Quarter.............................................   $37.44     $22.75
  Second Quarter............................................   $38.00     $27.63
  Third Quarter.............................................   $31.13     $20.69
  Fourth Quarter............................................   $30.63     $19.19

ITEM 6. SELECTED FINANCIAL DATA

                                                 FIVE FISCAL YEARS ENDED JANUARY 1, 2000
                                        ----------------------------------------------------------
                                           1999         1998         1997        1996       1995
                                        ----------   ----------   ----------   --------   --------
                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue...............................  $1,093,303   $1,320,180   $1,036,773   $888,642   $654,302
Unusual items(1)......................  $   59,301   $  263,595   $   48,010   $100,543   $     --
Income (loss) from operations.........  $  (12,750)  $   89,488   $  223,706   $116,212   $130,765
Income (loss) before cumulative effect
  of change in accounting method(2)...  $  (14,075)  $   25,124   $  177,398   $ 48,441   $111,077
Net income (loss)(3)..................  $  (14,075)  $   25,124   $  165,122   $ 48,441   $111,077
Net income (loss) per share--assuming
  dilution............................  $    (0.06)  $     0.10   $     0.68   $   0.21   $   0.48
Total assets..........................  $1,459,659   $1,481,916   $1,153,247   $875,754   $505,738
Long-term obligations.................  $   25,024   $  136,380   $    1,599   $ 20,292   $  4,240

(1) Unusual items are as follows for each of the fiscal years 1999, 1998, 1997, and 1996. There were no unusual items in 1995:

                                          1999       1998       1997       1996
                                        --------   --------   --------   --------
                                                     (IN THOUSANDS)
Write-off of acquired in-process
  technology..........................  $20,700    $194,100   $ 9,328    $ 95,700
Asset impairment......................   19,891          --     3,065       2,724
Restructuring charges.................   13,274      69,495    24,128       2,119
Merger costs..........................    8,436          --    11,489          --
Litigation settlement.................   (3,000)         --        --          --
                                        -------    --------   -------    --------
                                        $59,301    $263,595   $48,010    $100,543
                                        =======    ========   =======    ========

(2) Income (loss) before cumulative effect of change in accounting method in 1997 excluded a $12.3 million charge, net of taxes of $5.3 million, for reengineering project costs that had been previously capitalized by Cadence associated with its implementation of enterprise-wide information systems.

(3) Net income (loss) included a $9.2 million and $13.6 million after tax gain on the sale of stock of a subsidiary in 1997 and 1995, respectively.

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 herein. All references to years represent fiscal years unless otherwise noted. Except for the historical information contained herein, 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 "Disclosures about Market Risk", and "Liquidity and Capital Resources".

OVERVIEW

help its customers 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.

In December 1999, Cadence acquired all of the outstanding stock of Diablo Research Company LLC for cash and assumed all outstanding stock options of Diablo. Diablo was a high-technology engineering services firm with expertise in wireless communication, global positioning satellite solutions, and data transfer and home automation markets. The total purchase price was $39.9 million and the acquisition was accounted for as a purchase.

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 May 1999, Cadence completed its merger with Quickturn Design Systems, Inc. Quickturn designed, manufactured, sold, and supported 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 tax-free, 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 place at the beginning of such periods, in accordance with required pooling of interests accounting and disclosures.

In January 1999, Cadence acquired Design Acceleration, Inc., or DAI, a supplier of design verification technology used in system-on-a-chip, or 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.

In September 1998, Cadence acquired all of the outstanding stock of Ambit Design Systems, Inc. for cash. Ambit was a leading developer of design automation technology used in SOC design. The total purchase price was $255 million and the acquisition was accounted for as a purchase.

In September 1998, Cadence acquired the Bell Labs' Integrated Circuit Design Automation Group of Lucent Technologies Inc., or BLDA, for cash. BLDA was a design automation development organization that focused on the complex verification challenges companies face when designing integrated circuits and next-generation SOC. The total purchase price was $58 million and the acquisition was accounted for as a purchase.

In March 1998, Cadence acquired all of the outstanding stock of Excellent Design, Inc., or EXD, for cash. EXD provided application-specific integrated circuit, or ASIC, and SOC design and library development. The total purchase price was $40.9 million and the acquisition was accounted for as a purchase.

In February 1998, Cadence acquired all of the outstanding stock of Symbionics Group Limited for approximately 1 million shares of Cadence common stock and $21.3 million of cash. Symbionics provided product development design services to leading electronics manufacturers. The total purchase price was $46.1 million and the acquisition was accounted for as a purchase.

In May 1997, Cadence merged with Cooper & Chyan Technology, Inc., or CCT, whose software products were used to design sophisticated integrated circuits and high-speed printed circuit boards. In connection therewith, Cadence issued approximately 22.8 million shares of common stock. The merger was accounted for as a pooling of interests. All prior period consolidated financial statements were restated as if the merger took place at the beginning of such periods, in accordance with required pooling of interests accounting and disclosures.

In February 1997, Quickturn merged with SpeedSim, Inc., a provider of simulation software for the verification of digital logic designs. Quickturn acquired all of the outstanding shares of SpeedSim common stock in a tax-free, stock-for-stock transaction for approximately 2.8 million shares of Quickturn common stock. The acquisition was accounted for as a pooling of interests. In addition, Quickturn assumed all outstanding stock options of SpeedSim. All prior period consolidated financial statements were restated as if the merger took place at the beginning of such periods, in accordance with required pooling of interests accounting and disclosures.

In February 1997, Cadence and its subsidiary, Integrated Measurement Systems, Inc., or IMS, sold to the public 1.7 million shares of IMS common stock, of which approximately 1 million shares were sold by Cadence, netting Cadence approximately $18.6 million in cash. As a result of the offering and sale of shares by Cadence, Cadence's ownership interest in IMS decreased to approximately 37% in 1997 from approximately 55% in 1996. Accordingly, Cadence changed the accounting for its investments in IMS from consolidation to the equity method of accounting in fiscal 1997. The likelihood of such transactions in the future is dependent upon the state of the financial markets as well as liquidity and other considerations of each of Cadence and IMS. IMS manufactures and markets verification systems used in testing prototype ASICs.

RESULTS OF OPERATIONS

REVENUE

                                                                           % CHANGE
                                                                      -------------------
                                       1999       1998       1997      99/98      98/97
                                     --------   --------   --------   --------   --------
                                             (IN MILLIONS)
Product............................  $  505.4   $  760.5   $  618.4     (34)%       23%
Services...........................     294.9      265.2      168.8      11%        57%
Maintenance........................     293.0      294.5      249.6      (1)%       18%
                                     --------   --------   --------
  Total revenue....................  $1,093.3   $1,320.2   $1,036.8     (17)%       27%
                                     ========   ========   ========

SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE

                                       1999       1998       1997
                                     --------   --------   --------
Product............................       46%        58%        60%
Services...........................       27%        20%        16%
Maintenance........................       27%        22%        24%

Product revenue decreased $255.1 million in 1999, when compared to 1998, primarily due to the implementation of Cadence's new software subscription licensing model during the third quarter of 1999 and to a lesser extent a decrease in sales volume of Cadence's software products. These decreases were partially offset by an increase in emulation hardware product revenue in the same periods and the favorable impact of foreign currency exchange rate differences, primarily the Japanese yen. Revenue associated with software products under subscription licenses is recognized ratably over the license period because the agreements allow customers to exchange licensed products for unspecified future technology.

The decrease in sales volume of products was attributable primarily to lower sales of integrated circuit implementation products, which include place and route and physical design and verification tools.

Product revenue increased $142.1 million in 1998, when compared to 1997, primarily due to increased customer sales volume of place and route and physical design product tools used to design deep submicron integrated circuits. This increase was partially offset by a decrease in emulation hardware product revenue in the same period. Total product revenue in 2000 is expected to increase from 1999 and return to year-over-year growth in the second quarter of 2000. However, there can be no assurance that this expectation will prove accurate and actual results may differ materially.

Services revenue increased $29.7 million in 1999 and $96.4 million in 1998, when compared to each prior year, which were primarily attributable to an increase in Cadence's design and methodology services engagements. Increases in design services revenue were due to general increases in each of the four major areas, with the most significant increase in the wireless communications area.

Maintenance revenue remained relatively flat in 1999 compared to 1998. Maintenance revenue increased $44.9 million in 1998, when compared to 1997, primarily due to continued growth of the installed customer base and the renewal of maintenance and support contracts.

REVENUE BY GEOGRAPHY

                                                                           % CHANGE
                                                                      -------------------
                                       1999       1998       1997      99/98      98/97
                                     --------   --------   --------   --------   --------
                                             (IN MILLIONS)
Domestic...........................  $  526.8   $  676.6   $  509.6     (22)%       33%
International......................     566.5      643.6      527.2     (12)%       22%
                                     --------   --------   --------
  Total revenue....................  $1,093.3   $1,320.2   $1,036.8     (17)%       27%
                                     ========   ========   ========

REVENUE BY GEOGRAPHY AS A PERCENT OF TOTAL REVENUE

                                       1999       1998       1997
                                     --------   --------   --------
Domestic...........................       48%        51%        49%
International......................       52%        49%        51%

International revenue decreased $77.1 million in 1999, when compared to 1998, primarily due to decreases in product revenue in all international regions resulting from the implementation of Cadence's new subscription licensing model during the third quarter of 1999. The decrease in international product revenue was partially offset by an increase in services revenue in all international regions, except Asia.

The increase in international revenue in 1998 of $116.4 million, when compared to 1997, was primarily due to increased sales volume of Cadence's products and services in Europe and of Cadence's services in Japan, partially offset by a decrease in product sales volume in Japan. To a lesser extent, revenue growth in 1998 was also due to additional maintenance and support contracts in Asia and Canada.

Other differences in the rate of revenue growth over the years presented and as compared geographically are primarily due to fluctuations in sales and resulting sales volume of place and route and physical design products and for Cadence's design and methodology services offerings.

Foreign currency exchange rates positively affected reported revenue by $16.2 million in 1999, primarily due to the strengthening of the Japanese yen in relation to the U.S. dollar. Foreign currency exchange rates negatively affected reported revenue by $15.4 million in 1998 primarily due to the weakening 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
                                                                           -------------------
                                            1999       1998       1997      99/98      98/97
                                          --------   --------   --------   --------   --------
                                                  (IN MILLIONS)
Product.................................   $ 79.5     $ 77.5     $ 74.2       3%          4%
Services................................   $191.8     $188.8     $117.4       2%         61%
Maintenance.............................   $ 53.6     $ 52.4     $ 34.0       2%         54%

COST OF REVENUE AS A PERCENT OF RELATED REVENUE

                                            1999       1998       1997
                                          --------   --------   --------
Product.................................      16%        10%        12%
Services................................      65%        71%        70%
Maintenance.............................      18%        18%        14%

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

Cost of product revenue increased $2 million or 3% in 1999 when compared to 1998. The increase was primarily due to increases in manufacturing expenses associated with emulation system products, the acquisition of OrCAD in 1999, and amortization of capitalized software development costs. These costs were offset partially by inventory obsolescence charges of $5.7 million associated with the introduction of the Mercury Design Verification System recorded in 1998, reductions in purchased software amortization, and third-party royalty expenses. Cost of product revenue increased $3.3 million or 4% in 1998 compared to 1997. The increase was primarily due to increases in amortization of capitalized software development costs and third-party royalty expenses, partially offset by manufacturing cost savings for hardware emulation systems due to the availability of less expensive and more efficient components. The manufacturing cost savings exclude the impact of $2.6 million for the write-off of Arkos purchased inventory and a $2 million inventory obsolescence charge caused by an anticipated shorter product life cycle for the System Realizer emulation product replaced by Arkos product technology.

Because the majority of Cadence's cost of software product revenue does not vary significantly with changes in revenue, product gross margin decreased in 1999 when compared to 1998, due primarily to lower sales of software products and the introduction of the new subscription licensing model during the third quarter of 1999. Product gross margin in 1999 also declined due to a higher proportion of hardware revenue with lower gross margins than software product revenue.

Cost of services revenue includes costs associated with providing services to customers, primarily salaries and costs to recruit, develop and retain personnel, and costs to maintain the infrastructure necessary to manage a services organization. Cost of services revenue increased $3 million or 2% in 1999, when compared to 1998, due primarily to increases in amortization of purchased software and Japan methodology services outside commission costs, offset partially by a decrease in employee related costs, including incentive pay, associated primarily with Cadence's 1998 restructuring plans and lower revenues. Cost of services revenue increased $71.4 million or 61% in 1998, compared to 1997. This increase was due to investments made to increase services capacity, primarily due to the addition of services professionals.

The increase in services gross margins to 35% in 1999 as compared to 29% in 1998, was due primarily to increased utilization of services capacity and the management of expenses. Services gross margins decreased to 29% in 1998 as compared to 30% in 1997, primarily due to increased services capacity that was not fully utilized. Services gross margins have been and may continue to be adversely affected by the cost of integrating new services professionals as well as Cadence's inability to fully utilize these resources.

In addition, services gross margins may continue to be adversely affected by Cadence's inability to achieve operating efficiencies with its resources when implementing a growing number of services offerings.

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 revenue in absolute dollars and as a percent of related revenue remained relatively flat in 1999 when compared to 1998. Cost of maintenance revenue increased $18.4 million or 54% in 1998, when compared to 1997, primarily due to the investment in a new centralized customer response center and increased support levels on a per customer basis.

AMORTIZATION OF ACQUIRED INTANGIBLES

                                                            1999       1998       1997
                                                          --------   --------   --------
                                                                  (IN MILLIONS)
Amortization of acquired intangibles....................   $61.8      $18.5       $2.5

AMORTIZATION OF ACQUIRED INTANGIBLES AS A PERCENT OF TOTAL REVENUE

                                                            1999       1998       1997
                                                          --------   --------   --------
Amortization of acquired intangibles....................      6%         1%         0%

Amortization of acquired intangibles increased $43.3 million in 1999, when compared to 1998, primarily due to the 1999 acquisitions of OrCAD and DAI, and a full year's amortization related to Cadence's 1998 acquisitions of Ambit, BLDA, EXD, and Symbionics. Amortization of acquired intangibles increased $16 million in 1998, when compared to 1997, primarily due to Cadence's 1998 acquisitions. For additional information regarding these acquisitions see below under "In-Process Technology."

OPERATING EXPENSES

                                                                                % CHANGE
                                                                           -------------------
                                            1999       1998       1997      99/98      98/97
                                          --------   --------   --------   --------   --------
                                                  (IN MILLIONS)
Marketing and sales.....................   $354.2     $340.3     $299.8       4%         14%
Research and development................   $219.2     $202.8     $167.2       8%         21%
General and administrative..............   $ 86.7     $ 86.8     $ 69.9       0%         24%

OPERATING EXPENSES AS A PERCENT OF TOTAL REVENUE

                                            1999       1998       1997
                                          --------   --------   --------
Marketing and sales.....................      32%        26%        29%
Research and development................      20%        15%        16%
General and administrative..............       8%         7%         7%

MARKETING AND SALES

The increase in marketing and sales expenses of $13.9 million for 1999, when compared to 1998, was primarily due to an increase in sales support costs, the acquisition of OrCAD, and marketing program costs, partially offset by lower employee-related costs, resulting from Cadence's 1998 restructuring plans, lower employee training and education costs, and travel costs. Foreign currency exchange rates negatively affected marketing and sales expenses by $4.6 million in 1999, when compared to 1998, primarily due to the strengthening of the Japanese yen in relation to the U.S. dollar. The increase in marketing and sales expenses of $40.5 million in 1998, when compared to 1997, was primarily attributable to an increase in employee-related expenses resulting from increased headcount and commissions, a higher level of pre-sale

activities, and an increase in consulting and outside services costs. These increases were partially offset by the weakening of certain foreign currencies, primarily the Japanese yen, in relation to the U.S. dollar which favorably affected marketing and sales expenses by approximately $6.4 million in 1998 when compared to 1997.

RESEARCH AND DEVELOPMENT

Cadence's expenses in research and development, prior to the reduction for capitalization of software development costs, was $244.9 million for 1999, $224.5 million for 1998, and $182.3 million for 1997, representing 22% of total revenue for 1999, 17% for 1998, and 18% for 1997. Cadence capitalized software development costs of approximately $25.7 million for 1999, $21.7 million for 1998, and $15.1 million for 1997, which represented approximately 10% of total research and development expenditures for 1999, 10% for 1998, and 8% for 1997. The increase in capitalized software development costs in each of these three years resulted primarily from general increases in new product development.

The increase in net research and development expenses of $16.4 million for 1999, when compared to 1998, was primarily attributable to higher employee-related costs due to increases in headcount from Cadence's acquisitions of OrCAD in 1999 and the acquisitions of Ambit and BLDA in the third quarter of 1998, partially offset by increased capitalization of software development expenses. The increase of $35.6 million in 1998, when compared to 1997, was primarily attributable to higher employee-related costs due to increases in headcount, facility-related costs, consulting and other services, and management information systems costs. The amount of capitalized software development costs in any given period may vary depending on the exact nature of the development performed.

GENERAL AND ADMINISTRATIVE

General and administrative expenses remained relatively flat in 1999 when compared to 1998. General and administrative expenses increased $16.9 million in 1998, when compared to 1997, primarily as a result of increases in bad debt expense, and legal and advisory fees incurred in connection with the unsolicited tender offer by Mentor Graphics Corporation, and increases in consulting and outside services costs.

UNUSUAL ITEMS

Described below are unusual item charges in 1999, 1998, and 1997.

                                                          1999       1998       1997
                                                        --------   --------   --------
                                                                (IN MILLIONS)
Write-off of acquired in-process technology...........   $20.7      $194.1     $ 9.3
Asset impairment......................................    19.9          --       3.1
Restructuring charges.................................    13.3        69.5      24.1
Merger costs..........................................     8.4          --      11.5
Litigation settlement.................................    (3.0)         --        --
                                                         -----      ------     -----
                                                         $59.3      $263.6     $48.0
                                                         =====      ======     =====

IN-PROCESS TECHNOLOGY

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 OrCAD stock options. The purchase price was $131.4 million and the acquisition was accounted for as a purchase.

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 is expected to become commercially viable in 2000. Expenditures to complete this acquired in-process technology are expected to total approximately $2.3 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 maintenance research and development after they have reached a state of technological and commercial feasibility.

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 relate, in varying degrees, to the completion of all planning, designing, prototyping, verification, and testing activities that are 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 are 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 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 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 are unknown at this time.

As evidenced by its continued support for these projects, management believes that Cadence will successfully complete each of the major OrCAD research and development programs. However, there is risk associated with the completion of these projects and there is no assurance that any of them will be either technologically or commercially successful. If these projects are not successfully developed, future

revenue, and profitability of Cadence may be materially adversely affected. Additionally, the value of other intangible assets acquired may become impaired.

To date, OrCAD's results have not differed significantly from the forecast assumptions. In addition, Cadence's research and development expenditures since the acquisition have not differed materially from expectations. Revenue contribution from the acquired technology falls within an acceptable range of plans in its role in Cadence's suite of design systems and tools. The risks associated with this research and development are still considered high and no assurance can be made that these products will meet market expectations.

In January 1999, Cadence acquired 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." 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 has since been delayed to 2000 and 2001. Expenditures to complete this in-process technology are expected to total approximately $1.5 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 expenditures for additional research and development after they have reached a state of technological and commercial feasibility.

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, which Cadence expects to become commercially viable in 2000, a waveform viewer capable of supporting analog and mixed signal designs, which Cadence expects to become commercially viable in 2001, and a tool designed to analyze verification code coverage at the transactional level which was commercially viable in 1999. The nature of the efforts to complete these in-process research and development projects relate, in varying degrees, to the completion of all planning, designing, prototyping, verification, and testing activities that are 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 for which 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. 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%.

As evidenced by its continued support for these projects, management believes Cadence will successfully complete each of these DAI projects. However, there is risk associated with the completion of these projects and there is no assurance that any of them will be either technologically or commercially successful. If these projects are not successfully developed, Cadence's business, operating results, and financial condition may be harmed. In addition, the value of other intangible assets acquired may become impaired.

To date, DAI's results have not differed significantly from the forecasted assumptions. In addition, Cadence's research and development expenditures since the acquisition have not differed materially from expectations. Revenue contribution from the acquired technology falls within an acceptable range of plans in its role in Cadence's suite of design systems and tools. The risks associated with the research and development are still considered high and no assurance can be made that these future products will meet market expectations.

In September 1998, Cadence acquired all of the outstanding stock of Ambit for cash. Ambit was a leading developer of design automation technology used in SOC design. The total purchase price was $255 million and the acquisition was accounted for as a purchase.

Upon consummation of the Ambit acquisition, Cadence immediately charged to expense $106.5 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 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 was commercially viable in 1999, with the exception of one module, called Datapath Compiler, which is expected to become commercially viable by early 2001. BuildGates 3.0 and Physically Knowledgeable Synthesis were commercially viable in 1999. Expenditures to complete all in-process technology are expected to total approximately $15 million. Additionally, these projects will require maintenance research and development after they have reached a state of technological and commercial feasibility.

At the time of its acquisition by Cadence, Ambit was working on several significant research and development projects that were intended to provide the next generation version of its existing product, BuildGates 2.2. The nature of the efforts to complete the next generation version of BuildGates relate to the completion of all planning, designing, prototyping, verification, and testing activities that are necessary to establish that the proposed technologies meet their design specifications, including functional, technical, and economic performance requirements.

Cadence expects Ambit's creation of a fundamentally new approach to synthesis in deep submicron and in SOC to create the opportunity for additional consulting services revenue through the creation of an integrated, next generation version of BuildGates.

In September 1998, Cadence acquired BLDA for cash. BLDA was a design automation development organization that focused on the complex verification challenges companies face when designing integrated circuits and next-generation SOC. The total purchase price was $58 million and the acquisition was accounted for as a purchase.

Upon consummation of the BLDA acquisition, Cadence immediately charged to expense $30.3 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 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 includes a factor that takes into account the uncertainty surrounding the successful development of the acquired in-process technology. The acquired in-process technology is expected to become commercially viable in 2000. Expenditures to complete this in-process technology are expected to total approximately $5 million. These estimates are subject to change, given the uncertainties of the development process, and deviations from these estimates may occur. Additionally, these projects will require maintenance research and development after they have reached a state of technological and commercial feasibility.

BLDA's in-process research and development projects were related to its Formalcheck and Clover technologies. BLDA had two major enhancements underway for Formalcheck. This effort was expected to yield a revenue-generating product in 2000. BLDA's research and development related to Clover involved the design and development of new Design Rule Checking and Parasitic Extraction tools, which were expected to substantially improve the performance and functionality of the technology. This effort was completed in 1999. The nature of the efforts to complete the next generation version of Formalcheck and Clover relate to the completion of all planning, designing, prototyping, verification, and testing activities that are necessary to establish that the proposed technologies meet their design specifications, including functional, technical, and economic performance requirements.

As evidenced by its continued support for these projects, management believes Cadence is well positioned to successfully complete each of the major research and development programs. However, there is risk associated with the completion of these projects and there is no assurance that any of them will be either technologically or commercially successful.

The net cash flows resulting from the projects underway at Ambit and BLDA 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 are based on the potential market size that the 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 2003 through 2004 and decline rapidly in 2005 and 2006 as other new products 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 $50.3 million in connection with the Ambit acquisition and $23.2 million in connection with the BLDA acquisition. There can be no assurance that these assumptions will prove accurate, or that Cadence will realize the anticipated benefit of the acquisitions. The net cash flows generated from the acquired in-process technology are expected to reflect earnings before interest, taxes, and depreciation of approximately 38% to 49% of the sales generated from this in-process technology.

The discount of the net cash flows to their present value was based on the WACC. The discount rates used to discount the net cash flows from acquired in-process technology were 28% for Ambit and 25% for BLDA. These discount rates reflect 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 are unknown at this time.

If these projects are not successfully developed, Cadence's business, operating results, and financial condition may be negatively affected. In addition, the value of other intangible assets acquired may become impaired.

To date, Ambit's and BLDA's results have not differed significantly from the forecasted assumptions. Cadence's research and development expenditures since the acquisitions have not differed materially from expectations. The risks associated with the research and development are still considered high and no assurance can be made that upcoming products will meet market expectations.

In March 1998, Cadence acquired all of the outstanding stock of EXD. EXD provided application-specific integrated circuit, or ASIC, and SOC design and library development. The total purchase price was $40.9 million in cash and the acquisition was accounted for as a purchase.

Upon consummation of the EXD acquisition, Cadence immediately charged to expense $28.4 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 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 projects were expected to be commercially viable on dates ranging from the end of 1998 through 2000. However, the progression of these projects became impaired in the fourth quarter of 1999 as discussed further below.

At the time of its acquisition by Cadence, EXD had several significant research and development projects in process that, if successful, would have represented the introduction of new products and technologies to meet future market needs. These efforts included the development of new tools for library generation, delay calculation, memory compilation, and semiconductor intellectual property technology. These new technologies were intended to be fully supportive of deep submicron design functions, which are a critical market requirement. The nature of the efforts required to complete these research and development projects relate, to varying degrees, to the completion of all planning, designing, prototyping, verification, and testing activities that are necessary to establish that the proposed technologies meet their design specifications, including functional, technical, and economic performance requirements.

The successful completion of the EXD acquired in-process projects has been impaired and as a result differed significantly from the forecasted assumptions. In the fourth quarter of 1999, Cadence recorded a $13.3 million asset impairment charge. This asset impairment charge resulted from reduced Japanese market opportunities and the loss of key EXD employees resulting in diminished cash flow projections. Cadence entered into certain support agreements with external parties to provide support for EXD software tools previously sold to Cadence customers. The fair value of the EXD acquired intangibles was based on an evaluation of the present value of their estimated expected future cash flows, discounted at 16%.

In February 1998, Cadence acquired all of the outstanding stock of Symbionics for approximately 1 million shares of Cadence common stock and $21.3 million of cash. Symbionics provided product development design services to leading electronics manufacturers. The total purchase price was $46.1 million and the acquisition was accounted for as a purchase.

Upon consummation of the Symbionics acquisition, Cadence immediately charged to expense $28.5 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 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 projects were commercially viable by the end of 1999. Expenditures to complete these projects did not exceed $6 million.

At the time of its acquisition by Cadence, Symbionics was working on several significant research and development projects that, if successful, would meet future market needs. These efforts involve digital television, wireless home networking, cellular roaming and digital voice technologies, which were intended to ensure the long-term success and survival of the organization. The nature of the efforts required to complete the research and development projects relate, to varying degrees, to the completion of all planning, designing, prototyping, verification, and testing activities that are 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 which were underway at Symbionics used to value the acquired in-process technology at the time of acquisition 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 are 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 at the time of acquisition from the acquired in-process technology is expected to peak in 2001 and 2002 and decline rapidly thereafter as other new products 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 $6 million. There can be no assurance that these assumptions will prove accurate, or that Cadence will realize the anticipated benefit of the acquisition. The net cash flows generated from the acquired in-process technology are expected to reflect earnings before interest and taxes are estimated to be approximately 39% for the sales generated from Symbionics' in-process technology.

The discount applied to the net cash flows to calculate their present value was based on the WACC at the time of acquisition. The discount rates used to discount the net cash flows from the acquired in-process technology range from 22.5% to 27.5%. The discount rates are 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 are unknown at this time.

In 1997, Cadence wrote off $9.3 million of acquired in-process technology associated with its acquisitions of Synthesia AB, Advanced Microelectronics, and Arkos. These costs reflected in-process technology that had not reached technological feasibility and, in management's opinion, had no probable alternative future use.

ASSET IMPAIRMENT

In 1999, Cadence incurred charges totaling $19.9 million in asset impairment charges. Of this amount, $13.3 million represented asset impairment of acquired intangibles from the EXD acquisition. This asset impairment charge resulted from reduced Japanese market opportunities and the loss of key EXD employees resulting in diminished cash flow projections. Cadence entered into certain support agreements with external parties to provide support for EXD software tools previously sold to 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 will no longer be sold, and the abandonment of certain third-party software licenses that will no longer be used by Cadence's design services business.

In 1997, Cadence wrote-off capitalized software development costs of $3.1 million for products developed by Cadence that were replaced by CCT products or by license of replacement technology.

The impairment losses recorded were the amounts by which the carrying amounts of the intangible assets exceeded their fair market values.

RESTRUCTURING

In 1999, Cadence recorded $13.3 million of restructuring charges which consisted of $11.3 million to terminate approximately 100 employees and $2 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 all remaining severance benefits are expected to be paid in 2000.

Facilities consolidation charges of $2 million were incurred in connection with the closure of 15 Quickturn facilities, including $1 million to close duplicate and excess facilities and $1 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 costs written-off consist of leasehold improvements of facilities that were abandoned and whose estimated fair market value is zero. As of January 1, 2000, approximately 80% of the 15 Quickturn sites had been vacated. Noncancelable lease payments on vacated facilities will be paid out through 2003.

In 1998, Cadence recorded $69.5 million of restructuring charges primarily associated with Cadence's worldwide restructuring plan announced in the second half of 1998. Cadence's restructuring plans and associated costs consisted of $36.9 million to terminate approximately 700 employees, $29.9 million to downsize and close excess facilities, and $2.7 million of other restructuring expenses. Cadence's restructuring plan was primarily aimed at reducing the cost of excess personnel and capacity in its services business. A discussion about Cadence's gross margin trends for its services business can be found under "Cost of Revenue" within this section. Severance costs included severance benefits, notice pay, and outplacement services. In 1998, approximately $10.1 million of these costs resulted from the acceleration of stock options vesting under employment agreements. All terminations and termination benefits were communicated to the affected employees prior to year-end and all remaining severance benefits were substantially paid in 1999.

Facilities consolidation charges of $29.9 million were incurred in connection with the closure of 58 sales and engineering facilities, including $16.7 million to downsize and close facilities and $13.2 million in abandonment costs for the related leasehold improvements. Closure and exit costs included 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 costs written-off consist of leasehold improvements of facilities that were abandoned and whose estimated fair market value is zero. As of January 1, 2000, substantially all of the 58 sites had been vacated. Noncancelable lease payments on vacated facilities will be paid out through 2008.

Cadence also recorded $2.7 million of other restructuring charges consisting primarily of cancellation fees associated with certain vendor and conference arrangements and abandoned software.

In 1997, Cadence recorded restructuring charges of $24.1 million. These charges relate to restructuring plans primarily aimed at reducing costs after Cadence merged with CCT and acquired HLDS. Cadence's restructuring plans and associated costs consisted of $11.9 million to terminate approximately 230 employees, $4.4 million to close duplicate and excess facilities, and $3.7 million of other expenses associated with the business combinations. Also included in the restructuring costs were professional fees of $4.1 million for financial advisors, attorneys, and accountants related to the international restructuring

program. The remaining severance balances were paid out in 1998 and all facilities were vacated. Noncancelable lease payments on vacated facilities will be paid out through 2000.

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."

MERGER COSTS

In connection with acquisitions in 1999 and 1997, Cadence charged to expense Quickturn merger costs of $8.4 million and CCT and SpeedSim merger costs of $11.5 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 U.S. Mentor is permanently enjoined from producing, marketing, or selling SimExpress emulation systems in the U.S. In connection with the settlement, Mentor paid Cadence $3 million.

OTHER INCOME, NET

Other income, net for 1999, 1998, and 1997 is as follows:

                                                              1999          1998          1997
                                                            --------      --------      --------
                                                                       (IN MILLIONS)
Interest income.......................................       $ 5.4         $13.5         $20.9
Minority interest income (expense)....................         0.1          (0.2)         (0.3)
Equity income (loss) from investments.................         0.1          (0.9)          1.9
Gain on sale of stock of subsidiary...................          --            --          13.1
Other expense, net....................................        (0.3)         (0.9)         (3.3)
Gain (loss) on foreign exchange.......................        (0.6)          2.8          (1.1)
Interest expense......................................        (3.3)         (3.7)         (2.8)
                                                             -----         -----         -----
  Total other income, net.............................       $ 1.4         $10.6         $28.4
                                                             =====         =====         =====

Other income, net decreased $9.2 million and $17.8 million in 1999 and 1998, respectively, when compared to each prior year. The reductions were primarily attributable to interest income reductions in 1999 and 1998 of $8.1 million and $7.4 million, respectively, when compared to each prior year, which were primarily due to lower average cash and investment balances due in part to the payments made for acquisitions. Additionally, in February 1997, Cadence and IMS sold to the public 1.7 million shares of IMS common stock at $20.75 per share, of which 1 million shares were sold by Cadence, netting Cadence $18.6 million in cash. In connection with this transaction, Cadence recorded a pre-tax realized gain of $13.1 million, which is included in other income, net in the consolidated statements of operations which further reduced other income, net in 1998. Cadence also recorded in 1998 a $2.3 million unrealized gain, net of deferred taxes, which represented Cadence's proportionate share of IMS' equity as a result of IMS' sale of stock. This unrealized gain is reflected in the consolidated statements of stockholders' equity. The likelihood of such transactions in the future is dependent upon the state of the financial markets, as well as liquidity and other considerations of each of Cadence and IMS.

The loss on foreign exchange increased in 1999, when compared to 1998, due to the expense of option premiums in relation to Cadence's hedging program. The gain on foreign exchange increased in 1998,

when compared to 1997, due to favorable exchange rate movements for Asian currencies, primarily the Japanese yen. Other expense in 1999, 1998, and 1997 was due primarily to investment losses from a venture capital partnership.

INCOME TAXES

The provision for income taxes and the effective tax rates for 1999, 1998, and 1997 are as follows:

                                                             1999          1998          1997
                                                           --------      --------      --------
                                                                  (DOLLARS IN MILLIONS)
Provision for income taxes(1)........................       $  2.7        $74.9         $69.4
Effective tax rate...................................        (23.7)%       74.9%         29.6%

(1) Includes tax benefit in 1997 of $5.3 million on cumulative effect of change in accounting method.

At January 1, 2000, Cadence had total net deferred tax assets of approximately $53.6 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. The net valuation allowance increased by $11.4 million in 2000 due to the uncertainty of certain foreign subsidiaries generating sufficient taxable income to realize certain foreign deferred tax assets. 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 effective tax rate includes the write-off of acquired in-process technology of approximately $20.7 million for 1999, $194.1 million for 1998, and $9.3 million for 1997. The effective tax rates, excluding the write-off of acquired in-process technology, were 28.9% for 1999, 28.4% for 1998, and 28.5% for 1997.

CHANGE IN ACCOUNTING METHOD

In November 1997, the Emerging Issues Task Force of the Financial Accounting Standards Board issued Ruling 97-13 "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation," which requires companies to expense costs incurred for business process reengineering projects. As a result, Cadence recorded a $12.3 million charge in 1997, net of taxes of $5.3 million, as a cumulative effect of change in accounting method for reengineering project costs that had been previously capitalized by Cadence associated with its implementation of enterprise-wide information systems.

DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

Cadence's exposure to market risk for changes in interest rates relates primarily to its investment portfolio and long-term debt obligations. While Cadence is exposed with respect 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 stated in 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.

In October 1998, Cadence entered into a senior unsecured credit facility, referred to as the 1998 Facility, with a syndicate of banks that allows Cadence to borrow up to $355 million. As amended in September and November of 1999, the 1998 Facility is divided between a $177.5 million two year revolving credit facility, or the Two Year Facility, and a $177.5 million 364-day revolving credit facility convertible into a one year term loan, or the 364-Day Facility. The Two Year Facility expires on September 29, 2001. The 364-Day Facility will either expire on September 27, 2000, be converted to a one year term loan with a maturity date of September 27, 2001, or, at the request of Cadence and with the agreement of the bank group, be renewed for an additional one year. 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 the Federal Funds Rate plus 0.50% or the prime rate. As a result, Cadence's interest rate expenses associated with this borrowing will vary with market rates. In addition, commitment fees are payable on the unutilized portions of the Two Year Facility at rates between 0.23% and 0.30% based on a pricing grid tied to a financial covenant and on the unutilized portion of the 364-Day Facility at a fixed rate of 0.18%. The 1998 Facility contains certain financial and other covenants.

The table below presents the carrying value and related weighted average interest rates for Cadence's investment portfolio and its long-term debt obligations. 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 non-current assets. As of January 1, 2000, substantially all of Cadence's investments have maturities less than 12 months. The carrying value approximated fair value at January 1, 2000.

                                                                           AVERAGE
                                                             CARRYING      INTEREST
                                                               VALUE         RATE
                                                           -------------   --------
                                                           (IN MILLIONS)
Investment Securities:
  Short-term investments--fixed rate.....................      $ 7.4         5.48%
  Long-term investments--fixed rate......................        2.0         6.63%
                                                               -----
    Total short-term and long-term securities............        9.4         5.72%
  Cash equivalents--fixed rate...........................        9.6         4.84%
  Cash equivalents--variable rate........................       50.3         5.29%
                                                               -----
    Total interest bearing instruments...................      $69.3         5.29%
                                                               =====
Long-term Debt:
  Revolving credit facility..............................      $20.0         8.11%
                                                               =====

INTEREST RATE SWAP RISK

Cadence entered into a 4.8% fixed interest rate-swap in connection with its accounts receivable financing program to modify the interest rate characteristics of the receivables sold to a financing institution on a non-recourse basis. At January 1, 2000, the notional amount payable was $17.3 million which will be amortized in quarterly installments of approximately $2.2 million through October 2001. The estimated fair value at January 1, 2000 was $0.3 million.

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 and purchases foreign currency put options with financial institutions primarily to protect against currency exchange risks associated with existing assets and liabilities and probable but not firmly committed transactions, respectively. 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 purchases put options to hedge the currency exchange risks associated with probable but not firmly committed transactions. 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 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 and other factors in effect as the forward contracts and put options mature.

The table below provides information as of January 1, 2000 about Cadence's forward contracts and put options. 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 matured prior to January 15, 2000. The put options mature prior to September 30, 2000.

                                                                          AVERAGE
                                                            NOTIONAL      CONTRACT
                                                             AMOUNT         RATE
                                                          -------------   --------
                                                          (IN MILLIONS)
Forward Contracts:
    Japanese yen........................................      $ 80.1       104.71
    British pound sterling..............................        54.5         1.65
    Euro................................................        29.5         1.08
    Canadian dollars....................................         8.3         1.47
    Swedish krona.......................................         2.9         8.09
    Hong Kong dollars...................................         2.8         7.78
    Singapore dollars...................................         1.6         1.66
                                                              ------
                                                              $179.7
                                                              ======
    Estimated fair value................................      $ (2.5)
                                                              ======
Put Options:
    Japanese yen........................................      $ 27.8       107.99
                                                              ======
    Estimated fair value................................      $  0.3
                                                              ======

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 have a material impact on Cadence's results of operations and financial position during the year ended January 1, 2000. The realized gain (loss) on the forward contracts as they matured was not material to the consolidated operations of Cadence.

EQUITY PRICE RISK

As part of its authorized repurchase program, Cadence has sold put warrants and purchased call options through private placements. The put warrants, if exercised, 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 repurchases shares of its common stock under stock repurchase programs for issuance under its Employee Stock Purchase Plan, or ESPP, and its 1997 Stock Option Plan, referred to as the 1997 Plan and its 2000 Stock Option Plan adopted in January 2000. As part of these repurchase programs, Cadence has purchased and will purchase call options or has sold and will sell put warrants. 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.

- Put warrants allow the holder to sell to Cadence shares of Cadence common stock on a specified day at a specified price. Cadence has the right to settle the 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.

- Depending on the exercise price of the put warrants and the market price of Cadence common stock at the time of exercise, 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 at January 1, 2000 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 expired in February 2000 and Cadence had the contractual ability to settle the options prior to their maturity.

                                                           2000      ESTIMATED
                                                         MATURITY    FAIR VALUE
                                                         ---------   ----------
                                                          (SHARES AND CONTRACT
                                                          AMOUNTS IN MILLIONS)
Put Warrants:
    Shares.............................................      1.6
    Weighted average strike price......................   $13.08
    Contract amount....................................   $ 21.1       $ 0.1
Call Options:
    Shares.............................................      1.3
    Weighted average strike price......................   $13.33
    Contract amount....................................   $ 16.7       $13.6

YEAR 2000 UPDATE

Cadence has completed all of its Year 2000 projects as scheduled significantly reducing the uncertainty of significant Year 2000 interruptions. To date, Cadence's products, business systems, and operations have not experienced any significant Year 2000 related problems. Cadence is not aware that any of its major customers or third-party suppliers have experienced significant Year 2000 related problems.

To address Year 2000 issues, Cadence initiated a program designed to address the most critical Year 2000 items that would affect Cadence's products, its business systems, and the operations of its research and development, finance, sales, manufacturing, and human resources functions. Cadence also worked with critical suppliers and customers to determine that such suppliers' and customers' operations and the products and services are Year 2000 capable or to monitor their progress towards Year 2000 capability.

Cadence's Year 2000 efforts included a program to inventory, assess, remediate, and test the Year 2000 capability of its products. As a result of those efforts, Cadence verified that the most current release of Cadence's software products, as set forth in the Year 2000 Software Compliance List, which is available on Cadence's web site, were Year 2000 Compliant. Cadence uses the term Year 2000 Compliant to mean that the software will not: (A) cease to perform due solely to a change in date to or after January 1, 2000, or (B) generate incorrect or ambiguous data or results with respect to same-century and/or multi-century formulas, functions, date values, and date data interfaces. Cadence does not believe that customers are using a significant amount of products that are not determined to be Year 2000 Compliant.

Year 2000 related costs to resolve the readiness issues are not expected to exceed $13 million throughout the term of the project. Cadence expects this project to be completed in 2000.

Although Cadence has successfully modified its products and business systems, there may still be undetected failures or defects associated with Year 2000 functions. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations of Cadence. The reasonably likely worst case scenario associated with Cadence products for a Year 2000 problem is that a customer project could be delayed for a short period of time before the problem can be identified and remediated by Cadence's support process.

LIQUIDITY AND CAPITAL RESOURCES

At January 1, 2000, Cadence's principal sources of liquidity consisted of $118.8 million of cash and cash equivalents and short-term investments, as compared with $249.5 million at January 2, 1999, and $336.4 million at January 3, 1998, and the 1998 Facility. As of January 1, 2000, Cadence had outstanding borrowings of $20 million under the Two Year Facility. Cadence had no outstanding borrowings under the 364-Day Facility.

Cash provided by operating activities decreased $100 million to $127 million in the year ended January 1, 2000 as compared to the year ended January 2, 1999, primarily due to a decrease in net income before unusual items, decreases in accounts payable and accrued liabilities, and income taxes payable, partially offset by increases in depreciation and amortization, receivables, installment contract receivables, and deferred revenue. Cash provided by operating activities increased $32.5 million to $227 million for the year ended January 2, 1999 as compared to the year ended January 3, 1998. The increase was primarily due to increases in net income before unusual items, depreciation and amortization, deferred income taxes, and prepaid expenses and other, partially offset by decreases in receivables, installment contract receivables, and accounts payable and accrued liabilities.

At January 1, 2000, Cadence had net working capital of $58.4 million, as compared with $294.3 million at January 2, 1999. The primary reasons for the decrease were decreases in short-term investments of $33 million, cash and cash equivalents of $97.7 million, accounts receivable of $57.1 million, increases in accounts payable and accrued liabilities of $23 million, and a deferred revenue increase of $45.3 million, partially offset by a decrease in income taxes payable of $21.2 million. The increase in accounts payable

and accrued liabilities was primarily attributable to bonus and commissions payments to be paid in early 2000, accounts payable to vendor accruals and accrued consulting services, offset partially by reductions in restructure related accruals.

In addition to its short-term investments, Cadence's primary investing activities 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 $306.8 million at January 1, 2000, $591.3 million at January 2, 1999, and $132.7 million at January 3, 1998 of cash used for investing activities.

In connection with the consummation of the merger with Quickturn, Cadence rescinded its stock repurchase program, with the exception of continued systematic stock repurchases under its seasoned stock repurchase programs for Cadence's 1997 Plan and ESPP. In 1999, the Board of Directors approved a 10,000,000 share expansion of Cadence's existing seasoned systematic repurchase program to meet the share issuance requirements of Cadence's 1997 Plan. In February 2000, the Board of Directors approved a 15,000,000 share increase for stock repurchases. This increase included authorization to repurchase 5,000,000 shares on a systematic basis to meet share issuance requirements of Cadence's newly adopted 2000 Non-Statutory Stock Option Plan and authorization to repurchase 10,000,000 shares on a non-systematic basis to be used for general corporate purposes. Cadence is now authorized to repurchase an aggregate of 13,000,000 shares for the 1997 Plan, 5,000,000 for its 2000 Plan, 13,400,000 shares for the ESPP, and 10,000,000 shares for general corporate purposes.

Cadence sells put warrants and purchased call options through private placements. See "Notes to Consolidated Financial Statements." At January 1, 2000, Cadence had a maximum potential obligation related to put warrants to buy back 1.6 million shares of its common stock at an aggregate price of approximately $21.1 million. These put warrants expired in February 2000. Subsequently, Cadence has sold put warrants entitling the holder to sell to Cadence 7.6 million shares of its common stock at an aggregate price of approximately $159.8 million and purchased call options entitling Cadence to purchase 5.8 million shares of its common stock at an aggregate price of approximately $121.6 million. The put warrants and call options expire at various dates through November 2000 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 stock and, therefore, no amount was classified out of stockholders' equity in Cadence's consolidated balance sheets.

As part of its overall investment strategy, Cadence has become a limited partner in a venture capital fund and is committed to invest up to $100 million. As of January 1, 2000, Cadence had contributed approximately $33.2 million to this partnership for venture funding, which is reflected in other assets in the accompanying consolidated balance sheets, net of operating losses.

Cadence anticipates that current cash and short-term investment balances, cash flow from operations, and the remaining amounts available under the 1998 Facility will be sufficient to meet its working capital and capital requirements on a short-and long-term basis.

NEW ACCOUNTING STANDARDS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. It requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met and that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," was issued. The statement defers the effective date of SFAS No. 133 until the first quarter of fiscal 2001. Cadence has not yet determined the effect SFAS No. 133 will have on its financial position, results of operations, or cash flows.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin, or SAB, No. 101, "Revenue Recognition." SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements and is effective for the first quarter of Fiscal 2000. Cadence has not yet determined the effect SAB 101 will have on its financial position or results of operations.

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

                                                              1999                                        1998
                                            -----------------------------------------   -----------------------------------------
                                              4TH        3RD        2ND        1ST        4TH        3RD        2ND        1ST
                                            --------   --------   --------   --------   --------   --------   --------   --------
Revenue...................................  $268,022   $225,897   $264,193   $335,191   $376,472   $334,184   $315,736   $293,788
Cost of revenue...........................  $ 82,734   $ 81,577   $ 81,838   $ 78,694   $ 81,521   $ 83,991   $ 83,288   $ 69,892
Amortization of acquired intangibles......  $ 19,385   $ 16,833   $ 12,856   $ 12,714   $ 11,671   $  3,114   $  2,884   $    803
Income (loss) from operations(1)..........  $(32,020)  $(53,783)  $ (4,347)  $ 77,400   $ 64,210   $(70,195)  $ 78,924   $ 16,549
Net income (loss).........................  $(22,484)  $(41,446)  $ (3,007)  $ 52,862   $ 47,569   $(80,453)  $ 59,962   $ (1,954)
Net income (loss) per share--diluted......  $  (0.09)  $  (0.17)  $  (0.01)  $   0.20   $   0.19   $  (0.34)  $   0.23   $  (0.01)

(1) Income (loss) from operations for 1999 and 1998 included certain unusual item charges of $59.3 million and $263.6 million, respectively, which follow:

                                                               4TH        3RD        2ND        1ST
                                                             --------   --------   --------   --------
1999:
Write-off of acquired in-process technology................  $    --    $ 11,800   $    --    $ 8,900
Asset impairment...........................................   13,290          --     3,510      3,091
Restructuring charges......................................       --         371    10,703      2,200
Merger costs...............................................       --          --     8,436         --
Litigation settlement......................................       --          --    (3,000)        --
                                                             -------    --------   -------    -------
                                                             $13,290    $ 12,171   $19,649    $14,191
                                                             =======    ========   =======    =======
1998:
Write-off of acquired in-process technology................  $    --    $137,200   $    --    $56,900
Restructuring charges......................................   44,705      20,833        --      3,957
                                                             -------    --------   -------    -------
                                                             $44,705    $158,033   $    --    $60,857
                                                             =======    ========   =======    =======

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 2000 annual stockholders' meeting to be held on May 24, 2000.

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 2000 annual stockholders' meeting to be held on May 24, 2000.

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 2000 annual stockholders' meeting to be held on May 24, 2000.

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 2000 annual stockholders' meeting to be held on May 24, 2000.

PART IV.

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

                                                                        PAGE
                                                                      --------
(a) 1.  Financial Statements:
        - Report of Independent Public Accountants..................     49

        - Report of PricewaterhouseCoopers LLP, Independent
        Accountants.................................................     50

        - Consolidated Balance Sheets at January 1, 2000 and January
        2, 1999.....................................................     51

        - Consolidated Statements of Operations for the three fiscal
        years ended
        January 1, 2000.............................................     52

        - Consolidated Statements of Stockholders' Equity for the
        three fiscal years ended
        January 1, 2000.............................................     53

        - Consolidated Statements of Cash Flows for the three fiscal
        years ended
        January 1, 2000.............................................     54

        - Notes to Consolidated Financial Statements................     55

(a) 2.  Financial Statement Schedules:
        II.  Valuation and Qualifying Accounts and Reserves.........     86

        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
---------------------                          -------------
 2.01                   Agreement and Plan of Merger, dated as of December 8, 1998
                        among the Registrant, Quickturn Design Systems, Inc. and
                        CDSI Acquisition, Inc. as amended on December 16, 1998 and
                        January 4, 1999 (incorporated by reference to Exhibit 2.01
                        to the Registrant's Form 8-K filed on 12/10/98, as amended
                        by Forms 8-K/A filed on 12/22/98, 1/6/99, and 5/20/99. The
                        Disclosure Schedules related to the Merger Agreement have
                        been omitted but will be provided to the Commission upon its
                        request pursuant to Item 601 (b)(2) of Regulation S-K (the
                        1999 Form S-4).

 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) from the
                        Registrant's Form 10-K for the year ended December 31,
                        1991).

       EXHIBIT
       NUMBER                                  EXHIBIT TITLE
---------------------                          -------------
                        (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 Bylaws, as currently in effect
                        (incorporated by reference to Exhibit 3.02 to the 1987
                        Form S-1 and as amended by Exhibit 3-b to the 1989 Form 8-K
                        and 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.

 10.01                  The Registrant's 1987 Stock Option Plan, as amended and
                        restated on February 23, 1998 (incorporated by reference to
                        the Registrant's Preliminary Proxy Statement filed on March
                        16, 1998 (the 1998 Preliminary 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 (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, 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
                        Exhibit 10.08-10.10 to the 1988 Form S-1).

 10.04                  The Registrant's 1993 Directors Stock Option Plan including
                        the Form of Stock Option Grant (incorporated by reference to
                        Exhibit 10.04 of the 1994 Form S-8).

 10.05                  The Registrant's 1995 Directors Stock Option Plan including
                        the Form of Stock Option Grant (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 on March 4, 1997 (incorporated by reference to
                        Exhibit 10.07 to the Registrant's Form 10-K for the fiscal
                        year ended December 28, 1996).

 10.07                  The Registrant's Senior Executive Bonus Plan for 1995
                        (incorporated by reference to Exhibit 10.08 of the
                        Registrant's Form 10-K for the fiscal year ended
                        December 31, 1994 (the 1994 Form 10-K)).

 10.08                  The Registrant's Senior Executive Bonus Plan for 1996
                        (incorporated by reference to Exhibit 10.08 to the 1995
                        Form 10-K).

 10.09                  The Registrant's Senior Executive Bonus Plan (previously the
                        Chief Executive Officer Bonus Plan for 1996), as amended
                        January 1, 1998 (incorporated by reference to the 1998
                        Preliminary Proxy Statement).

       EXHIBIT
       NUMBER                                  EXHIBIT TITLE
---------------------                          -------------
 10.10                  The Registrant's Deferred Compensation Plan for 1994
                        (incorporated by reference to Exhibit 10.09 to the 1994
                        Form 10-K).

 10.11                  The Registrant's 1996 Deferred Compensation Venture
                        Investment Plan (incorporated by reference to Exhibit 10.11
                        to the 1995 Form 10-K).

 10.12                  Amended and Restated Lease, dated June 29, 1989, by and
                        between River Oaks Place Associates (ROPA), a California
                        limited partnership, and the Registrant, for the
                        Registrant's offices at 555 River Oaks Parkway, San Jose,
                        California (incorporated by reference to Exhibit 10.14 to
                        the Registrant's Form 10-K (No. 1-10606) for the year ended
                        December 31, 1990 (the 1990 Form 10-K)).

 10.13                  Lease, dated June 29, 1989, by and between ROPA and the
                        Registrant for the Registrant's offices at 575 River Oaks
                        Parkway, San Jose, California (incorporated by reference to
                        Exhibit 10.16 to the 1990 Form 10-K).

 10.14                  Lease, dated June 29, 1989, by and between ROPA and the
                        Registrant for the Registrant's offices at 535 and 545 River
                        Oaks Parkway, San Jose, California (incorporated by
                        reference to Exhibit 10.17 to the 1990 Form 10-K).

 10.15                  Lease, dated December 19, 1988, by and among the Richard T.
                        Peery and John Arrillaga Separate Trusts and Valid Logic
                        Systems Incorporated (Valid) (which merged into the
                        Registrant) for the Registrant's offices at 2835 North First
                        Street, San Jose, California (incorporated by reference to
                        Exhibit 10.18 to the Form 10-K (No. 0-11974) for Valid for
                        the fiscal year ended December 30, 1990).

 10.16                  The 1993 Non-Statutory Stock Option Plan (incorporated by
                        reference to Exhibit 4.05 to the 1994 Form S-8).

 10.17                  Consulting agreement, dated October 26, 1993, with Alberto
                        Sangiovanni-Vincentelli (incorporated by reference to
                        Exhibit 10.29 to the Registrant's Form 10-Q for the second
                        quarter ended June 30, 1994).

 10.18                  The Registrant's amended and restated 401(k) Plan
                        (incorporated by reference to Exhibit 10.29 of the
                        Registrant's Form 10-Q for the first quarter ended
                        March 30, 1996 (the 1996 First Quarter Form 10-Q)).

 10.19                  Amendment, dated May 3, 1996 to Registrant's 1993
                        Non-Statutory Stock Option Plan (incorporated by reference
                        to Exhibit 10.30 to the 1996 First Quarter Form 10-Q).

 10.20                  Amendment, dated August 2, 1996 to the Registrant's 1993
                        Non-Statutory Stock Option Plan, (incorporated by reference
                        to Exhibit 10.39 to the 1996 Second Quarter Form 10-Q).

 10.21                  Amendment Number 1, dated May 31, 1996, (incorporated by
                        reference to Exhibit 10.40 to the 1996 Second Quarter
                        Form 10-Q), to Lease Agreement for the Registrant's offices
                        at 555 River Oaks Parkway, San Jose, California, by and
                        between ROPA and the Registrant (incorporated by reference
                        to Exhibit 10.14 to the 1990 Form 10-K).

 10.22                  Amendment Number 2, dated May 31,1996, (incorporated by
                        reference to Exhibit 10.41 to the 1996 Second Quarter
                        Form 10-Q), to Lease Agreement for the Registrant's offices
                        at 555 River Oaks Parkway, San Jose, California, by and
                        between ROPA and the Registrant (incorporated by reference
                        to Exhibit 10.14 to the 1990 Form 10-K).

 10.23                  Amendment Number 1, dated May 31, 1996, (incorporated by
                        reference to Exhibit 10.42 to the 1996 Second Quarter
                        Form 10-Q), to Lease Agreement for the Registrant's offices
                        at 575 River Oaks Parkway, San Jose, California, by and
                        between ROPA and the Registrant (incorporated by reference
                        to Exhibit 10.16 to the 1990 Form 10-K).

       EXHIBIT
       NUMBER                                  EXHIBIT TITLE
---------------------                          -------------
 10.24                  Amendment Number 2, dated May 31, 1996, (incorporated by
                        reference to Exhibit 10.43 to the 1996 Second Quarter
                        Form 10-Q), to Lease Agreement for the Registrant's offices
                        at 575 River Oaks Parkway, San Jose, California, by and
                        between ROPA and the Registrant (incorporated by reference
                        to Exhibit 10.16 to the 1990 Form 10-K).

 10.25                  Amendment Number 1, dated May 31, 1996, (incorporated by
                        reference to Exhibit 10.44 to the 1996 Second Quarter
                        Form 10-Q), to Lease Agreement for the Registrant's offices
                        at 535 and 545 River Oaks Parkway, San Jose, California, by
                        and between ROPA and the Registrant (incorporated by
                        reference to Exhibit 10.17 to the 1990 Form 10-K).

 10.26                  Amendment Number 2, dated May 31, 1996, (incorporated by
                        reference to Exhibit 10.45 to the 1996 Second Quarter
                        Form 10-Q), to Lease Agreement for the Registrant's offices
                        at 535 and 545 River Oaks Parkway, San Jose, California, by
                        and between ROPA and the Registrant (incorporated by
                        reference to Exhibit 10.17 to the 1990 Form 10-K).

 10.27                  Distribution Agreement, dated April 28, 1997, 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 second quarter ended June 28, 1997).

 10.28                  CCT 1993 Equity Incentive Plan, 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 27, 1996).

 10.29                  Employment Agreement, dated October 19, 1997, between the
                        Registrant and John R. Harding (incorporated by reference to
                        Exhibit 10.41 to the Registrant's Form 10-K for the Fiscal
                        year ended January 3, 1998 (the 1997 Form 10-K)).

 10.30                  Indemnity Agreement, dated October 19, 1997, by and between
                        the Registrant and John R. Harding (incorporated by
                        reference to Exhibit 10.44 to the 1997 Form 10-K).

 10.31                  Letter Agreement, dated December 5, 1997, between the
                        Registrant and Joseph B. Costello (incorporated by reference
                        to Exhibit 10.42 to the 1997 Form 10-K).

 10.32                  Form of Executive Severance Agreement (incorporated by
                        reference to Exhibit 10.43 to the 1997 Form 10-K).

 10.33                  Revolving Credit Agreement, dated September 30, 1998, by and
                        between ABN-AMRO Bank and the Registrant (incorporated by
                        reference to Exhibit 10.45 from the Registrant's Form 10-Q
                        for the third quarter ended October 3, 1998 (the 1998 Third
                        Quarter Form 10-Q)).

 10.34                  Amendment, dated October 16, 1998, to the Revolving Credit
                        Agreement, by and between ABN-AMRO Bank and the Registrant
                        (incorporated by reference to Exhibit 10.46 from the 1998
                        Third Quarter Form 10-Q).

 10.35                  Agreement and Plan of Reorganization, dated September 3,
                        1998, by and among the Registrant, Ambit Design Systems,
                        Inc., and Adirondack Transaction Corp. (incorporated by
                        reference to Exhibit 2.01 to the Registrant's Current Report
                        on Form 8-K originally filed on September 30, 1998).

 10.36                  Consulting Agreement, dated March 8, 1999, between the
                        Registrant and George M. Scalise.

 10.37                  Executive Termination and Release Agreement dated May 24,
                        1999, between Cadence and John R. Harding (incorporated by
                        reference to Exhibit 10.48 from the Registrant's Form 10-Q
                        for the second quarter ended July 3, 1999 (the 1999 Second
                        Quarter Form 10-Q)).

       EXHIBIT
       NUMBER                                  EXHIBIT TITLE
---------------------                          -------------
 10.38                  The Registrant's 1995 Directors Stock Option Plan, as
                        amended May 5, 1999 (incorporated by reference to
                        Exhibit 10.49 from the 1999 Second Quarter Form 10-Q).

 10.39                  The Registrant's 1990 Employee Stock Purchase Plan, as
                        amended May 5, 1999 (incorporated by reference to
                        Exhibit 10.50 from the 1999 Second Quarter Form 10-Q).

 10.40                  Employment Agreement, dated September 16, 1999, between the
                        Registrant and H. Raymond Bingham (incorporated by reference
                        to Exhibit 10.51 from the Registrant's Form 10-Q for the
                        third quarter ended October 2, 1999 (the 1999 Third Quarter
                        Form 10-Q)).

 10.41                  Consulting Agreement, dated July 1999, between the
                        Registrant and Alberto Sangiovanni-Vincentelli (incorporated
                        by reference to Exhibit 10.52 from the 1999 Third Quarter
                        Form 10-Q).

 10.42                  Amendment, dated September 27, 1999, to the Revolving Credit
                        Agreement, by and between ABN-AMRO Bank and the Registrant
                        (incorporated by reference to Exhibit 10.53 from the 1999
                        Third Quarter Form 10-Q).

 10.43                  Amendment, dated November 3, 1999, to the Revolving Credit
                        Agreement, by and between ABN-AMRO Bank and the Registrant
                        (incorporated by reference to Exhibit 10.54 from the 1999
                        Third Quarter Form 10-Q).

 10.44                  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) originally
                        filed on February 3, 1999).

 10.45                  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).

 10.46                  Pi Design Systems, Inc. 1990 Stock Option Plan, as amended,
                        (incorporated by reference to Exhibit 99.2 to the
                        Registrant's Form S-8 Registration Statement
                        (No. 333-69589) filed on June 7, 1999).

 10.47                  Quickturn Design Systems, Inc. 1992 Key Executive Stock
                        Option Plan, as amended, (incorporated by reference to
                        Exhibit 99.3 to the Registrant's Form S-8 Registration
                        Statement (No. 333-69589) filed on June 7, 1999).

 10.48                  Quickturn Design Systems, Inc. 1993 Employee Qualified Stock
                        Purchase Plan, as amended, (incorporated by reference to
                        Exhibit 99.4 to the Registrant's Form S-8 Registration
                        Statement (No. 333-69589) filed on June 7, 1999).

 10.49                  Quickturn Design Systems, Inc. 1994 Outside Director Stock
                        Option Plan (incorporated by reference to Exhibit 99.7 to
                        the Registrant's Form S-8 Registration Statement
                        (No. 333-69589) filed on June 7, 1999).

 10.50                  Quickturn Design Systems, Inc. 1996 Supplemental Stock Plan,
                        as amended, (incorporated by reference to Exhibit 99.5 to
                        the Registrant's Form S-8 Registration Statement
                        (No. 333-69589) filed on June 7, 1999).

 10.51                  Quickturn Design Systems, Inc. 1997 Stock Option Plan, as
                        amended, (incorporated by reference to Exhibit 99.6 to the
                        Registrant's Form S-8 Registration Statement
                        (No. 333-69589) filed on June 7, 1999).

 10.52                  SpeedSim, Inc. 1995 Incentive and Nonqualified Stock Option
                        Plan (incorporated by reference to Exhibit 99.8 to the
                        Registrant's Form S-8 Registration Statement
                        (No. 333-69589) filed on June 7, 1999).

 10.53                  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).

       EXHIBIT
       NUMBER                                  EXHIBIT TITLE
---------------------                          -------------
 10.54                  OrCAD, Inc. 1995 Stock Option Plan (incorporated by
                        reference to Exhibit 99.2 to the Registrant's Form S-8
                        Registration Statement (No. 333-85591) filed on August 19,
                        1999).

 10.55                  OrCAD, Inc. Amended 1995 Stock Incentive Plan (incorporated
                        by reference to Exhibit 99.3 to the Registrant's Form S-8
                        Registration Statement (No. 333-85591) filed on August 19,
                        1999).

 10.56                  Form of Indemnity Agreement between the Registrant and Key
                        Executives and Board of Directors of the Registrant.

 10.57                  Form of Executive Retention Agreement between the Registrant
                        and Key Executives of the Registrant.

 10.58                  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).

 10.59                  Diablo Research Company LLC 1999 Stock Option Plan
                        (incorporated by reference to Exhibit 99.2 to the
                        Registrant's Form S-8 Registration Statement
                        (No. 333-93609) filed on December 24, 1999).

 10.60                  The Registrant's 2000 Non-Statutory Equity Incentive Plan
                        (incorporated by reference to Exhibit 99.1 to the
                        Registrant's Form S-8 Registration Statement filed on
                        March 27, 2000).

 21.01                  Subsidiaries of the Registrant.

 23.01                  Consent of Arthur Andersen LLP.

 23.02                  Consent of PricewaterhouseCoopers LLP.

 27.01                  Financial data schedule for the year ended January 1, 2000.

 27.02                  Financial data schedule for the periods ended January 3,
                        1998, January 2, 1999, April 4, 1998, July 4, 1998, and
                        October 3, 1998.

 27.03                  Financial data schedule for the period ended April 3, 1999.

(b) REPORTS ON FORM 8-K:

On December 10, 1998 and as amended on December 22, 1998, January 6, 1999, May 20, 1999, and June 15, 1999, the Registrant filed a Current Report on Form 8-K reporting Cadence's agreement to acquire Quickturn Design Systems, Inc., a Delaware corporation, and amendments to this agreement.

On May 6, 1999, the Registrant filed a Current Report on Form 8-K reporting Cadence's press release announcing its first quarter 1999 results and announcing the appointment of H. Raymond Bingham to the position of President and Chief Executive Officer.

On May 26, 1999 and as amended on June 15, 1999, the Registrant filed a Current Report on Form 8-K reporting the completion of Cadence's agreement to acquire Quickturn Design Systems, Inc., a Delaware 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 January 1, 2000 and January 2, 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 1, 2000. 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 did not audit the financial statements of Quickturn Design Systems, Inc., for the years ended December 31, 1998 and 1997, a company acquired during 1999 in a transaction accounted for as a pooling of interests, as discussed in Acquisitions in the Notes to the Consolidated Financial Statements. Such statements are included in the consolidated financial statements of Cadence Design Systems, Inc. and reflect total revenues of eight percent and eleven percent of the related consolidated totals for the years ended January 2, 1999 and January 3, 1998. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for Quickturn Design Systems, Inc., is based solely upon the report of the other auditors.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Cadence Design Systems, Inc. and subsidiaries as of January 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2000, in conformity with generally accepted accounting principles.

As explained in Cumulative Change in Accounting Method in the Notes to Consolidated Financial Statements, effective November 1997, Cadence changed its method of accounting for costs incurred for business process reengineering projects.

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 financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic 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 financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

San Jose, California
January 21, 2000
(Except for the matters discussed in
Subsequent Events, as to which the
date is February 25, 2000)

REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS

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

In our opinion, the consolidated balance sheet as of December 31, 1998 and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the two years in the period ended December 31, 1998 of Quickturn Design Systems, Inc. and its subsidiaries (not presented separately herein) present fairly, in all material respects, the financial position, results of operations and cash flows of Quickturn Design Systems, Inc. and its subsidiaries at December 31, 1998 and for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Quickturn Design Systems, Inc. for any period subsequent to December 31, 1998.

/s/ PricewaterhouseCoopers LLP

San Jose, California
January 15, 1999

CADENCE DESIGN SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

JANUARY 1, 2000 AND JANUARY 2, 1999

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                 1999         1998
                                                              ----------   ----------
                                       ASSETS
Current Assets:
  Cash and cash equivalents.................................  $  111,401   $  209,074
  Short-term investments....................................       7,357       40,403
  Receivables, net..........................................     248,034      305,143
  Inventories, net..........................................      19,872        9,903
  Prepaid expenses and other................................      93,248      101,629
                                                              ----------   ----------
    Total current assets....................................     479,912      666,152
Property, plant, and equipment, net.........................     330,409      274,208
Software development costs, net.............................      10,692       13,045
Acquired intangibles, net...................................     402,154      286,088
Installment contract receivables............................      84,160      100,529
Other assets................................................     152,332      141,894
                                                              ----------   ----------
                                                              $1,459,659   $1,481,916
                                                              ==========   ==========

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Notes payable and current portion of capital leases.......  $    3,924   $    1,273
  Accounts payable and accrued liabilities..................     265,518      242,524
  Income taxes payable......................................          --       21,241
  Deferred revenue..........................................     152,116      106,786
                                                              ----------   ----------
    Total current liabilities...............................     421,558      371,824
                                                              ----------   ----------
Long-Term Liabilities:
  Long-term debt and capital leases.........................      25,024      136,380
  Minority interest liability...............................          41          377
  Other long-term liabilities...............................      26,887       25,505
                                                              ----------   ----------
    Total long-term liabilities.............................      51,952      162,262
                                                              ----------   ----------

Commitments and Contingencies

Stockholders' Equity:
  Preferred stock--$0.01 par value; authorized 400 shares in
    1999 and 1998, none issued or outstanding...............          --           --
  Common stock and capital in excess of $0.01 par value
    Authorized: 600,000 shares
    Issued: 253,768 shares in 1999 and 247,371 in 1998
    Outstanding: 243,328 shares in 1999 and 237,212 in
    1998....................................................     857,960      817,978
  Treasury stock at cost: 10,440 shares in 1999 and 10,159
    in 1998.................................................    (240,748)    (219,417)
  Retained earnings.........................................     344,247      358,322
  Accumulated other comprehensive income (loss).............      24,690       (9,053)
                                                              ----------   ----------
    Total stockholders' equity..............................     986,149      947,830
                                                              ----------   ----------
                                                              $1,459,659   $1,481,916
                                                              ==========   ==========

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 JANUARY 1, 2000

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                              1999         1998         1997
                                                           ----------   ----------   ----------
Revenue:
  Product................................................  $  505,459   $  760,441   $  618,340
  Services...............................................     294,916      265,211      168,789
  Maintenance............................................     292,928      294,528      249,644
                                                           ----------   ----------   ----------
    Total revenue........................................   1,093,303    1,320,180    1,036,773
                                                           ----------   ----------   ----------
Costs and Expenses:
  Cost of product........................................      79,504       77,513       74,181
  Cost of services.......................................     191,760      188,793      117,407
  Cost of maintenance....................................      53,579       52,386       34,038
  Amortization of acquired intangibles...................      61,788       18,472        2,460
  Marketing and sales....................................     354,205      340,295      299,829
  Research and development...............................     219,181      202,810      167,245
  General and administrative.............................      86,735       86,828       69,897
  Unusual items..........................................      59,301      263,595       48,010
                                                           ----------   ----------   ----------
    Total costs and expenses.............................   1,106,053    1,230,692      813,067
                                                           ----------   ----------   ----------
Income (loss) from operations............................     (12,750)      89,488      223,706
  Other income, net......................................       1,370       10,558       28,390
                                                           ----------   ----------   ----------
Income (loss) before provision for income taxes and
  cumulative effect of change in accounting method.......     (11,380)     100,046      252,096
  Provision for income taxes.............................       2,695       74,922       74,698
                                                           ----------   ----------   ----------
Income (loss) before cumulative effect of change in
  accounting method......................................     (14,075)      25,124      177,398
  Cumulative effect of change in accounting method, net
    of taxes of $5,261 in 1997...........................          --           --       12,276
                                                           ----------   ----------   ----------
Net income (loss)........................................  $  (14,075)  $   25,124   $  165,122
                                                           ==========   ==========   ==========
Basic net income (loss) per share:
  Net income (loss) before cumulative effect of change in
    accounting method....................................  $    (0.06)  $     0.11   $     0.82
                                                           ==========   ==========   ==========
  Net income (loss)......................................  $    (0.06)  $     0.11   $     0.76
                                                           ==========   ==========   ==========
Diluted net income (loss) per share:
  Net income (loss) before cumulative effect of change in
    accounting method....................................  $    (0.06)  $     0.10   $     0.73
                                                           ==========   ==========   ==========
  Net income (loss)......................................  $    (0.06)  $     0.10   $     0.68
                                                           ==========   ==========   ==========
Weighted average common shares outstanding...............     242,037      234,605      216,650
                                                           ==========   ==========   ==========
Weighted average common shares outstanding--assuming full
  dilution...............................................     242,037      257,862      243,341
                                                           ==========   ==========   ==========

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 JANUARY 1, 2000

(IN THOUSANDS)

                                                             COMMON STOCK
                                                        ----------------------                                       ACCUMULATED
                                                                    PAR VALUE                                           OTHER
                                           COMPRE-                 AND CAPITAL      TREASURY STOCK                     COMPRE-
                                           HENSIVE                  IN EXCESS    --------------------   RETAINED       HENSIVE
                                        INCOME (LOSS)    SHARES      OF PAR       SHARES     AMOUNT     EARNINGS    INCOME (LOSS)
                                        -------------   --------   -----------   --------   ---------   ---------   -------------
BALANCE, DECEMBER 28, 1996............                  279,464     $711,469      (62,945)  $(325,637)  $168,076       $(1,825)
  Purchase of treasury stock..........                       --         (720)      (4,592)   (104,526)        --            --
  Issuance of common and treasury
    stock.............................                   16,188       70,414        1,167       7,308         --            --
  Tax benefits from employee stock
    transactions......................                       --      124,040           --          --         --            --
  Retirement of treasury stock in
    connection with the CCT
    acquisition.......................                  (22,778)     (32,429)      22,778      32,429         --            --
  Common stock and warrants issued in
    connection with an acquisition....                      636        9,500           --          --         --            --
  Treasury stock issued in connection
    with acquisitions.................                       --           --          128       1,755         --            --
  Unrealized gain on investment in
    subsidiary........................                       --        2,304           --          --         --            --
  Use of treasury stock for common
    stock dividend....................                  (36,725)    (291,636)      36,725     291,386         --            --
  Amortization of deferred
    compensation......................                       --          227           --          --         --            --
  Net income..........................    $165,122           --           --           --          --    165,122            --
  Unrealized holding gain on
    marketable securities.............          78           --           --           --          --         --            78
  Translation loss....................      (5,972)          --           --           --          --         --        (5,972)
                                          --------      -------     --------     --------   ---------   --------       -------
                                          $159,228
                                          ========
BALANCE, JANUARY 3, 1998..............                  236,785      593,169       (6,739)    (97,285)   333,198        (7,719)
  Purchase of treasury stock..........                       --           --       (6,479)   (172,171)        --            --
  Issuance of common and treasury
    stock.............................                   10,586       85,147        1,804      30,400         --            --
  Tax benefits from employee stock
    transactions......................                       --      109,713           --          --         --            --
  Treasury stock issued in connection
    with acquisitions.................                       --       26,957        1,155      19,639         --            --
  Treasury stock issued in connection
    with warrants exercised...........                       --          322          100          --         --            --
  Amortization of deferred
    compensation......................                       --          176           --          --         --            --
  Equity adjustments related to
    acquisitions......................                       --        2,494
  Net income..........................    $ 25,124           --           --           --          --     25,124            --
  Unrealized holding gain on
    marketable securities.............          37           --           --           --          --         --            37
  Translation loss....................      (1,371)          --           --           --          --         --        (1,371)
                                          --------      -------     --------     --------   ---------   --------       -------
                                          $ 23,790
                                          ========
BALANCE, JANUARY 2, 1999..............                  247,371      817,978      (10,159)   (219,417)   358,322        (9,053)
  Purchase of treasury stock..........                       --           (2)      (4,585)   (115,832)        --            --
  Issuance of common and treasury
    stock.............................                    5,126       (2,562)       3,654      80,466         --            --
  Issuance of common stock in
    connection with warrants
    exercised.........................                    1,271       13,340           --          --         --            --
  Tax benefits from employee stock
    transactions......................                       --       10,305           --          --         --            --
  Treasury stock issued in connection
    with acquisitions.................                       --        2,089          650      14,035         --            --
  Amortization of deferred
    compensation......................                                   130
  Equity adjustments related to
    acquisitions......................                       --       16,682           --          --         --            --
  Net loss............................    $(14,075)          --           --           --          --    (14,075)           --
  Unrealized holding gain on
    marketable securities.............      36,249           --           --           --          --         --        36,249
  Translation loss....................      (2,506)          --           --           --          --         --        (2,506)
                                          --------      -------     --------     --------   ---------   --------       -------
                                          $ 19,668
                                          ========
BALANCE, JANUARY 1, 2000..............                  253,768     $857,960      (10,440)  $(240,748)  $344,247       $24,690
                                                        =======     ========     ========   =========   ========       =======

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 JANUARY 1, 2000

(IN THOUSANDS)

                                                                1999       1998       1997
                                                              --------   --------   --------
Cash and Cash Equivalents at Beginning of Year..............  $209,074   $221,030   $314,422
                                                              --------   --------   --------
Cash Flows from Operating Activities:
  Net income (loss).........................................   (14,075)    25,124    165,122
  Adjustments to reconcile net income (loss) to cash
    provided by operating activities:
    Depreciation and amortization...........................   163,896    109,105     65,646
    Asset impairment and write-off of equipment and
      non-current assets....................................    20,973        357      3,065
    Write-off of acquired in-process technology and charges
      related to Arkos acquisition..........................    20,700    194,100     14,859
    Provisions for losses on trade accounts receivable......     9,070      7,687     12,428
    Non-cash restructuring charges..........................     5,556     13,321      2,347
    Write-down of venture capital partnership investments...     5,500      2,000      2,000
    Changes in other long-term liabilities and minority
      interest..............................................     1,201     (1,076)     2,691
    Gain on sale of stock of subsidiary.....................        --         --    (13,061)
    Write-off of business process re-engineering costs......        --         --     17,537
    Write-down of inventories...............................        --      3,435      6,153
    Equity (income) loss from investments...................      (124)       889     (1,934)
    Deferred income taxes...................................    (1,431)    24,725    (73,584)
    Changes in operating assets and liabilities, net of
      effect of acquired and disposed businesses:
      Receivables...........................................  (153,662)  (191,641)   (43,180)
      Inventories...........................................    (9,969)    (2,439)    (6,481)
      Prepaid expenses and other............................    12,462     21,410    (31,130)
      Installment contract receivables......................    57,008   (127,284)  (105,711)
      Accounts payable and accrued liabilities..............    (4,139)    34,913     55,102
      Income taxes payable..................................   (23,438)   123,452    126,559
      Deferred revenue......................................    37,694    (10,925)    (3,804)
                                                              --------   --------   --------
        Net cash provided by operating activities...........   127,222    227,153    194,624
                                                              --------   --------   --------
Cash Flows from Investing Activities:
  Maturities of short-term investments--held-to-maturity....    25,990     60,367     37,039
  Purchases of short-term investments--held-to-maturity.....       (43)   (35,872)   (82,204)
  Maturities and sales of short-term
    investments--available-for-sale.........................    26,349    564,136    144,343
  Purchases of short-term investments--available-for-sale...       (15)  (513,241)  (211,745)
  Purchases of property, plant, and equipment...............  (110,444)  (121,395)   (99,957)
  Capitalization of software development costs..............   (25,684)   (21,695)   (15,011)
  Increase in acquired intangibles and other assets.........   (28,490)   (82,856)    (2,971)
  Net proceeds from sale of subsidiary stock................        --         --     18,582
  Investment in venture capital partnership and equity
    investments.............................................    (9,144)   (13,037)   (11,887)
  Cash effect of business acquisitions and dispositions.....  (133,055)  (352,326)    (2,891)
  Sale of put warrants......................................     3,609     14,812     19,016
  Purchases of call options.................................    (3,609)   (14,812)   (19,016)
                                                              --------   --------   --------
        Net cash used for investing activities..............  (254,536)  (515,919)  (226,702)
                                                              --------   --------   --------
Cash Flows from Financing Activities:
  Proceeds from long-term debt..............................   267,069    150,000         53
  Principal payments on long-term debt and capital leases...  (378,320)   (17,757)   (25,328)
  Proceeds from issuance of common stock....................    91,244    104,763     76,957
  Purchases of treasury stock...............................  (115,832)  (170,830)  (105,118)
  Proceeds from transfer of financial assets in exchange for
    cash....................................................   167,680    211,919         --
                                                              --------   --------   --------
        Net cash provided by (used for) financing
           activities.......................................    31,841    278,095    (53,436)
                                                              --------   --------   --------
Effect of exchange rate changes on cash.....................    (2,200)    (1,285)    (7,878)
                                                              --------   --------   --------
Decrease in cash and cash equivalents.......................   (97,673)   (11,956)   (93,392)
                                                              --------   --------   --------
Cash and Cash Equivalents at End of Year....................  $111,401   $209,074   $221,030
                                                              ========   ========   ========

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

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 1, 2000

CADENCE

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.

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 1999 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.

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 for those operations whose functional currency is the U.S. dollar, and as a separate component of stockholders' equity for those operations whose functional currency is the local currency.

DERIVATIVE FINANCIAL INSTRUMENTS

Cadence enters into foreign currency forward exchange contracts and purchases foreign currency put options with financial institutions primarily to protect against currency exchange risks associated with existing assets and liabilities and probable but not firmly committed transactions, respectively. 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 in accrued liabilities.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Cadence purchases put options to hedge the currency exchange risks associated with probable but not firmly committed transactions. 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 and other factors in effect as the forward contracts and put options mature.

REVENUE RECOGNITION

Product revenue consists principally of revenue earned under software license agreements and is generally recognized upon shipment of the software if collection of the resulting receivable is probable, the fee is fixed or determinable, and vendor-specific objective evidence exists to allocate the total fee to all delivered and undelivered elements of the arrangement. Revenue associated with software products under subscription licenses is recognized ratably over the license period because the agreements allow customers to exchange licensed products for unspecified future technology. Installment contract receivables result from customer contracts with Cadence's top-rated credit customers. Cadence uses installment contracts as a standard business practice and has a history of successfully collecting under the original payment terms without making concessions on payments, products, or services. Emulation hardware product revenue is recognized upon shipment.

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 versus 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, revenue is recognized when the work is completed.

Maintenance revenue consists of fees for providing technical support for software products and software product updates and is recognized ratably over the term of the support agreement.

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) 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 equity. Cadence has reported the components of comprehensive income (loss) on its consolidated statements of stockholders' equity.

NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is calculated by dividing net income
(loss) by the weighted average shares of common stock outstanding during the year, and for diluted net income per share, net income is divided by the weighted average shares of common stock outstanding and potential common shares outstanding during the year. Potential common shares outstanding included in the dilution calculation consist of dilutive shares issuable upon the exercise of outstanding common stock options, warrants, contingent issuances of common stock, and put warrants computed using the treasury stock method. For

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the year in which Cadence had a loss, potential common shares outstanding are excluded from the computation of diluted net loss per share as their effects are anti-dilutive.

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 in debt and marketable equity securities at the time of purchase. Debt 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 (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 chips 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.

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

SOFTWARE DEVELOPMENT COSTS AND ACQUIRED INTANGIBLES

Cadence capitalizes software development costs in compliance with 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,

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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 one to seven years).

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 both the software development costs and acquired intangibles in the near term.

LONG-LIVED ASSETS

Cadence 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 future undiscounted cash flows 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.

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.

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 program. Cadence's investment policy primarily 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.

ACCRUED WARRANTY

Cadence provides an accrual for future warranty costs based on the historical relationship of revenue to warranty costs incurred.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NEW ACCOUNTING STANDARDS

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

BALANCE SHEET COMPONENTS

A summary of balance sheet components follows:

                                                                1999        1998
                                                              ---------   ---------
                                                                 (IN THOUSANDS)
Receivables:
  Accounts receivables......................................  $ 201,951   $ 196,822
  Installment contract receivables--current.................     90,671     131,310
                                                              ---------   ---------
    Total receivables.......................................    292,622     328,132
  Less: Allowances..........................................    (44,588)    (22,989)
                                                              ---------   ---------
    Receivables, net........................................  $ 248,034   $ 305,143
                                                              =========   =========
Inventories:
  Raw materials.............................................  $  19,033   $   8,798
  Work in process...........................................        839       1,105
                                                              ---------   ---------
    Inventories, net........................................  $  19,872   $   9,903
                                                              =========   =========
Prepaid Expenses and Other:
  Prepaid expenses and other................................  $  61,779   $  69,933
  Deferred income taxes.....................................     31,469      31,696
                                                              ---------   ---------
    Prepaid expenses and other..............................  $  93,248   $ 101,629
                                                              =========   =========
Property, Plant, and Equipment:
  Computer equipment and related software...................  $ 261,696   $ 223,639
  Buildings.................................................     96,735      46,672
  Land......................................................     64,745      48,485
  Leasehold and building improvements.......................     61,552      56,516
  Furniture and fixtures....................................     57,488      48,689
  Equipment.................................................     43,978      41,290
  Construction in progress..................................     16,761      22,264
                                                              ---------   ---------
    Total cost..............................................    602,955     487,555
  Less: Accumulated depreciation and amortization...........   (272,546)   (213,347)
                                                              ---------   ---------
    Property, plant, and equipment, net.....................  $ 330,409   $ 274,208
                                                              =========   =========
Software Development Costs:
  Cost......................................................  $  49,298   $  39,254
  Less: Accumulated amortization............................    (38,606)    (26,209)
                                                              ---------   ---------
    Software development costs, net.........................  $  10,692   $  13,045
                                                              =========   =========
Acquired Intangibles:
  Goodwill and other intangibles............................  $ 454,805   $ 283,287
  Purchased software........................................     58,199      35,483
  Less: Accumulated amortization............................   (110,850)    (32,682)
                                                              ---------   ---------
    Acquired intangibles, net...............................  $ 402,154   $ 286,088
                                                              =========   =========
Accounts Payable and Accrued Liabilities:
  Payroll and payroll related accruals......................  $ 129,174   $ 125,303
  Other accrued liabilities.................................     97,902      86,479
  Accounts payable..........................................     38,442      30,742
                                                              ---------   ---------
    Accounts payable and accrued liabilities................  $ 265,518   $ 242,524
                                                              =========   =========

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FINANCIAL INSTRUMENTS

INVESTMENTS

A summary of Cadence's held-to-maturity and available-for-sale investment portfolios follows:

                                                            1999       1998
                                                          --------   --------
                                                            (IN THOUSANDS)
Held-to-maturity:
  Foreign debt securities...............................  $    998   $ 10,080
  Corporate debt securities.............................        --     11,607
  Repurchase agreements.................................        --      8,000
  Commercial paper......................................        --      7,992
  U.S. Government notes.................................        --      4,999
                                                          --------   --------
    Total held-to-maturity..............................       998     42,678
                                                          --------   --------
Available-for-sale:
  Marketable equity securities..........................    40,504         --
  Corporate debt securities.............................     7,163     24,441
  Auction rate securities...............................     6,000         --
  Repurchase agreements.................................     5,000         --
  Foreign debt securities...............................       194         --
  U.S. Government notes.................................       997        997
  State and local municipality notes....................        --      8,248
                                                          --------   --------
    Total available-for-sale............................    59,858     33,686
                                                          --------   --------
      Total investment securities.......................    60,856     76,364
Less: Cash equivalents..................................   (11,000)   (15,992)
                                                          --------   --------
        Total short-term and long-term investments......  $ 49,856   $ 60,372
                                                          ========   ========

The contractual maturities of these investments, excluding marketable equity securities, as of January 1, 2000, were as follows (in thousands):

Due in less than 1 year.....................................   $7,357
Due in 1 to 3 years.........................................    1,995
                                                               ------
                                                               $9,352
                                                               ======

Excluding marketable equity securities, the carrying value of cash and cash equivalents, short-term investments, and long-term investments approximate fair value (based on quoted market prices) of such investments. Accordingly, the gross realized and unrealized gains and losses were immaterial for each of the two years. As of January 1, 2000, the unrealized gain on marketable equity securities was $36.2 million.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." During the year ended January 1, 2000, Cadence transferred accounts receivable totaling $167.7 million, 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 January 1, 2000 and January 2, 1999:

                                                   1999                   1998
                                           --------------------   --------------------
                                           NOTIONAL      FAIR     NOTIONAL      FAIR
                                           PRINCIPAL    VALUE     PRINCIPAL    VALUE
                                           ---------   --------   ---------   --------
                                                         (IN THOUSANDS)
Forward contracts........................   $73,135    $(2,530)    $44,886    $(2,296)
Put options..............................   $27,779    $   323     $    --    $    --

The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of January 1, 2000, and January 2, 1999. As of January 1, 2000, and January 2, 1999, 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

DIABLO RESEARCH COMPANY LLC

In December 1999, Cadence acquired all of the outstanding stock of Diablo Research Company LLC and assumed all outstanding stock options. Diablo was a high-technology engineering services firm with expertise in wireless communication, global positioning satellite solutions, and data transfer and home automation markets. The total purchase price was $39.9 million in cash, and the acquisition was accounted for as a purchase. In connection with the acquisition, Cadence acquired net intangibles of $40.9 million. The results of operations of Diablo 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 Diablo acquisition are being amortized on a straight-line basis over five years.

ORCAD, INC.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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. If these projects are not successfully developed, future revenue and profitability of Cadence may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired.

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 designed, manufactured, sold, and supported hardware and software products that verified the design of computer chips and electronic systems. Cadence acquired all of the outstanding shares of Quickturn common stock in a tax-free, 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 place at the beginning of such periods, in accordance with required pooling of interests accounting and disclosures. Revenue and net income (loss) of the separate companies for the period and fiscal years preceding the acquisition were as follows:

                                      QUARTER ENDED     YEAR ENDED        YEAR ENDED
                                      APRIL 3, 1999   JANUARY 2, 1999   JANUARY 3, 1998
                                      -------------   ---------------   ---------------
                                                       (IN THOUSANDS)
REVENUE:
Cadence, as previously reported.....     $305,234       $1,216,070        $  926,369
Quickturn...........................       29,957          104,110           110,404
                                         --------       ----------        ----------
  Combined..........................     $335,191       $1,320,180        $1,036,773
                                         ========       ==========        ==========
NET INCOME (LOSS):
Cadence, as previously reported.....     $ 51,778       $   31,982        $  168,100
Quickturn...........................        1,084           (6,858)           (2,978)
                                         --------       ----------        ----------
  Combined..........................     $ 52,862       $   25,124        $  165,122
                                         ========       ==========        ==========

DESIGN ACCELERATION, INC.

In January 1999, Cadence acquired Design Acceleration, Inc., or DAI. DAI was a supplier of design verification technology used in system-on-a-chip design. Cadence acquired all of the outstanding stock of

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 net 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. If these projects are not successfully developed, future revenue, and profitability of Cadence may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired. 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.

AMBIT DESIGN SYSTEMS, INC.

In September 1998, Cadence acquired all of the outstanding stock of Ambit Design Systems, Inc. for cash. The total purchase price was $255 million and the acquisition was accounted for as a purchase. The results of operations of Ambit 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 seven years.

Management estimated that $106.5 million of the purchase price 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 statement 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. If these projects are not successfully developed, future revenue and profitability of Cadence may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In connection with the acquisition, net assets acquired were as follows:

                                                              (IN THOUSANDS)
Acquired intangibles, including in-process technology.......     $308,678
Property, plant, and equipment, net and other non-currrent
  assets....................................................        9,333
Cash, receivables, and other current assets.................        8,349
Current liabilities assumed.................................      (13,605)
Deferred income taxes.......................................      (57,765)
                                                                 --------
  Net assets acquired.......................................     $254,990
                                                                 ========

The following table represents unaudited consolidated pro forma financial information as if Cadence and Ambit had been combined as of the beginning of the periods presented. The pro forma data are presented for illustrative purposes only and are not necessarily indicative of the combined financial position or results of operations of future periods or the results that actually would have resulted had Cadence and Ambit been a combined company during the specified periods. The pro forma results include the effects of the amortization of acquired intangible assets and adjustments to the income tax provision. The pro forma combined results exclude acquisition-related charges for acquired in-process technology related to Ambit.

                                                           FISCAL YEAR ENDED
                                                       -------------------------
                                                       JANUARY 2,    JANUARY 3,
                                                          1999          1998
                                                       -----------   -----------
                                                       (IN THOUSANDS, EXCEPT PER
                                                            SHARE AMOUNTS)
Revenue..............................................  $1,330,996    $1,039,686
                                                       ==========    ==========
Net income...........................................  $  112,772    $  140,610
                                                       ==========    ==========
Net income per share:
  Basic..............................................  $     0.48    $     0.65
                                                       ==========    ==========
  Diluted............................................  $     0.44    $     0.58
                                                       ==========    ==========

BELL LABS' INTEGRATED CIRCUIT DESIGN AUTOMATION GROUP

In September 1998, Cadence acquired Bell Labs' Integrated Circuit Design Automation Group of Lucent Technologies Inc., BLDA, for cash. The total purchase price was $58.0 million and the acquisition was accounted for as a purchase. The results of operations of BLDA 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 $30.3 million of the purchase price 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

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

uncertainty surrounding the successful development of the acquired in-process technology. If these projects are not successfully developed, future revenue, and profitability of Cadence may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired.

EXCELLENT DESIGN, INC.

In March 1998, Cadence acquired all of the outstanding stock of Excellent Design, Inc., EXD, for cash. The total purchase price was $40.9 million and the acquisition was accounted for as a purchase. The results of operations of EXD 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 $28.4 million of the purchase price 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. If these projects are not successfully developed, future revenue, and profitability of Cadence may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired. In the fourth quarter of 1999, Cadence recorded asset impairment charges of $13.3 million. See further discussion at "Asset Impairment."

SYMBIONICS GROUP LIMITED

In February 1998, Cadence acquired all of the outstanding stock of Symbionics Group Limited for approximately 1 million shares of Cadence common stock and $21.3 million of cash. The total purchase price was $46.1 million and the acquisition was accounted for as a purchase. The results of operations of Symbionics 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 $28.5 million of the purchase price 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. If these projects are not successfully developed, future revenue, and profitability of Cadence may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired.

Comparative pro forma financial information has not been presented as the results of operations of BLDA, EXD, and Symbionics were not material to Cadence's consolidated financial statements, either individually or in the aggregate.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ADVANCED MICROELECTRONICS

In October 1997, Cadence acquired certain assets and related business from the Advanced Microelectronics division of the Institute for Technology Development, referred to as Advanced Microelectronics, a non-profit corporation organized to conduct and transfer scientific research into usable high technology for commercial application. This division provided contract engineering services on a time-and-materials basis for the design and development of integrated circuits. The total purchase price was $2.4 million and the acquisition was accounted for as a purchase. Accordingly, the results of operations of Advanced Microelectronics 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. The excess of purchase price over net assets acquired was $2.1 million, of which $1.7 million related to the write-off of in-process technology that had not reached technological feasibility and, in management's opinion, had no probable alternative future use. Comparative pro forma financial information has not been presented as the results of operations of Advanced Microelectronics were not material to Cadence's consolidated financial statements.

ARKOS DESIGN, INC.

In June 1997, pursuant to an asset purchase agreement among Quickturn, Synopsys, Inc., and Arkos Design, Inc., Quickturn acquired from Synopsys certain assets relating to Synopsys' emulation business, including all the outstanding common stock of Arkos, for approximately 0.5 million shares of Quickturn common stock and $5 million of cash. The total purchase price was $16.7 million and the acquisition was accounted for as a purchase. Accordingly, the results of operations of Arkos and the estimated fair value of the assets acquired and liabilities assumed are included in the consolidated financial statements from the date of acquisition. Intangibles arising from the acquisition are being amortized on a straight-line basis over five years. The excess of purchase price over net assets acquired was $7.9 million, of which $2.8 million related to the write-off of in-process technology that had not reached technological feasibility and, in management's opinion, had no probable alternative future use. Comparative pro forma financial information has not been presented as the results of operations of Arkos were not material to Quickturn's consolidated financial statements.

COOPER & CHYAN TECHNOLOGY, INC.

In May 1997, Cadence merged with Cooper & Chyan Technology, Inc., or CCT, whose software products were used to design sophisticated integrated circuits and high-speed printed circuit boards. In connection therewith, Cadence issued approximately 22.8 million shares of common stock. The merger was accounted for using the pooling of interests method of accounting. Cadence had restated all prior period consolidated financial statements as if the merger took place at the beginning of such periods, in accordance with required pooling of interests accounting and disclosures. Reconciliation of the current

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

consolidated financial statements with previously reported separate company information is presented below:

                                                                   1997
                                                              --------------
                                                              (IN THOUSANDS)
REVENUE
Cadence.....................................................    $1,026,297
CCT.........................................................        10,476
                                                                ----------
  Combined and restated.....................................    $1,036,773
                                                                ==========
NET INCOME (LOSS)
Cadence.....................................................    $  166,488
CCT.........................................................        (1,366)
                                                                ----------
  Combined and restated.....................................    $  165,122
                                                                ==========

SYNTHESIA AB

In February 1997, Cadence acquired all of the outstanding stock of Synthesia AB for 115,166 shares of Cadence common stock and cash. The total purchase price was $4.7 million and the acquisition was accounted for as a purchase. The results of operations of Synthesia and the estimated fair value of the assets acquired and liabilities assumed were included in Cadence's consolidated financial statements from the date of acquisition. In connection with the acquisition, net intangibles of $5.6 million were acquired, of which $4.9 million related to the write-off of in-process technology that had not reached technological feasibility and, in management's opinion, had no probable alternative future use. Comparative pro forma financial information has not been presented as the results of operations of Synthesia were not material to Cadence's consolidated financial statements.

SPEEDSIM, INC.

CREDIT FACILITY AND LONG-TERM DEBT

In October 1998, Cadence entered into a senior unsecured credit facility, referred to as the 1998 Facility with a syndicate of banks that allows Cadence to borrow up to $355 million. As amended in September and November of 1999, the 1998 Facility is divided between a $177.5 million two year revolving credit facility, or the Two Year Facility, and a $177.5 million 364-day revolving credit facility convertible into a one year term loan, or the 364-Day Facility. The Two Year Facility expires on September 29, 2001. The 364-Day Facility will either expire on September 27, 2000, be converted to a one year term loan with a maturity date of September 27, 2001, or, at the request of Cadence and with the agreement of the bank group, be renewed for an additional one year. 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

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

higher of the Federal Funds Rate plus 0.50% or the prime rate. As a result, Cadence's interest rate expenses associated with this borrowing will vary with market rates. In addition, commitment fees are payable on the unutilized portions of the Two Year Facility at rates between 0.23% and 0.30% based on a pricing grid tied to a financial covenant and on the unutilized portion of the 364-Day Facility at a fixed rate of 0.18%. The 1998 Facility contains certain financial and other covenants. As of January 1, 2000, Cadence had $20 million outstanding under the Two Year Facility at a weighted average interest rate of 8.11%.

A summary of long-term debt and capital leases follows:

                                                             1999       1998
                                                           --------   --------
                                                             (IN THOUSANDS)
Revolving credit facility................................  $20,000    $135,000
Capital lease obligations................................    8,948       2,653
                                                           -------    --------
  Total..................................................   28,948     137,653
Less: Current portion of capital leases..................    3,924       1,273
                                                           -------    --------
  Long-term debt and capital leases......................  $25,024    $136,380
                                                           =======    ========

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 million, $25.1 million, and $18.6 million for 1999, 1998, and 1997, respectively.

At January 1, 2000, 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:
  2000....................................................   $4,198    $ 39,797
  2001....................................................    2,318      28,867
  2002....................................................    1,678      25,133
  2003....................................................      962      19,739
  2004....................................................      411      13,752
  Thereafter..............................................       --      64,851
                                                             ------    --------
    Total lease payments..................................    9,567    $192,139
                                                                       ========
Less: amount representing interest
  (average interest rate of 5.42%)........................      619
                                                             ------
  Present value of lease payments.........................    8,948
Less: current portion.....................................    3,924
                                                             ------
  Long-term portion.......................................   $5,024
                                                             ======

The cost of equipment under capital leases included in the consolidated balance sheets as property, plant, and equipment at January 1, 2000 and January 2, 1999 was approximately $14 million and $6 million, respectively. Accumulated amortization of the leased equipment at January 1, 2000 and January 2, 1999 was approximately $5.5 million and $3.5 million, respectively.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CONTINGENCIES

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 anticompetitive 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.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 1999, 1998, and 1997:

                                                                1999       1998       1997
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
Weighted average common shares used to calculate basic net
  income (loss) per share...................................  242,037    234,605    216,650
  Options...................................................       --     22,778     26,304
  Puts......................................................       --        257         58
  Warrants and other contingent common shares...............       --        222        329
                                                              -------    -------    -------
Weighted average common and potential common shares used to
  calculate diluted net income (loss) per share.............  242,037    257,862    243,341
                                                              =======    =======    =======

Options to purchase 56,181,714 shares of common stock at the weighted average price of $14.29 per share 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 at the weighted average prices of $3.22 and $23.60 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 warrants outstanding expire in February 2000 and June 2003. Put warrants to purchase 1,615,175 shares of common stock at the weighted average price of $13.08 per share 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 put warrants outstanding expired in February 2000.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

STOCK COMPENSATION PLANS

STOCK OPTION PLANS

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 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 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 Directors' Stock Option Plans, referred to as the Directors' Plans, Cadence may grant non-qualified options to its non-employee directors for up to 2,032,502 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 all are administered as if issued under their original plans. All of the Acquired Options have been adjusted to effectuate the price conversion under the terms of the Agreements and Plans of Reorganization between Cadence and the companies acquired. The Acquired Options generally become exercisable over a four or five year period and generally expire either five or 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)

A summary of the status of all of Cadence's stock option plans as of and during the years ended January 1, 2000, January 2, 1999, and January 3, 1998 follows:

                                             1999                     1998                      1997
                                    ----------------------   -----------------------   -----------------------
                                                  WEIGHTED                  WEIGHTED                  WEIGHTED
                                                  AVERAGE                   AVERAGE                   AVERAGE
                                                  EXERCISE                  EXERCISE                  EXERCISE
                                      SHARES       PRICE        SHARES       PRICE        SHARES       PRICE
                                    -----------   --------   ------------   --------   ------------   --------
Outstanding at beginning of
  year............................   42,678,756    $14.07      46,733,239    $11.28      46,775,913    $ 6.49
  Assumption of acquired companies
    options.......................    2,649,553    $ 5.78         816,334    $ 2.83              --        --
  Granted.........................   25,205,953    $14.48      13,510,326    $18.64      18,479,244    $16.88
  Exercised.......................   (6,658,815)   $ 7.64     (11,136,992)   $ 7.11     (15,698,160)   $ 3.45
  Forfeited.......................   (7,693,733)   $16.50      (7,244,151)   $14.04      (2,823,758)   $12.14
                                    -----------              ------------              ------------
Outstanding at end of year........   56,181,714    $14.29      42,678,756    $14.07      46,733,239    $11.28
                                    ===========              ============              ============
Options exercisable at end of
  year............................   21,226,714                17,493,945                17,971,289
Options available for future
  grant...........................   11,541,925                19,261,461                14,853,922
Weighted average fair value of
  options granted during the
  year............................  $      9.19              $      13.52              $       7.51

A summary of the status of all of Cadence's stock option plans at January 1, 2000 follows:

                                       OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                               ------------------------------------   ----------------------
                                              WEIGHTED
                                               AVERAGE     WEIGHTED                 WEIGHTED
                                 NUMBER       REMAINING    AVERAGE      NUMBER      AVERAGE
          RANGE OF             OUTSTANDING   CONTRACTUAL   EXERCISE   EXERCISABLE   EXERCISE
       EXERCISE PRICES         AT 1/1/2000      LIFE        PRICE     AT 1/1/2000    PRICE
-----------------------------  -----------   -----------   --------   -----------   --------
$ 0.02-$ 5.00................   4,059,235        3.86       $ 2.11     3,940,431     $ 2.12
$ 5.01-$10.00................   9,383,995        7.13       $ 7.07     6,326,329     $ 6.97
$10.01-$15.00................  23,695,229        8.90       $13.10     4,890,156     $13.79
$15.01-$20.00................   8,632,087        8.22       $18.13     3,048,771     $17.61
$20.01-$25.00................   7,048,881        8.28       $22.74     2,036,380     $22.70
$25.01-$30.00................   3,059,877        8.58       $27.07       793,965     $26.19
$30.01-$35.00................     271,610        8.53       $33.18       180,389     $34.06
$35.01-$40.00................      30,800        8.27       $35.07        10,293     $35.07
                               ----------                             ----------
Total........................  56,181,714                             21,226,714
                               ==========                             ==========

STOCK REPURCHASE PLAN

Cadence has authorized two seasoned systematic stock repurchase programs under which it repurchases common stock to satisfy estimated requirements for shares to be issued under its Employee Stock Purchase Plan, or ESPP, and the 1997 Plan. Such repurchases are intended to cover Cadence's expected reissuances under the ESPP and the 1997 Plan for the next 12 months and 24 months, respectively.

As part of its authorized repurchase program, Cadence has sold put warrants through private placements. At January 1, 2000, there were 1.6 million put warrants outstanding that entitle the holder to sell one share of common stock to Cadence on a specified date and at a specified price of $13.08 per share. Additionally, during this same period, Cadence purchased call options that entitle Cadence to buy one

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

share of common stock at a specified price to satisfy anticipated stock repurchase requirements under Cadence's systematic repurchase programs. At January 1, 2000, Cadence had 1.3 million call options outstanding at a price of $13.33 per share. The put warrants and call options outstanding at January 1, 2000 are exercisable in February 2000 and Cadence has the contractual ability to settle the options prior to their maturity. At January 1, 2000, the fair value of the call options was approximately $13.6 million and the fair value of the put warrants was approximately $0.1 million. The fair value of put warrants and call options was estimated by Cadence's investment bankers.

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 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 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 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 common stock. At January 1, 2000, 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. The effect of the exercise of these put warrants and call options is reported in the line titled "Purchase of treasury stock" within the consolidated statements of stockholders' equity.

EMPLOYEE STOCK PURCHASE PLAN

Under the ESPP, Cadence is authorized to issue up to 23,500,000 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. Under the ESPP, Cadence issued 2,110,222, 1,252,855 and 1,392,136 shares to employees in 1999, 1998, and 1997, respectively. The weighted average purchase price and the weighted average fair value of shares issued in 1999 was $12.56 and $16.59, respectively.

In November 1998, Cadence amended its ESPP providing 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, commencing in February 1999.

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. The fair value of Cadence's options granted and shares purchased under the ESPP program for years ended January 1, 2000, January 2, 1999, and January 3, 1998 reported below 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
                                                   ------------------------------
                                                     1999       1998       1997
                                                   --------   --------   --------
Risk-free interest rate..........................   5.90%      5.22%      6.20%
Volatility factors of the expected market price
  of Cadence common stock........................    62%        59%        44%
Weighted average expected life of an option......  5 Years    4 Years    4 Years

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                                 EMPLOYEE STOCK PURCHASE PLAN
                                               ---------------------------------
                                                 1999        1998        1997
                                               ---------   ---------   ---------
Risk-free interest rate, based on weighted
  average....................................    4.95%       5.21%       5.33%
Volatility factors of the expected market
  price of Cadence common stock..............     62%         59%         44%
Weighted average expected life of ESPP
  shares.....................................  0.5 Years   0.5 Years   0.5 Years

The Black-Scholes option valuation model was developed by the financial markets for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Cadence's options have characteristics significantly different from those of exchange traded options and changes in the subjective input assumptions can materially affect the fair value estimate. In management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options granted to its employees.

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 fixed 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:

                                                   1999           1998           1997
                                                ----------      ---------      ---------
                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss):
  As reported.............................      $ (14,075)      $ 25,124       $165,122
                                                =========       ========       ========
  Pro forma...............................      $(127,954)      $(57,569)      $120,977
                                                =========       ========       ========
Basic net income (loss) per share:
  As reported.............................      $   (0.06)      $   0.11       $   0.76
                                                =========       ========       ========
  Pro forma...............................      $   (0.53)      $  (0.25)      $   0.56
                                                =========       ========       ========
Diluted net income (loss) per share:
  As reported.............................      $   (0.06)      $   0.10       $   0.68
                                                =========       ========       ========
  Pro forma...............................      $   (0.53)      $  (0.25)      $   0.50
                                                =========       ========       ========

The effects of applying SFAS No. 123 on pro forma disclosures of net income
(loss) and net income (loss) per share for 1999, 1998, and 1997 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

At January 1, 2000, Cadence had warrants outstanding to purchase 254,237 and 140,000 shares of Cadence common stock at $23.60 and $3.22 per share, respectively. The warrants for 254,237 shares expired in February 2000. The warrant for 140,000 shares expires in June 2003 and can be exercised at any time in increments of not less than 50,000 shares.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

RESERVED FOR FUTURE ISSUANCE

At January 1, 2000, Cadence had reserved the following shares of authorized but unissued common stock for future issuance:

                                                                SHARES
                                                              ----------
Employee stock option plans.................................  66,073,969
ESPP........................................................   7,058,788
Director stock option plans.................................   1,642,170
Put warrants................................................   1,615,175
Warrants....................................................     394,237
Other option agreements.....................................       7,500
                                                              ----------
                                                              76,791,839
                                                              ==========

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 part of this plan, 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, referred to as a Right, par value $0.01 per share, of Cadence at a price of $240 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. As of February 1, 2000, Cadence has changed its Rights agent.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD

In November 1997, the FASB Emerging Issues Task Force issued Ruling 97-13 "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation," which requires companies to expense costs incurred for business process reengineering projects. As a result, Cadence recorded a $12.3 million charge in 1997, net of income taxes of $5.3 million, as a cumulative effect of change in accounting method for reengineering project costs that had been previously capitalized by Cadence associated with its implementation of enterprise-wide information systems. This change in accounting method reduced basic net income per share and diluted net income per share for 1997 by $0.06 and $0.05, respectively.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INCOME TAXES

The provision for income taxes consisted of the following components:

                                                  1999       1998       1997
                                                --------   --------   --------
                                                        (IN THOUSANDS)
Current:
  Federal.....................................  $ 16,391   $ 68,854   $107,251
  State.......................................     1,771     14,925     16,137
  Foreign.....................................    10,376     27,979     19,633
                                                --------   --------   --------
    Total current.............................    28,538    111,758    143,021
                                                --------   --------   --------
Deferred (prepaid):
  Federal.....................................   (22,074)   (37,257)   (68,633)
  State.......................................    (5,486)    (6,958)    (3,667)
  Foreign.....................................     1,717      7,379     (1,284)
                                                --------   --------   --------
    Total deferred (prepaid):.................   (25,843)   (36,836)   (73,584)
                                                --------   --------   --------
Total provision for income taxes..............  $  2,695   $ 74,922   $ 69,437
                                                ========   ========   ========

Income (loss) before income taxes included income of approximately $11.5 million for 1999, $1.6 million for 1998, and $144.8 million for 1997, from Cadence's foreign subsidiaries. The provision for income taxes is net of the benefit of operating loss carryforwards totaling $28.3 million for 1999, $3.9 million for 1998, and $3.6 million for 1997.

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:

                                                  1999          1998       1997
                                                --------      --------   --------
                                                         (IN THOUSANDS)
Provision computed at the federal statutory
  rate........................................  $ (3,983)     $ 35,017   $ 82,401
State income tax, net of federal tax effect...      (539)        7,125      9,498
Amortization of acquired intangibles..........   (11,429)        1,020        706
Write-off of in-process technology............     7,245        46,615         --
Foreign income tax at a higher (lower) rate...     3,014       (21,604)   (25,501)
Acquisition costs.............................     2,952        (2,679)     6,005
Foreign withholding taxes.....................        --         1,110      5,049
Foreign tax credit............................        --        (1,110)    (5,049)
Research and development tax credit...........    (5,219)       (6,891)    (4,925)
Change in valuation allowance.................    11,429        15,371     (1,714)
Other.........................................      (775)          948      2,967
                                                --------      --------   --------
  Provision for income taxes..................  $  2,695      $ 74,922   $ 69,437
                                                ========      ========   ========
Effective tax rate............................     (23.7)%        74.9%      29.6%
                                                ========      ========   ========

The provision for income taxes in 1997 includes a tax benefit of $5.3 million on cumulative effect of change in accounting method.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

                                                           1999        1998
                                                         ---------   --------
                                                            (IN THOUSANDS)
Deferred Tax Assets:
  Intangibles..........................................  $  53,625   $ 30,290
  Accruals and reserves................................     34,939     22,027
  Accrued intercompany royalty.........................     33,685     37,430
  Tax credits..........................................     24,238     22,827
  Sales returns and allowances.........................     20,865     19,890
  Net operating losses.................................     12,241     16,631
  Depreciation and amortization........................     10,293     15,521
  Restructure reserves.................................     10,069     12,920
  Other................................................     15,294      9,110
                                                         ---------   --------
    Total deferred tax assets..........................    215,249    186,646
Valuation allowance--provision for income taxes........    (21,105)    (9,676)
Valuation allowance--equity and intangibles............    (19,853)    (5,695)
                                                         ---------   --------
    Net deferred tax assets............................    174,291    171,275
                                                         ---------   --------
Deferred Tax Liabilities:
  Intangibles..........................................    (85,856)   (58,928)
  Other................................................    (17,577)    (9,744)
  Accrued intercompany royalty.........................     (9,624)   (10,694)
  Capitalized software.................................     (7,570)    (7,483)
                                                         ---------   --------
    Total deferred tax liabilities.....................   (120,627)   (86,849)
                                                         ---------   --------
      Total net deferred tax assets....................  $  53,664   $ 84,426
                                                         =========   ========

Cadence provides for U.S. income taxes on the earnings of foreign subsidiaries unless they are considered permanently invested outside of the U.S. At January 1, 2000, the cumulative amount of earnings upon which U.S. income taxes have not been provided are approximately $127.3 million. At January 1, 2000, the unrecognized deferred tax liability for these earnings was approximately $45.1 million.

The net valuation allowance increased by $25.6 million in 1999. The increase in valuation allowance--provision for income taxes of $11.4 million is due to the uncertainty of certain foreign subsidiaries generating sufficient taxable income to realize certain foreign deferred tax assets. The increase in valuation allowance-equity and intangibles of $14.2 million 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 and may not be available to offset future provision for income taxes.

The remaining net operating loss carryforwards will expire at various dates from 2000 through 2019 and federal tax credit carryforwards will expire at various dates from 2000 through 2014.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A dispute between Cadence and the Internal Revenue Service regarding $15.6 million in tax credits for the tax years 1989 through 1991 was settled during 1999 with no material adjustments to the returns as originally filed.

EMPLOYEE BENEFIT PLAN

Cadence maintains 401(k) savings plans to provide retirement benefits through tax deferred salary deductions for all its domestic employees. Cadence may make discretionary contributions, as determined by the Board of Directors, which cannot exceed a percentage of the annual aggregate salaries of those employees eligible to participate. Cadence made total contributions to the plans of $3.9 million, $4.2 million, and $3.8 million for 1999, 1998, and 1997, respectively.

In January 2000, Cadence amended its 401(k) plan to provide that Cadence will match contributions with 50% of every dollar contributed, up to a contribution level of 6% of the salaries of those employees who participate in the 401(k) plan.

STATEMENT OF CASH FLOWS

The supplemental cash flow information for 1999, 1998, and 1997 follows:

                                                                1999       1998       1997
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
Cash Paid During the Year for:
  Interest..................................................  $ 2,975    $  3,181   $  1,507
                                                              =======    ========   ========
  Income taxes (including foreign withholding tax)..........  $25,330    $ 12,091   $ 16,391
                                                              =======    ========   ========
Non-Cash Investing and Financing Activities:
  Capital lease obligations incurred for equipment..........  $ 7,727    $  1,505   $  2,570
                                                              =======    ========   ========
  Common and treasury stock issued for acquisitions.........  $21,201    $ 28,971   $  9,500
                                                              =======    ========   ========
  Unrealized holding gain on marketable securities..........  $36,249    $     37   $     78
                                                              =======    ========   ========
  Write-off of unearned deferred compensation...............  $    --    $     83   $     --
                                                              =======    ========   ========
Tax benefits from employee stock transactions...............  $10,305    $109,713   $124,040
                                                              =======    ========   ========

INTEGRATED MEASUREMENT SYSTEMS, INC.

In February 1997, Cadence and its subsidiary, Integrated Measurement Systems, Inc., or IMS, sold to the public 1.7 million shares of IMS common stock, of which approximately 1 million shares were sold by Cadence, netting Cadence approximately $18.6 million in cash. As a result of the offering and sale of shares by Cadence, Cadence's ownership interest in IMS decreased to approximately 37% from approximately 55%. Accordingly, Cadence changed the accounting for its investment in IMS from consolidation to the equity method of accounting in fiscal 1997. The likelihood of such transactions in the future is dependent upon the state of the financial markets as well as liquidity and other considerations of each of Cadence and IMS. IMS manufactures and markets verification systems used in testing prototype ASICs.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNUSUAL ITEMS AND RESTRUCTURING

Described below are unusual items and restructuring charges in 1999, 1998, and 1997:

                                                    1999       1998       1997
                                                  --------   --------   --------
                                                          (IN THOUSANDS)
Write-off of acquired in-process technology.....  $20,700    $194,100   $ 9,328
Asset impairment................................   19,891          --     3,065
Restructuring charges...........................   13,274      69,495    24,128
Merger costs....................................    8,436          --    11,489
Litigation settlement...........................   (3,000)         --        --
                                                  -------    --------   -------
  Total unusual items...........................  $59,301    $263,595   $48,010
                                                  =======    ========   =======

IN-PROCESS TECHNOLOGY

Described below are the write-offs of acquired in-process technology charges in 1999, 1998, and 1997:

                                                     1999       1998       1997
                                                   --------   --------   --------
                                                           (IN THOUSANDS)
OrCAD............................................  $11,800    $     --    $   --
DAI..............................................    8,900          --        --
Ambit............................................       --     106,500        --
BLDA.............................................       --      30,300        --
Symbionics.......................................       --      28,500        --
EXD..............................................       --      28,400        --
Other............................................       --         400        --
Synthesia AB.....................................       --          --     4,900
Arkos............................................       --          --     2,728
Advanced Microelectronics........................       --          --     1,700
                                                   -------    --------    ------
  Total write-offs of acquired in-process
    technology...................................  $20,700    $194,100    $9,328
                                                   =======    ========    ======

These acquired in-process technology charges represent in-process technology that had not reached technological feasibility and had no probable alternative future use. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations--In-Process Technology."

ASSET IMPAIRMENT

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In 1997, Cadence wrote-off capitalized software development costs of $3.1 million for products developed by Cadence that were replaced by CCT products or by license of replacement technology.

The impairment losses recorded were the amounts by which the carrying amounts of the intangible assets exceeded their fair market values.

RESTRUCTURING

Facilities consolidation charges of $2 million were incurred in connection with the closure of 15 Quickturn facilities, including $1 million to close duplicate and excess facilities and $1 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 costs written off consist of leasehold improvements of facilities that were abandoned and whose estimated fair market value is zero. As of January 1, 2000, approximately 80% of the 15 Quickturn sites had been vacated. Noncancelable lease payments on vacated facilities will be paid out through 2003.

In 1998, Cadence recorded $69.5 million of restructuring charges primarily associated with Cadence's worldwide restructuring plan in the second half of 1998. Cadence's restructuring plans and associated costs consisted of $36.9 million to terminate approximately 700 employees, $29.9 million to downsize and close excess facilities, and $2.7 million of other restructuring expenses. Cadence's restructuring plan was primarily aimed at reducing the cost of excess personnel and capacity in its services business. Severance costs included severance benefits, notice pay, and outplacement services. In 1998, approximately $10.1 million of these costs resulted from the acceleration of stock options vesting under employment agreements. All terminations and termination benefits were communicated to the affected employees prior to year-end and all remaining severance benefits were substantially paid in 1999.

Facilities consolidation charges of $29.9 million were incurred in connection with the closure of 58 sales and engineering facilities, including $16.7 million to downsize and close facilities and $13.2 million in abandonment costs for the related leasehold improvements. Closure and exit costs included 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 costs written-off consist of leasehold improvements of facilities that were abandoned and whose estimated fair market value is zero. As of January 1, 2000, substantially all of the 58 sites had been vacated. Noncancelable lease payments on vacated facilities will be paid out through 2008.

Cadence also recorded $2.7 million of other restructuring charges consisting primarily of cancellation fees associated with certain vendor and conference arrangements and abandoned software.

In 1997, Cadence recorded restructuring charges of $24.1 million. These charges relate to restructuring plans primarily aimed at reducing costs after Cadence merged with CCT and acquired HLDS.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Cadence's restructuring plans and associated costs consisted of $11.9 million to terminate approximately 230 employees, $4.4 million to close duplicate and excess facilities, and $3.7 million of other expenses associated with the business combinations. Also included in the restructuring costs were professional fees of $4.1 million for financial advisors, attorneys, and accountants related to the international restructuring program. The remaining severance balances were paid out in 1998 and all facilities were vacated. Noncancelable lease payments on vacated facilities will be paid out through 2000.

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 the Company's restructuring activity during fiscal years 1999, 1998, and 1997:

                                             SEVERANCE
                                                AND        EXCESS         OTHER
                                             BENEFITS    FACILITIES   RESTRUCTURING    ASSETS     TOTAL
                                             ---------   ----------   -------------   --------   --------
                                                                    (IN THOUSANDS)
Balance, December 28, 1996.................  $    655      $ 1,072       $    --      $    --    $  1,727
  1997 restructuring charges                   11,895        2,102         7,784        2,347      24,128
  Non-cash charges.........................        --           --            --       (2,347)     (2,347)
  Cash charges.............................   (10,263)        (536)       (5,273)          --     (16,072)
                                             --------      -------       -------      -------    --------
Balance, January 3, 1998...................     2,287        2,638         2,511           --       7,436
  1998 restructuring charges                   36,860       16,749         2,718       13,168      69,495
  Non-cash charges.........................   (10,095)      (1,364)           --       (1,862)    (13,321)
  Cash charges.............................   (15,937)      (3,527)       (3,016)          (2)    (22,482)
                                             --------      -------       -------      -------    --------
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 charges.........................      (356)        (813)         (241)      (4,543)     (5,953)
  Cash charges.............................   (15,502)      (8,376)       (2,047)      (1,760)    (27,685)
                                             --------      -------       -------      -------    --------
Balance, January 1, 2000...................  $  8,013      $ 6,464       $   426      $ 5,861    $ 20,764
                                             ========      =======       =======      =======    ========

MERGER COSTS

In connection with the acquisitions in 1999 and 1997, Cadence charged to expense Quickturn merger costs of $8.4 million and CCT and SpeedSim merger costs of $11.5 million, respectively, 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 U.S. Mentor is permanently enjoined from producing, marketing or selling SimExpress emulation systems in the U.S. In connection with the settlement, Mentor paid Cadence $3 million.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OTHER INCOME, NET

Other income, net components for 1999, 1998, and 1997 follows:

                                                     1999       1998       1997
                                                   --------   --------   --------
                                                           (IN THOUSANDS)
Interest income..................................  $ 5,406    $13,501    $20,922
Minority interest income (expense)...............      125       (256)      (353)
Equity income (loss) from investments............      124       (889)     1,934
Gain on sale of stock of subsidiary..............       --         --     13,061
Other expense, net...............................     (389)      (872)    (3,239)
Gain (loss) on foreign exchange..................     (600)     2,809     (1,155)
Interest expense.................................   (3,296)    (3,735)    (2,780)
                                                   -------    -------    -------
  Total other income, net........................  $ 1,370    $10,558    $28,390
                                                   =======    =======    =======

SEGMENT REPORTING

In 1998, Cadence adopted Statement of Financial Accounting Standards, or SFAS, No. 131, "Disclosures about Segments of an Enterprise and Related Information." Under SFAS No. 131, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker when deciding how to allocate resources and when assessing performance. Cadence currently has three operating segments: Products, Services, and Maintenance. Cadence's chief operating decision making group is the Executive Staff, which includes Cadence's President and Chief Executive Officer and his senior staff.

Cadence's business activities are organized on the basis of three operating segments. The Products segment designs and licenses to customers a variety of electronic design automation products. The Services segment offers 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 is primarily a technical support organization, and maintenance agreements are offered to customers either as part of our product license agreements or separately. Cadence's organizational structure reflects this segmentation and segments have not been aggregated for purposes of this disclosure.

Segment income from operations is defined as gross margin under generally accepted accounting principles and excludes 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 intersegment revenue or expenses.

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 is allocated among the segments in order to determine each segments' gross margin.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following tables present information about reported segments for the years ended January 1, 2000, January 2, 1999, and January 3, 1998:

                                                          PRODUCT    SERVICES   MAINTENANCE      OTHER       TOTAL
                                                          --------   --------   ------------   ---------   ----------
                                                                                (IN THOUSANDS)
1999:
  Revenue...............................................  $505,459   $294,916     $292,928     $      --   $1,093,303
  Cost of revenue.......................................    79,504    191,760       53,579            --      324,843
  Amortization of acquired intangibles..................    55,962      5,826           --            --       61,788
                                                          --------   --------     --------     ---------   ----------
    Gross margin........................................   369,993     97,330      239,349            --      706,672
  Marketing and sales...................................        --         --           --      (354,205)    (354,205)
  Research and development..............................        --         --           --      (219,181)    (219,181)
  General and administrative............................        --         --           --       (86,735)     (86,735)
  Unusual items.........................................        --         --           --       (59,301)     (59,301)
  Other income, net.....................................        --         --           --         1,370        1,370
                                                          --------   --------     --------     ---------   ----------
  Income (loss) before provision for income taxes and
    cumulative effect of change in accounting method....  $369,993   $ 97,330     $239,349     $(718,052)  $  (11,380)
                                                          ========   ========     ========     =========   ==========
  Depreciation and amortization.........................  $ 85,919   $ 21,987     $  2,280     $  53,710   $  163,896
                                                          ========   ========     ========     =========   ==========
1998:
  Revenue...............................................  $760,441   $265,211     $294,528     $      --   $1,320,180
  Cost of revenue.......................................    77,513    188,793       52,386            --      318,692
  Amortization of acquired intangibles..................    14,800      3,672           --            --       18,472
                                                          --------   --------     --------     ---------   ----------
    Gross margin........................................   668,128     72,746      242,142            --      983,016
  Marketing and sales...................................        --         --           --      (340,295)    (340,295)
  Research and development..............................        --         --           --      (202,810)    (202,810)
  General and administrative............................        --         --           --       (86,828)     (86,828)
  Unusual items.........................................        --         --           --      (263,595)    (263,595)
  Other income, net.....................................        --         --           --        10,558       10,558
                                                          --------   --------     --------     ---------   ----------
  Income (loss) before provision for income taxes and
    cumulative effect of change in accounting method....  $668,128   $ 72,746     $242,142     $(882,970)  $  100,046
                                                          ========   ========     ========     =========   ==========
  Depreciation and amortization.........................  $ 40,537   $ 16,297     $  2,307     $  49,964   $  109,105
                                                          ========   ========     ========     =========   ==========
1997:
  Revenue...............................................  $618,340   $168,789     $249,644     $      --   $1,036,773
  Cost of revenue.......................................    74,181    117,407       34,038            --      225,626
  Amortization of acquired intangibles..................     2,424         36           --            --        2,460
                                                          --------   --------     --------     ---------   ----------
    Gross margin........................................   541,735     51,346      215,606            --      808,687
  Marketing and sales...................................        --         --           --      (299,829)    (299,829)
  Research and development..............................        --         --           --      (167,245)    (167,245)
  General and administrative............................        --         --           --       (69,897)     (69,897)
  Unusual items.........................................        --         --           --       (48,010)     (48,010)
  Other income, net.....................................        --         --           --        28,390       28,390
                                                          --------   --------     --------     ---------   ----------
  Income (loss) before provision for income taxes and
    cumulative effect of change in accounting method....  $541,735   $ 51,346     $215,606     $(556,591)  $  252,096
                                                          ========   ========     ========     =========   ==========
  Depreciation and amortization.........................  $ 22,184   $  8,411     $  1,880     $  33,171   $   65,646
                                                          ========   ========     ========     =========   ==========

Internationally, excluding Japan, Cadence markets and supports its products and services primarily through its subsidiaries and various distributors. Following a reorganization of Cadence's distribution channel in Japan in 1997, Cadence licenses its products through Innotech Corporation, in which Cadence is an approximately 18% stockholder. Cadence markets its methodology and design services in Japan through a wholly-owned subsidiary.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Revenues are attributed to geographic areas based on the country in which the customer is domiciled. In 1999, 1998, and 1997, 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.

The following table presents a summary of revenues and long-lived assets by geographic region for years ended January 1, 2000, January 2, 1999, and January 3, 1998:

                                             1999                      1998                      1997
                                    -----------------------   -----------------------   -----------------------
                                                 LONG-LIVED                LONG-LIVED                LONG-LIVED
                                     REVENUES      ASSETS      REVENUES      ASSETS      REVENUES      ASSETS
                                    ----------   ----------   ----------   ----------   ----------   ----------
North America:
  United States...................  $  526,824    $273,542    $  676,567    $233,050    $  509,557    $191,720
  Other...........................      25,853       3,843        36,710       3,995        17,977       2,164
                                    ----------    --------    ----------    --------    ----------    --------
    Total North America...........     552,677     277,385       713,277     237,045       527,534     193,884
                                    ----------    --------    ----------    --------    ----------    --------
Europe:
  United Kingdom..................      94,037      37,250        85,010      21,349        40,988       2,644
  Germany.........................      38,839         860        54,953       1,328        53,449       1,357
  Other...........................     122,736       3,231       130,630       4,180       100,666       3,111
                                    ----------    --------    ----------    --------    ----------    --------
    Total Europe..................     255,612      41,341       270,593      26,857       195,103       7,112
                                    ----------    --------    ----------    --------    ----------    --------
Japan and Asia:
  Japan...........................     223,425       5,079       261,239       2,381       253,511       2,083
  Asia............................      61,589       6,604        75,071       7,925        60,625       5,460
                                    ----------    --------    ----------    --------    ----------    --------
    Total Japan and Asia..........     285,014      11,683       336,310      10,306       314,136       7,543
                                    ----------    --------    ----------    --------    ----------    --------
                                    $1,093,303    $330,409    $1,320,180    $274,208    $1,036,773    $208,539
                                    ==========    ========    ==========    ========    ==========    ========

SUBSEQUENT EVENTS

In January 2000, Cadence's Board of Directors approved the 2000 Non-Statutory Stock Option Plan, referred to as the 2000 Plan which provides for the issuance of non-qualified options to its employees to purchase up to 10,000,000 shares of Cadence common stock at an exercise price not less than the fair market value of the common stock on the date of grant. Options granted under the 2000 Plan become exercisable over periods up to four years, with, generally, 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.

In February 2000, the Board of Directors approved a 15,000,000 share increase for stock repurchases. This increase included authorization to repurchase 5,000,000 shares on a systematic basis to meet share issuance requirements of Cadence's newly adopted 2000 Plan and authorization to repurchase 10,000,000 shares on a non-systematic basis to be used for general corporate purposes. Cadence is now authorized to repurchase an aggregate of 13,000,000 shares for the 1997 Plan, 5,000,000 for the 2000 Plan, 13,400,000 shares for the ESPP, and 10,000,000 shares for general corporate purposes.

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, as amended, and Rule 14d-10 thereunder. The lawsuit arises out of Cadence's acquisition of OrCAD, which was completed in August 1999. Management believes the action is without merit and intends to vigorously defend it.

CADENCE DESIGN SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)

SCHEDULE II

                                                             ADDITIONS
                                                      ------------------------
                                         BALANCE AT   CHARGED TO     CHARGED                     BALANCE AT
                                         BEGINNING    COSTS AND     TO OTHER                       END OF
DESCRIPTION                              OF PERIOD     EXPENSES    ACCOUNTS(2)   DEDUCTIONS(1)     PERIOD
-----------                              ----------   ----------   -----------   -------------   ----------
Deducted from asset accounts:
Provisions for losses on trade accounts
  receivable and sales returns:
  Year Ended January 1, 2000...........    $22,989      $9,070       $33,963       $(21,434)       $44,588
  Year Ended January 2, 1999...........    $26,080      $7,687       $ 3,314       $(14,092)       $22,989
  Year Ended January 3, 1998...........    $13,695      $  438       $27,467       $(15,520)       $26,080

(1) Uncollectible accounts written-off, net of recoveries, and sales returns allowance offset against revenues.

(2) Sales returns allowance offset against revenue.

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 24, 2000

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                                                         March 24, 2000
-------------------------------------------
H. Raymond Bingham
PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)

/s/ WILLIAM PORTER                                                             March 24, 2000
-------------------------------------------
William Porter
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING
OFFICER)

ADDITIONAL DIRECTORS

                     NAME/TITLE                                                     DATE
                     ----------                                                     ----
/s/ DONALD L. LUCAS
-------------------------------------------                                    March 24, 2000
Donald L. Lucas

/s/ CAROL BARTZ
-------------------------------------------                                    March 24, 2000
Carol Bartz

/s/ DR. LEONARD Y. W. LIU
-------------------------------------------                                    March 24, 2000
Dr. Leonard Y. W. Liu

/s/ DR. ALBERTO SANGIOVANNI-VINCENTELLI
-------------------------------------------                                    March 24, 2000
Dr. Alberto Sangiovanni-Vincentelli

/s/ GEORGE M. SCALISE
-------------------------------------------                                    March 24, 2000
George M. Scalise

/s/ DR. JOHN B. SHOVEN
-------------------------------------------                                    March 24, 2000
Dr. John B. Shoven

/s/ ROGER SIBONI
-------------------------------------------                                    March 24, 2000
Roger Siboni

EXHIBIT 4.02

AMENDED AND RESTATED

RIGHTS AGREEMENT

Amended and Restated Rights Agreement, dated as of February 1, 2000, between Cadence Design Systems, Inc., a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability company (the "Rights Agent").

The Board of Directors of the Company authorized and declared a dividend of one preferred share purchase right (a "Right") for each share of Common Stock (as hereinafter defined) of the Company outstanding as of the close of business (as defined below) on February 20, 1996 (the "Record Date"), each Right representing the right to purchase one one-thousandth (subject to adjustment) of a share of Preferred Stock (as hereinafter defined), upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right (subject to adjustment as provided herein) with respect to each share of Common Stock that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are hereinafter defined); provided, however, that Rights may be issued with respect to shares of Common Stock that shall become outstanding after the Distribution Date and prior to the Redemption Date and the Final Expiration Date in accordance with Section 22.

The Company entered into that certain Rights Agreement, dated as of February 9, 1996, between Cadence Design Systems, Inc., a Delaware corporation (the "Company"), and Harris Trust and Savings Bank, a national banking association ("Harris Trust").

The Company has appointed ChaseMellon Shareholder Services, L.L.C. as its transfer agent and desires that it replace Harris Trust as rights agent pursuant to this Agreement and amend the Agreement solely to change the rights agent.

Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows:

Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meaning indicated:

(a) "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the shares of Common Stock then outstanding, but shall not include an Exempt Person (as such term is hereinafter defined); provided, however, that if the Board of Directors of the Company determines in good faith that a Person who would otherwise

be an "Acquiring Person" has become such inadvertently (including, without limitation, because (i) such Person was unaware that it beneficially owned a percentage of Common Stock that would otherwise cause such Person to be an "Acquiring Person" or (ii) such Person was aware of the extent of its Beneficial Ownership of Common Stock but had no actual knowledge of the consequences of such Beneficial Ownership under this Rights Agreement) and without any intention of changing or influencing control of the Company, and such Person, as promptly as practicable divested or divests himself or itself of Beneficial Ownership of a sufficient number of shares of Common Stock so that such Person would no longer be an Acquiring Person, then such Person shall not be deemed to be or to have become an "Acquiring Person" for any purposes of this Agreement. Notwithstanding the foregoing, (i) if a Person would be deemed an Acquiring Person upon the adoption of this Agreement because of Beneficial Ownership of between 15% and 20% of the shares of stock on such date, such Person will not be deemed an Acquiring Person for any purposes of this Agreement unless and until such Person acquires Beneficial Ownership of any additional shares of Common Stock after the adoption of this Agreement unless upon the consummation of the acquisition of such additional shares of Common Stock such Person does not beneficially own 15% or more of the shares of Common Stock then outstanding and (ii) no Person shall become an "Acquiring Person" as the result of an acquisition of shares of Common Stock by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the shares of Common Stock then outstanding, provided, however, that if a Person shall become the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding by reason of such share acquisitions by the Company and thereafter become the Beneficial Owner of any additional shares of Common Stock, then such Person shall be deemed to be an "Acquiring Person" unless upon the consummation of the acquisition of such additional shares of Common Stock such Person does not own 15% or more of the shares of Common Stock then outstanding. The phrase "then outstanding", when used with reference to a Person's Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder.

(b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this Agreement.

(c) A Person shall be deemed the "Beneficial Owner" of, shall be deemed to have "Beneficial Ownership" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates is deemed to beneficially own, directly or indirectly within the meaning of Rule 13d-3 of the General Rules and Regulations under the Exchange Act as in effect on the date of this Agreement; (ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a

bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, (x) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase, (y) securities which such Person has a right to acquire on the exercise of Rights at any time prior to the time a Person becomes an Acquiring Person or (z) securities issuable upon exercise of Rights from and after the time a Person becomes an Acquiring Person if such Rights were acquired by such Person or any of such Person's Affiliates or Associates prior to the Distribution Date or pursuant to Section 3(a) or Section 22 hereof ("original Rights") or pursuant to Section 11(i) or Section 11(n) with respect to an adjustment to original Rights; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security by reason of such agreement, arrangement or understanding if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section 1(c)(ii)(B)) or disposing of any securities of the Company.

(d) "Business Day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the State of New York, or the State in which the principal office of the Rights Agent is located, are authorized or obligated by law or executive order to close.

(e) "Close of Business" on any given date shall mean 5:00 P.M., New York City time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M., New York City time, on the next succeeding Business Day.

(f) "Common Stock" when used with reference to the Company shall mean the common stock, presently par value $.01 per share, of the Company. "Common Stock" when used with reference to any Person other than the Company shall mean the capital stock (or, in the case of an unincorporated entity, the equivalent equity interest) with the greatest voting power of such other Person or, if such other Person is a subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person.

(g) "Distribution Date" shall have the meaning set forth in Section 3 hereof.

(h) "Exempt Person" shall mean the Company, any Subsidiary (as such term is hereinafter defined) of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any entity or trustee holding Common Stock for or pursuant to the terms of any such plan or for the purpose of funding any such plan or funding other employee benefits for employees of the Company or of any Subsidiary of the Company.

(i) "Final Expiration Date" shall have the meaning set forth in Section 7 hereof.

(j) "New York Stock Exchange" shall mean the stock market operated by the New York Stock Exchange, Inc.

(k) "Person" shall mean any individual, firm, corporation, limited liability company, trust, partnership or other entity, and shall include any successor (by merger or otherwise) of such entity.

(l) "Preferred Stock" shall mean the Series A Junior Participating Preferred Stock, par value $.01 per share, of the Company having the rights and preferences set forth in the Form of Amended Certificate of Designations attached to this Agreement as Exhibit A.

(m) "Redemption Date" shall have the meaning set forth in
Section 7 hereof.

(n) "Securities Act" shall mean the Securities Act of 1933, as amended.

(o) "Stock Acquisition Date" shall mean the first date of public announcement (which for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such or such earlier date as a majority of the Board of Directors shall become aware of the existence of an Acquiring Person.

(p) "Subsidiary" of any Person shall mean any corporation or other entity of which securities or other ownership interests having ordinary voting power sufficient to elect a majority of the board of directors or other persons performing similar functions are beneficially owned, directly or indirectly, by such Person, and any corporation or other entity that is otherwise controlled by such Person.

Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable.

Section 3. Issue of Right Certificates. (a) Until the earlier of (i) the tenth day after the Stock Acquisition Date or (ii) the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any Person becomes an Acquiring Person) after the date of the commencement by any Person (other than an Exempt Person) of, or of the first public announcement of the intention of such Person (other than an Exempt Person) to

commence, a tender or exchange offer the consummation of which would result in any Person becoming the Beneficial Owner of shares of Common Stock aggregating 15% or more of the Common Stock then outstanding (including any such date which is after the date of this Agreement and prior to the issuance of the Rights; the earlier of such dates being herein referred to as the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for Common Stock registered in the names of the holders thereof and not by separate Right Certificates, and (y) the Rights will be transferable only in connection with the transfer of Common Stock. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested, send) by first-class, insured, postage-prepaid mail, to each record holder of Common Stock as of the Close of Business on the Distribution Date (other than any Acquiring Person or any Associate or Affiliate of an Acquiring Person), at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of Exhibit B hereto (a "Right Certificate"), evidencing one Right (subject to adjustment as provided herein) for each share of Common Stock so held. As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates.

(b) On the Record Date, or as soon as practicable thereafter, the Company will send a copy of a Summary of Rights to Purchase Shares of Preferred Stock, in substantially the form of Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of Common Stock as of the Close of Business on the Record Date (other than any Acquiring Person or any Associate or Affiliate of any Acquiring Person), at the address of such holder shown on the records of the Company. With respect to certificates for Common Stock outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with the Summary of Rights. Until the Distribution Date (or the earlier of the Redemption Date or the Final Expiration Date), the surrender for transfer of any certificate for Common Stock outstanding on the Record Date, with or without a copy of the Summary of Rights, shall also constitute the transfer of the Rights associated with the Common Stock represented thereby.

(c) Certificates issued for Common Stock (including, without limitation, upon transfer of outstanding Common Stock, disposition of Common Stock out of treasury stock or issuance or reissuance of Common Stock out of authorized but unissued shares) after the Record Date but prior to the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend:

This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement between Cadence Design Systems, Inc. and ChaseMellon Shareholder Services, L.L.C., dated as of February 1, 2000, as the same may be amended from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Cadence Design Systems, Inc. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Cadence Design Systems, Inc. will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. Under certain circumstances, as set forth in the

Rights Agreement, Rights owned by or transferred to any Person who becomes an Acquiring Person (as defined in the Rights Agreement) and certain transferees thereof will become null and void and will no longer be transferable. With respect to such certificates containing the foregoing legend, until the Distribution Date, the Rights associated with the Common Stock represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate, except as otherwise provided herein, shall also constitute the transfer of the Rights associated with the Common Stock represented thereby. In the event that the Company purchases or otherwise acquires any Common Stock after the Record Date but prior to the Distribution Date, any Rights associated with such Common Stock shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Stock which are no longer outstanding.

Notwithstanding this paragraph (c), the omission of a legend shall not affect the enforceability of any part of this Agreement or the rights of any holder of the Rights.

Section 4. Form of Right Certificates. The Right Certificates (and the forms of election to purchase shares and of assignment to be printed on the reverse thereof) shall be substantially in the form set forth in Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate which do not affect the duties and responsibilities of the Rights Agent, and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of the New York Stock Exchange or of any other stock exchange or automated quotation system on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Sections 11, 13 and 22 hereof, the Right Certificates shall entitle the holders thereof to purchase such number of one one-thousandths of a share of Preferred Stock as shall be set forth therein at the price per one one-thousandth of a share of Preferred Stock set forth therein (the "Purchase Price"), but the number of such one one-thousandths of a share of Preferred Stock and the Purchase Price shall be subject to adjustment as provided herein.

Section 5. Countersignature and Registration. (a) The Right Certificates shall be executed on behalf of the Company by the Chairman of the Board of Directors, the President, any of the Vice Presidents, the Treasurer or the Controller of the Company, either manually or by facsimile signature, shall have affixed thereto the Company's seal or a facsimile thereof, and shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Right Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the Person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any Person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Agreement any such Person was not such an officer.

(b) Following the Distribution Date, and receipt by the Rights Agent of written notice and a list of record holders of the Rights referred to in Section 3(a) hereof, the Rights Agent will keep or cause to be kept, at an office or agency designated pursuant to
Section 26 hereof for such purpose, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates.

Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. (a) Subject to the provisions of Sections 7(e), 11(a)(ii) and 14 hereof, at any time after the Close of Business on the Distribution Date, and prior to the Close of Business on the earlier of the Redemption Date or the Final Expiration Date, any Right Certificate or Right Certificates may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of one one-thousandths of a share of Preferred Stock as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the office or agency of the Rights Agent designated for such purpose. Thereupon the Rights Agent shall countersign and deliver to the Person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. The Rights Agent shall not be required to process any transaction unless and until it receives written evidence that all taxes and governmental charges have been paid in full.

(b) Subject to the provisions of Section 11(a)(ii) hereof, at any time after the Distribution Date and prior to the Close of Business on the earlier of the Redemption Date or the Final Expiration Date, upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will make and deliver a new Right Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered holder in lieu of the Right Certificate so lost, stolen, destroyed or mutilated.

Section 7. Exercise of Rights, Purchase Price; Expiration Date of Rights. (a) Except as otherwise provided herein, the Rights shall become exercisable on the Distribution Date, and thereafter the registered holder of any Right Certificate may, subject to Section 11(a)(ii) hereof and except as otherwise provided herein, exercise the Rights evidenced thereby in whole or in part upon surrender of the Right Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at the office or agency of the Rights Agent designated for such purpose, together with payment of the Purchase Price for each one one-thousandth of a share of Preferred Stock as to which the Rights are exercised, at any time which

is both after the Distribution Date and prior to the earliest of (i) the Close of Business on February 9, 2006 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date") or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof.

(b) The Purchase Price shall be initially $240 for each one one-thousandth of a share of Preferred Stock purchasable upon the exercise of a Right. The Purchase Price and the number of one one-thousandths of a share of Preferred Stock or other securities or property to be acquired upon exercise of a Right shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) of this Section 7.

(c) Except as otherwise provided herein, upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase duly executed, accompanied by payment of the aggregate Purchase Price for the shares of Preferred Stock to be purchased and an amount equal to any applicable tax or governmental charge required to be paid by the holder of such Right Certificate in accordance with Section 9 hereof, in cash or by certified check, cashier's check or money order payable to the order of the Company, the Rights Agent shall thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Stock certificates for the number of shares of Preferred Stock to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) requisition from the depositary agent depositary receipts representing interests in such number of one one-thousandths of a share of Preferred Stock as are to be purchased (in which case certificates for the Preferred Stock represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby directs the depositary agent to comply with such request, (ii) when necessary to comply with this Agreement, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) promptly after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder and (iv) when necessary to comply with this Agreement, after receipt, promptly deliver such cash to or upon the order of the registered holder of such Right Certificate.

(d) Except as otherwise provided herein, in case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the exercisable Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of Section 14 hereof.

(e) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder of Rights upon the occurrence of any purported transfer or exercise of Rights pursuant to Section 6 hereof or this Section 7 unless such registered holder shall have (i) properly completed and signed the certificate contained in the form of assignment or election to purchase set forth on the reverse side of the Rights Certificate

surrendered for such transfer or exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) thereof as the Company or the Rights Agents shall reasonably request.

Section 8. Cancellation and Destruction of Right Certificates. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Right Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Right Certificates, and in such case shall deliver a certificate of destruction thereof to the Company.

Section 9. Availability of Shares of Preferred Stock. (a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued shares of Preferred Stock or any shares of Preferred Stock held in its treasury, the number of shares of Preferred Stock that will be sufficient to permit the exercise in full of all outstanding Rights.

(b) So long as the shares of Preferred Stock (and, following the time that a Person becomes an Acquiring Person, shares of Common Stock and other securities) issuable upon the exercise of Rights may be listed or admitted to trading on the New York Stock Exchange or listed on any other national securities exchange or quotation system, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable, all shares reserved for such issuance to be listed or admitted to trading on the New York Stock Exchange or listed on any other exchange or quotation system upon official notice of issuance upon such exercise.

(c) From and after such time as the Rights become exercisable, the Company shall use its best efforts, if then necessary to permit the issuance of shares of Preferred Stock (and following the time that a Person first becomes an Acquiring Person, shares of Common Stock and other securities) upon the exercise of Rights, to register and qualify such shares of Preferred Stock (and following the time that a Person first becomes an Acquiring Person, shares of Common Stock and other securities) under the Securities Act and any applicable state securities or "Blue Sky" laws (to the extent exemptions therefrom are not available), cause such registration statement and qualifications to become effective as soon as possible after such filing and keep such registration and qualifications effective until the earlier of the date as of which the Rights are no longer exercisable for such securities and the Final Expiration Date. The Company may temporarily suspend, for a period of time not to exceed 90 days, the exercisability of the Rights in order to prepare and file a registration statement under the Securities Act and permit it to become effective. Upon any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer

in effect. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction unless the requisite qualification in such jurisdiction shall have been obtained and until a registration statement under the Securities Act (if required) shall have been declared effective.

(d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all shares of Preferred Stock (and, following the time that a Person becomes an Acquiring Person, shares of Common Stock and other securities) delivered upon exercise of Rights shall, at the time of delivery of the certificates therefor (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares.

(e) The Company further covenants and agrees that it will pay when due and payable any and all taxes and governmental charges which may be payable in respect of the issuance or delivery of the Right Certificates or of any shares of Preferred Stock (or shares of Common Stock or other securities) upon the exercise of Rights. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer or delivery of Right Certificates to a Person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Stock (or shares of Common Stock or other securities) in a name other than that of, the registered holder of the Right Certificate evidencing Rights surrendered for exercise or to issue or deliver any certificates or depositary receipts for Preferred Stock (or shares of Common Stock or other securities) upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by that holder of such Right Certificate at the time of surrender) or until it has been established to the Company's reasonable satisfaction that no such tax is due.

Section 10. Preferred Stock Record Date. Each Person in whose name any certificate for Preferred Stock is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the shares of Preferred Stock represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Stock transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Stock transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate shall not be entitled to any rights of a holder of Preferred Stock for which the Rights shall be exercisable, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein.

Section 11. Adjustment of Purchase Price, Number of Shares and Number of Rights. The Purchase Price, the number of shares of Preferred Stock or other securities or property purchasable upon exercise of each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11.

(a)(i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of Preferred Stock or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Stock transfer books of the Company were open, the holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. (ii) Subject to Section 24 of this Agreement and except as otherwise provided in this Section 11(a)(ii), in the event any Person becomes an Acquiring Person, each holder of a Right shall thereafter have the right to receive, upon exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-thousandths of a share of Preferred Stock for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of shares of Preferred Stock, such number of shares of Common Stock (or at the option of the Company, such number of one one- thousandths of shares of Preferred Stock) as shall equal the result obtained by (x) multiplying the then current Purchase Price by the number of one one-thousandths of a share of Preferred Stock for which a Right is then exercisable and dividing that product by (y) 50% of the then current per share market price of the Company's Common Stock (determined pursuant to Section 11(d) hereof) on the date of the occurrence of such event; provided, however, that the Purchase Price and the number of shares of Common Stock so receivable upon exercise of a Right shall thereafter be subject to further adjustment as appropriate in accordance with Section 11(f) hereof. Notwithstanding anything in this Agreement to the contrary, however, from and after the time (the "invalidation time") when any Person first becomes an Acquiring Person, any Rights that are beneficially owned by (x) any Acquiring Person (or any Affiliate or Associate of any Acquiring Person), (y) a transferee of any Acquiring Person (or any such Affiliate or Associate) who becomes a transferee after the invalidation time or (z) a transferee of any Acquiring Person (or any such Affiliate or Associate) who became a transferee prior to or concurrently with the invalidation time pursuant to either (I) a transfer from the Acquiring Person to holders of its equity securities or to any Person with whom it has any continuing agreement, arrangement or understanding regarding the transferred Rights or (II) a transfer which the Board of Directors has determined is part of an agreement, arrangement or understanding which has the purpose or effect of avoiding the provisions of this paragraph, and subsequent transferees of such Persons, shall be void without any further action and any holder of such Rights shall thereafter have no rights whatsoever with respect to such Rights under

any provision of this Agreement. The Company shall use all reasonable efforts to ensure that the provisions of this Section 11(a)(ii) are complied with, but shall have no liability to any holder of Right Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person or its Affiliates, Associates or transferees hereunder. From and after the invalidation time, no Right Certificate shall be issued pursuant to Section 3 or Section 6 hereof that represents Rights that are or have become void pursuant to the provisions of this paragraph, and any Right Certificate delivered to the Rights Agent that represents Rights that are or have become void pursuant to the provisions of this paragraph shall be cancelled. From and after the occurrence of an event specified in Section 13(a) hereof, any Rights that theretofore have not been exercised pursuant to this
Section 11(a)(ii) shall thereafter be exercisable only in accordance with Section 13 and not pursuant to this Section 11(a)(ii). (iii) The Company may at its option substitute for a share of Common Stock issuable upon the exercise of Rights in accordance with the foregoing subparagraph (ii) such number or fractions of shares of Preferred Stock having an aggregate current market value equal to the current per share market price of a share of Common Stock. In the event that there shall not be sufficient shares of Common Stock issued but not outstanding or authorized but unissued to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii), the Board of Directors shall, to the extent permitted by applicable law and any material agreements then in effect to which the Company is a party (A) determine the excess of
(1) the value of the shares of Common Stock issuable upon the exercise of a Right in accordance with the foregoing subparagraph
(ii) (the "Current Value") over (2) the then current Purchase Price multiplied by the number of one one-thousandths of shares of Preferred Stock for which a Right was exercisable immediately prior to the time that the Acquiring Person became such (such excess, the "Spread"), and (B) with respect to each Right (other than Rights which have become void pursuant to Section 11(a)(ii)), make adequate provision to substitute for the shares of Common Stock issuable in accordance with subparagraph (ii) upon exercise of the Right and payment of the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3) shares of Preferred Stock or other equity securities of the Company (including, without limitation, shares or fractions of shares of preferred stock which, by virtue of having dividend, voting and liquidation rights substantially comparable to those of the shares of Common Stock, are deemed in good faith by the Board of Directors to have substantially the same value as the shares of Common Stock (such shares of Preferred Stock and shares or fractions of shares of preferred stock are hereinafter referred to as "Common Stock equivalents"), (4) debt securities of the Company,
(5) other assets, or (6) any combination of the foregoing, having a value which, when added to the value of the shares of Common Stock actually issued upon exercise of such Right, shall have an aggregate value equal to the Current Value (less the amount of any reduction in the Purchase Price), where such aggregate value has been determined by the Board of Directors upon the advice of a nationally recognized investment banking firm selected in good faith by the Board of Directors; provided, however, if the Company shall not make adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the date that the Acquiring Person became such (the "Section 11(a)(ii) Trigger Date"), then the Company shall be obligated to deliver, to the extent permitted by applicable law and any material agreements then in effect to which the Company is a party, upon the

surrender for exercise of a Right and without requiring payment of the Purchase Price, shares of Common Stock (to the extent available), and then, if necessary, such number or fractions of shares of Preferred Stock (to the extent available) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. If, upon the date any Person becomes an Acquiring Person, the Board of Directors shall determine in good faith that it is likely that sufficient additional shares of Common Stock could be authorized for issuance upon exercise in full of the Rights, then, if the Board of Directors so elects, the thirty (30) day period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek stockholder approval for the authorization of such additional shares (such thirty (30) day period, as it may be extended, is herein called the "Substitution Period"). To the extent that the Company determines that some action need be taken pursuant to the second and/or third sentence of this Section 11(a)(iii), the Company (x) shall provide, subject to Section 11(a)(ii) hereof and the last sentence of this
Section 11(a)(iii) hereof, that such action shall apply uniformly to all outstanding Rights and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such second sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section
11(a)(iii), the value of the shares of Common Stock shall be the current per share market price (as determined pursuant to Section
11(d)(i)) on the Section 11(a)(ii) Trigger Date and the per share or fractional value of any "Common Stock equivalent" shall be deemed to equal the current per share market price of the Common Stock. The Board of Directors of the Company may, but shall not be required to, establish procedures to allocate the right to receive shares of Common Stock upon the exercise of the Rights among holders of Rights pursuant to this Section 11(a)(iii).

(b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Stock entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Stock (or shares having the same rights, privileges and preferences as the Preferred Stock ("equivalent preferred shares")) or securities convertible into Preferred Stock or equivalent preferred shares at a price per share of Preferred Stock or equivalent preferred shares (or having a conversion price per share, if a security convertible into shares of Preferred Stock or equivalent preferred shares) less than the then current per share market price of the Preferred Stock (determined pursuant to Section 11(d) hereof) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of shares of Preferred Stock and equivalent preferred shares outstanding on such record date plus the number of shares of Preferred Stock and equivalent preferred shares which the aggregate offering price of the total number of shares of Preferred Stock and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price, and the denominator of which shall

be the number of shares of Preferred Stock and equivalent preferred shares outstanding on such record date plus the number of additional shares of Preferred Stock and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. Shares of Preferred Stock and equivalent preferred shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed.

(c) In case the Company shall fix a record date for the making of a distribution to all holders of the Preferred Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend or a dividend payable in Preferred Stock) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price of the Preferred Stock (determined pursuant to Section 11(d) hereof) on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company whose determination shall be described in a statement filed with the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one share of Preferred Stock, and the denominator of which shall be such current per share market price (determined pursuant to Section 11(d) hereof) of the Preferred Stock; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company to be issued upon exercise of one Right. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed.

(d) (i) Except as otherwise provided herein, for the purpose of any computation hereunder, the "current per share market price" of any security (a "Security" for the purpose of this Section
11(d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that in the event that the current per share market price of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities

convertible into such shares, or (B) any subdivision, combination or reclassification of such Security, and prior to the expiration of 30 Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price shall be appropriately adjusted to reflect the current market price per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported by the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day.

(ii) For the purpose of any computation hereunder, if the Preferred Stock is publicly traded, the "current per share market price" of the Preferred Stock shall be determined in accordance with the method set forth in Section 11(d)(i). If the Preferred Stock is not publicly traded but the Common Stock is publicly traded, the "current per share market price" of the Preferred Stock shall be conclusively deemed to be the current per share market price of the Common Stock as determined pursuant to Section 11(d)(i) multiplied by one thousand (appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof). If neither the Common Stock nor the Preferred Stock is publicly traded, "current per share market price" shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent.

(e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one ten-thousandth of a share of Preferred Stock or share of Common Stock or other share or security as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the date of the expiration of the right to exercise any Rights.

(f) If as a result of an adjustment made pursuant to
Section 11(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than the Preferred Stock, thereafter the Purchase Price and the number of such other shares so receivable upon exercise of a Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Stock contained in Sections 11(a), 11(b),
11(c), 11(e), 11(h), 11(i) and 11(m), and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like terms to any such other shares.

(g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-thousandths of a share of Preferred Stock purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein.

(h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-thousandths of a share of Preferred Stock (calculated to the nearest one ten-thousandth of a share of Preferred Stock) obtained by (i) multiplying (x) the number of one one-thousandths of a share covered by a Right immediately prior to such adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price.

(i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of one one-thousandths of a share of Preferred Stock purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one-thousandths of a share of Preferred Stock for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights and provide a copy of such public announcement to the Rights Agent, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company may, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such

adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement.

(j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-thousandths of a share of Preferred Stock issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of one one-thousandths of a share of Preferred Stock which were expressed in the initial Right Certificates issued hereunder.

(k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then par value, if any, of the Preferred Stock or other shares of capital stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of Preferred Stock or other such shares at such adjusted Purchase Price.

(l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date of the Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. The Company shall notify the Rights Agent in writing of any adjustment in the Purchase Price and/or its election of deferment.

(m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any consolidation or subdivision of the Preferred Stock, issuance wholly for cash of any shares of Preferred Stock at less than the current market price, issuance wholly for cash or Preferred Stock or securities which by their terms are convertible into or exchangeable for Preferred Stock, dividends on Preferred Stock payable in shares of Preferred Stock or issuance of rights, options or warrants referred to hereinabove in Section 11(b), hereafter made by the Company to holders of its Preferred Stock shall not be taxable to such stockholders.

(n) Anything in this Agreement to the contrary notwithstanding, in the event that at any time after the date of this Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on the Common Stock payable in Common Stock or (ii) effect a subdivision, combination or consolidation of the Common Stock (by reclassification or otherwise than by payment of a dividend payable in Common Stock) into a greater or lesser number of Common Stock, then in any such case, the number of Rights associated with each share of Common Stock then outstanding, or issued or delivered thereafter, shall be proportionately adjusted so that the number of Rights thereafter associated with each share of Common Stock following any such event shall equal the result obtained by multiplying the number of Rights associated with each share of Common Stock immediately prior to such event by a fraction the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of shares of Common Stock outstanding immediately following the occurrence of such event.

(o) The Company agrees that, after the earlier of the Distribution Date or the Stock Acquisition Date, it will not, except as permitted by Sections 23, 24 or 27 hereof, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or eliminate the benefits intended to be afforded by the Rights.

Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Section 11 or 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment, and a brief, reasonably detailed statement of the facts, computations and methodology of accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Common Stock or the Preferred Stock a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate in accordance with Section 25 hereof (if so required under Section 25 hereof). The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained and shall not be deemed to have knowledge of any such adjustment unless and until it shall have received such certificate.

Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earnings Power. (a) In the event, directly or indirectly, at any time after any Person has become an Acquiring Person, (i) the Company shall merge with and into any other Person, (ii) any Person shall consolidate with the Company, or any Person shall merge with and into the Company and the Company shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the Common Stock shall be changed into or exchanged for stock or other securities of any other Person (or of the Company) or cash or any other property, or (iii) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person (other than the Company or one or more of its wholly-owned Subsidiaries), then upon the first occurrence of such event, proper provision shall be made so that: (A) each holder of record of a Right (other than Rights which have become void pursuant to Section 11(a)(ii)) shall thereafter have the right to receive, upon the exercise thereof at a price equal to

the then current Purchase Price multiplied by the number of one one-thousandths of a share of Preferred Stock for which a Right was exercisable (whether or not such Right was then exercisable) immediately prior to the time that any Person first became an Acquiring Person (each as subsequently adjusted thereafter pursuant to Sections 11(a)(i), 11(b), 11(c),
11(h), 11(i) and 11(m)), in accordance with the terms of this Agreement and in lieu of Preferred Stock, such number of validly issued, fully paid and non-assessable and freely tradeable shares of Common Stock of the Principal Party (as defined herein) not subject to any liens, encumbrances, rights of first refusal or other adverse claims, as shall be equal to the result obtained by (1) multiplying the then current Purchase Price by the number of one one-thousandths of a share of Preferred Stock for which a Right was exercisable immediately prior to the time that any Person first became an Acquiring Person (as subsequently adjusted thereafter pursuant to Sections
11(a)(i), 11(b), 11(c), 11(h), 11(i) and 11(m)) and (2) dividing that product by 50% of the then current per share market price of the Common Stock of such Principal Party (determined pursuant to Section 11(d)(i) hereof) on the date of consummation of such consolidation, merger, sale or transfer; provided that the Purchase Price and the number of shares of Common Stock of such Principal Party issuable upon exercise of each Right shall be further adjusted as provided in Section 11(f) of this Agreement to reflect any events occurring in respect of such Principal Party after the date of the such consolidation, merger, sale or transfer; (B) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer, all the obligations and duties of the Company pursuant to this Agreement; (C) the term "Company" shall thereafter be deemed to refer to such Principal Party; and (D) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of its shares of Common Stock in accordance with Section 9 hereof) in connection with such consummation of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the shares of its Common Stock thereafter deliverable upon the exercise of the Rights; provided that, upon the subsequent occurrence of any consolidation, merger, sale or transfer of assets or other extraordinary transaction in respect of such Principal Party, each holder of a Right shall thereupon be entitled to receive, upon exercise of a Right and payment of the Purchase Price as provided in this Section
13(a), such cash, shares, rights, warrants and other property which such holder would have been entitled to receive had such holder, at the time of such transaction, owned the Common Stock of the Principal Party receivable upon the exercise of a Right pursuant to this Section 13(a), and such Principal Party shall take such steps (including, but not limited to, reservation of shares of stock) as may be necessary to permit the subsequent exercise of the Rights in accordance with the terms hereof for such cash, shares, rights, warrants and other property.

(b) "Principal Party" shall mean (i) in the case of any transaction described in (i) or (ii) of the first sentence of Section 13(a) hereof: (A) the Person that is the issuer of the securities into which the shares of Common Stock are converted in such merger or consolidation, or, if there is more than one such issuer, the issuer the shares of Common Stock of which have the greatest aggregate market value of shares outstanding, or (B) if no securities are so issued, (x) the Person that is the other party to the merger, if such Person survives said merger, or, if there is more than one such Person, the Person the shares of Common Stock of which have the greatest aggregate market value of shares outstanding or (y) if the Person that is the other party to the merger does not survive the

merger, the Person that does survive the merger (including the Company if it survives) or (z) the Person resulting from the consolidation; and

(ii) in the case of any transaction described in
(iii) of the first sentence in Section 13(a) hereof, the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions, or, if each Person that is a party to such transaction or transactions receives the same portion of the assets or earning power so transferred or if the Person receiving the greatest portion of the assets or earning power cannot be determined, whichever of such Persons as is the issuer of Common Stock having the greatest aggregate market value of shares outstanding; provided, however, that in any such case described in the foregoing clause (b)(i) or
(b)(ii), if the Common Stock of such Person is not at such time or has not been continuously over the preceding 12-month period registered under Section 12 of the Exchange Act, then
(1) if such Person is a direct or indirect Subsidiary of another Person the Common Stock of which is and has been so registered, the term "Principal Party" shall refer to such other Person, or (2) if such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Stock of all of which is and has been so registered, the term "Principal Party" shall refer to whichever of such Persons is the issuer of Common Stock having the greatest aggregate market value of shares outstanding, or (3) if such Person is owned, directly or indirectly, by a joint venture formed by two or more Persons that are not owned, directly or indirectly, by the same Person, the rules set forth in clauses
(1) and (2) above shall apply to each of the owners having an interest in the venture as if the Person owned by the joint venture was a Subsidiary of both or all of such joint venturers, and the Principal Party in each such case shall bear the obligations set forth in this Section 13 in the same ratio as its interest in such Person bears to the total of such interests.

(c) The Company shall not consummate any consolidation, merger, sale or transfer referred to in Section 13(a) hereof unless prior thereto the Company and the Principal Party involved therein shall have executed and delivered to the Rights Agent an agreement confirming that the requirements of Sections 13(a) and (b) hereof shall promptly be performed in accordance with their terms and that such consolidation, merger, sale or transfer of assets shall not result in a default by the Principal Party under this Agreement as the same shall have been assumed by the Principal Party pursuant to Sections 13(a) and
(b) hereof and providing that, as soon as practicable after executing such agreement pursuant to this Section 13, the Principal Party will:

(i) prepare and file a registration statement under the Securities Act, if necessary, with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, use its best efforts to cause such registration statement to become effective as soon as practicable after such filing and use its best efforts to cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the Final Expiration Date, and similarly comply with applicable state securities laws;

(ii) use its best efforts, if the Common Stock of the Principal Party shall be listed or admitted to trading on the New York Stock Exchange or on a national securities exchange, to list or admit to trading (or continue the listing of) the Rights and the securities purchasable upon exercise of the Rights on the New York Stock Exchange or such securities exchange, or, if the Common Stock of the Principal Party shall not be listed or admitted to trading on the New York Stock Exchange or a national securities exchange, to cause the Rights and the securities receivable upon exercise of the Rights to be reported by such other system then in use;

(iii) deliver to holders of the Rights historical financial statements for the Principal Party which comply in all respects with the requirements for registration on Form 10 (or any successor form) under the Exchange Act; and

(iv) obtain waivers of any rights of first refusal or preemptive rights in respect of the Common Stock of the Principal Party subject to purchase upon exercise of outstanding Rights.

(d) In case the Principal Party has provision in any of its authorized securities or in its certificate of incorporation or by-laws or other instrument governing its corporate affairs, which provision would have the effect of (i) causing such Principal Party to issue (other than to holders of Rights pursuant to this Section 13), in connection with, or as a consequence of, the consummation of a transaction referred to in this Section 13, shares of Common Stock of such Principal Party at less than the then current market price per share thereof (determined pursuant to Section 11(d) hereof) or securities exercisable for, or convertible into, Common Stock of such Principal Party at less than such then current market price, or (ii) providing for any special payment, tax or similar provision in connection with the issuance of the Common Stock of such Principal Party pursuant to the provisions of Section 13, then, in such event, the Company hereby agrees with each holder of Rights that it shall not consummate any such transaction unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing that the provision in question of such Principal Party shall have been cancelled, waived or amended, or that the authorized securities shall be redeemed, so that the applicable provision will have no effect in connection with, or as a consequence of, the consummation of the proposed transaction.

(e) The Company covenants and agrees that it shall not, at any time after a Person first becomes an Acquiring Person, enter into any transaction of the type contemplated by (i) - (iii) of Section 13(a) hereof if (x) at the time of or immediately after such consolidation, merger, sale, transfer or other transaction there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights, (y) prior to, simultaneously with or immediately after such consolidation, merger, sale, transfer of other transaction, the stockholders of the Person who constitutes, or would constitute, the Principal Party for purposes of Section 13(a) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates

or Associates or (z) the form or nature of organization of the Principal Party would preclude or limit the exercisability of the Rights.

Section 14. Fractional Rights and Fractional Shares. (a) The Company shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used.

(b) The Company shall not be required to issue fractions of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock) upon exercise of the Rights or to distribute certificates which evidence fractional shares of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock). Interests in fractions of Preferred Stock in integral multiples of one one-thousandth of a share of Preferred Stock may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; provided, that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Stock represented by such depositary receipts. In lieu of fractional shares of Preferred Stock that are not integral multiples of one one-thousandth of a share of Preferred Stock, the Company shall pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one share of Preferred Stock. For the purposes of this Section 14(b), the current market value of a share of Preferred Stock shall be the closing price of a share of Preferred Stock (as determined pursuant to Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of such exercise.

(c) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above).

Section 15. Rights of Action. All rights of action in respect of this Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of the Common Stock); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Stock), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Stock), on his own behalf and for his own benefit, may enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Right Certificate (or, prior to the Distribution Date, such Common Stock) in the manner provided in such Right Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person subject to this Agreement.

Section 16. Agreement of Right Holders. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that:

(a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Stock;

(b) after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the office or agency of the Rights Agent designated for such purpose, duly endorsed or accompanied by a proper instrument of transfer; and

(c) the Company and the Rights Agent may deem and treat the Person in whose name the Right Certificate (or, prior to the Distribution Date, the Common Stock certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the Common Stock certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary.

Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Stock or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or

withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in this Agreement), or to receive dividends or subscription rights, or otherwise, until the Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof.

Section 18. Concerning the Rights Agent. (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration preparation, delivery, amendment, and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, damage, judgment, fine, penalty, claim, demand, settlement, cost or expense, incurred without gross negligence, bad faith or willful misconduct on the part of the Rights Agent, for any action taken, suffered or omitted by the Rights Agent in connection with the execution, acceptance and administration of this Agreement and the exercise and performance hereunder of its duties, including without limitation the costs and expenses of defending against any claim of liability arising therefrom, directly or indirectly. The indemnity provided herein shall survive termination of this Agreement and the termination and expiration of the Rights. The costs and expenses incurred in enforcing this right of indemnification shall be paid by the Company. Anything to the contrary notwithstanding, in no event shall the Rights Agent be liable for special, punitive, indirect, consequential or incidental loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Rights Agent has been advised of the possibility of such loss or damage, any liability of the Rights Agent under this Agreement will be limited to the amount of fees paid by the Company to the Rights Agent hereunder.

(b) The Rights Agent shall be authorized and protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, it's the acceptance and administration of this Agreement in reliance upon any Right Certificate or certificate for the Preferred Stock or Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained. The Rights Agent shall not be deemed to have any duty or notice unless and until the Company has provided the Rights Agent with written consent.

Section 19. Merger or Consolidation or Change of Name of Rights Agent. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the stock transfer or corporate trust powers of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof.

(b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement.

Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations expressly imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound:

(a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent and the Rights Agent shall incur no liability for or in respect of any action taken, suffered or omitted by it in good faith and in accordance with such opinion.

(b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board of Directors, the President, any Vice President, the Treasurer, the Controller or the Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization and protection to the Rights Agent and the Rights Agent shall incur no liability for or in respect of any action taken, suffered or omitted in good faith by it under the provisions of this Agreement in reliance upon such certificate.

(c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own negligence, bad faith or willful misconduct.

(d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only.

(e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights
(including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any

adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Sections 3, 11, 13, 23 and 24, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after receipt of a certificate furnished pursuant to Section 12, describing such change or adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Preferred Stock or other securities to be issued pursuant to this Agreement or any Right Certificate or as to whether any shares of Preferred Stock or other securities will, when issued, be validly authorized and issued, fully paid and nonassessable.

(f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement.

(g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any person reasonably believed by the Rights Agent to be one of the Chairman of the Board of Directors, the President, the Chief Financial Officer or the Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties, and such instructions shall be full authorization and protection to the Rights Agent and the Rights Agent shall incur no liability for or in respect of any action taken, suffered or omitted by it in good faith in accordance with written instructions of any such officer or for any delay in acting while waiting for those instructions. The Rights Agent may conclusively rely on the most recent instructions given by any such officer. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken, suffered or omitted by the Rights Agent under this Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Rights Agent shall not be liable for any action taken, suffered or omitted by the Rights Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than five Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken, suffered or omitted.

(h) The Rights Agent and any stockholder, affiliate, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity.

(i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, absent gross negligence, bad faith or willful misconduct in the selection and continued employment thereof.

(j) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate contained in the form of assignment or the form of election to purchase set forth on the reverse thereof, as the case may be, has not been completed to certify the holder is not an Acquiring Person (or an Affiliate or Associate thereof), a Rights Agent shall not take any further action with respect to such requested exercise or transfer without first consulting with the Company.

Section 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Common Stock or Preferred Stock by registered or certified mail, and, following the Distribution Date, to the holders of the Right Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock or Preferred Stock by registered or certified mail, and, following the Distribution Date, to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a Person organized and doing business under the laws of the United States or any State thereof, which is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock or Preferred Stock, and, following the Distribution Date, mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Right Certificates shall have been countersigned but not

delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement.

Section 22. Issuance of New Right Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such forms as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of Common Stock following the Distribution Date and prior to the earlier of the Redemption Date and the Final Expiration Date, the Company may with respect to shares of Common Stock so issued or sold pursuant to (i) the exercise of stock options, (ii) under any employee plan or arrangement, (iii) upon the exercise, conversion or exchange of securities notes or debentures issued by the Company or (iv) a contractual obligation of the Company in each case existing prior to the Distribution Date, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale.

Section 23. Redemption. (a) The Board of Directors of the Company may, at any time prior to such time as any Person first becomes an Acquiring Person, redeem all but not less than all the then outstanding Rights at a redemption price of $.01 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (the redemption price being hereinafter referred to as the "Redemption Price"). The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish.

(b) Immediately upon the action of the Board of Directors ordering the redemption of the Rights pursuant to paragraph (a) of this
Section 23 (or at such later time as the Board of Directors may establish for the effectiveness of such redemption), and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give public notice of any such redemption; provided, however, that the failure to give, or any defect in, any such notice shall not affect the validity of such redemption. Within 10 days after such action of the Board of Directors ordering the redemption of the Rights (or such later time as the Board of Directors may establish for the effectiveness of such redemption), the Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption shall state the method by which the payment of the Redemption Price will be made.

Section 24. Exchange. (a) The Board of Directors of the Company may, at its option, at any time after any Person first becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become null and void pursuant to the provisions of
Section 11(a)(ii) hereof) for shares of Common Stock at an exchange ratio of one share of Common Stock per Right, (such exchange ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after (1) any Person (other than an Exempt Person), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of shares of Common Stock aggregating 50% or more of the shares of Common Stock then outstanding or
(2) the occurrence of an event specified in Section 13(a) hereof.

(b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of the holders of such Rights shall be to receive that number of shares of Common Stock equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company shall promptly mail a notice of any such exchange to all of the holders of the Rights so exchanged at their last addresses as they appear upon the registry books of the Rights Agent and to the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the shares of Common Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 11(a)(ii) hereof) held by each holder of Rights.

(c) In the event that there shall not be sufficient shares of Common Stock issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company may, in its discretion, take such action as may be necessary to authorize additional shares of Common Stock for issuance upon exchange of the Rights. In the event that the Company shall determine not to take such action or shall, after good faith effort, be unable to take such action as may be necessary to authorize such additional shares of Common Stock, the Company shall substitute, to the extent of such insufficiency, for each share of Common Stock that would otherwise be issuable upon exchange of a Right, a number of shares of Preferred Stock or fractions thereof (or equivalent preferred shares as such term is defined in Section 11(b)) having an aggregate current per share market price (determined pursuant to Section 11(d) hereof) equal to the current per share market price of one share of Common Stock (determined pursuant to Section 11(d) hereof) as of the date of issuance of such shares of Preferred Stock or fractions thereof (or equivalent preferred shares).

(d) The Company shall not, in connection with any exchange pursuant to this Section 24, be required to issue fractions of shares of Common Stock or to distribute

certificates which evidence fractional shares of Common Stock. In lieu of such fractional shares of Common Stock, the Company shall pay to the registered holders of the Right Certificates with regard to which such fractional shares of Common Stock would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole share of Common Stock. For the purposes of this paragraph (d), the current market value of a whole share of Common Stock shall be the closing price of a share of Common Stock
(as determined pursuant to the second sentence of Section 11(d)(i)
hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24.

Section 25. Notice of Certain Events. (a) In case the Company shall at any time after the earlier of the Distribution Date or the Stock Acquisition Date propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Stock or to make any other distribution to the holders of its Preferred Stock (other than a regular quarterly cash dividend), (ii) to offer to the holders of its Preferred Stock rights or warrants to subscribe for or to purchase any additional shares of Preferred Stock or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Stock (other than a reclassification involving only the subdivision of outstanding Preferred Stock), (iv) to effect the liquidation, dissolution or winding up of the Company, or (v) to declare or pay any dividend on the Common Stock payable in Common Stock or to effect a subdivision, combination or consolidation of the Common Stock (by reclassification or otherwise than by payment of dividends in Common Stock), then, in each such case, the Company shall give to the Rights Agent and to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the date on which such liquidation, dissolution or winding up is to take place and the date of participation therein by the holders of the Common Stock and/or Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 10 days prior to the record date for determining holders of the Preferred Stock for purposes of such action, and in the case of any such other action, at least 10 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Stock and/or Preferred Stock, whichever shall be the earlier.

(b) In case any event described in Section 11(a)(ii) or
Section 13 shall occur then the Company shall as soon as practicable thereafter give to each holder of a Right Certificate (or if occurring prior to the Distribution Date, the holders of the Common Stock) in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) and Section 13 hereof.

Section 26. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows:

Cadence Design Systems, Inc. 555 River Oaks Parkway

San Jose, California 95134 Attention: Corporate Secretary

Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows:

ChaseMellon Shareholder Services, L.L.C.

235 Montgomery Street, 23rd Floor
San Francisco, CA 94104

Tel: 415-743-1429
Attention: Daniel W. Spengel, Asst. Vice President

Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company.

Section 27. Supplements and Amendments. Except as provided in the penultimate sentence of this Section 27, for so long as the Rights are then redeemable, the Company may in its sole and absolute discretion, and the Rights Agent shall if the Company so directs, supplement or amend any provision of this Agreement in any respect without the approval of any holders of the Rights. At any time when the Rights are no longer redeemable, except as provided in the penultimate sentence of this Section 27, the Company may, and the Rights Agent shall, if the Company so directs, supplement or amend this Agreement without the approval of any holders of Rights Certificates in order to (i) cure any ambiguity, (ii) correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) shorten or lengthen any time period hereunder, or (iv) change or supplement the provisions hereunder in any manner which the Company may deem necessary or desirable; provided that no such supplement or amendment shall adversely affect the interests of the holders of Rights as such (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person), and no such amendment may cause the rights again to become redeemable or cause the Agreement again to become amendable other than in accordance with this sentence. Notwithstanding anything contained in this Agreement to the contrary, no supplement or amendment shall be made which changes the Redemption Price. Anything to the contrary notwithstanding the Rights Agent cannot be required to change or increase its duties and obligations hereunder unless expressly consented to in writing by the Rights Agent. Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment.

Section 28. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.

Section 29. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Stock).

Section 30. Severability. If any term, provision, covenant or restriction of this Agreement or applicable to this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

Section 31. Governing Law. This Agreement and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State.

Section 32. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.

Section 33. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written.

Attest: CADENCE DESIGN SYSTEMS, INC.

By By

Name: Name:
Title: Title:

Attest: CHASEMELLON SHAREHOLDER SERVICES, L.L.C.

By                                      By

Name:                                   Name:
Title:                                  Title:

FORM

AMENDED

CERTIFICATE OF DESIGNATIONS

SERIES A JUNIOR PARTICIPATING PREFERRED STOCK

CADENCE DESIGN SYSTEMS, INC.

(Pursuant to Section 151 of the

General Corporation Law of the State of Delaware)

Cadence Design Systems, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Company"), hereby certifies that the following resolution was duly adopted by the Board of Directors of the Company as required by Section 151 of the General Corporation Law of the State of Delaware at a meeting duly called and held on February 9, 1996:

RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of the Company (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Company's Certificate of Incorporation, (hereinafter called the "Certificate of Incorporation"), the Board of Directors on May 26, 1989 adopted a resolution creating a series of shares of Preferred Stock, $.01 par value, designated as Series A Junior Participating Preferred Stock and filed such designation with the Secretary of State of Delaware on June 8, 1989, no shares of which have been issued as of February 9, 1996; and the Board of Directors on February 9, 1996 adopted the following resolution to amend and restate the terms of such Preferred Stock; and be it further

RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of the Delaware General Corporation Law and the Certificate of Incorporation, the Series A Junior Participating Preferred Stock of the Corporation heretofore created be, and that the designation thereof and the powers, designations, preferences and relative, participating, optional or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are hereby amended and restated as follows:

Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 400,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into Series A Preferred Stock.

Section 2. Dividends and Distributions.

(A) Subject to the rights of the holders of any shares of any series of Preferred Stock of the Company (the "Preferred Stock") (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $.01 per share of the Company (the "Common Stock") and of any other stock of the Company ranking junior to the Series A Preferred Stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of January, April, July, and October in each year (each such date being referred to herein as a "Dividend Payment Date"), commencing on the first Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or
(b) subject to the provision for adjustment hereinafter set forth, 1000 times the aggregate per share amount of all cash dividends, and 1000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock, declared on the Common Stock since the immediately preceding Dividend Payment Date or, with respect to the first Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Company shall at any time after February 9, 1996, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(B) The Company shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Dividend Payment Date and the next subsequent Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable, when, as and if declared, on such subsequent Dividend Payment Date.

(C) Dividends shall begin to accrue and be cumulative, whether or not earned or declared, on outstanding shares of Series A Preferred Stock from the Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof.

Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights;

(A) Subject to the provision for adjustment hereinafter set forth and except as otherwise provided in the Certificate of Incorporation or required by law, each share of Series A Preferred Stock shall entitle the holder thereof to 1000 votes on all matters upon which the holders of the Common Stock of the Company are entitled to vote. In the event the Company shall at any time after February 9, 1996, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(B) Except as otherwise provided herein, in the Certificate of Incorporation or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, and except as otherwise required by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Company having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Company.

(C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.

Section 4. Certain Restrictions.

(A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not earned or declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Company shall not:

(i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (as to dividends) to the Series A Preferred Stock;

(ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (as to dividends) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Company ranking junior (as to dividends and upon dissolution, liquidation or winding up) to the Series A Preferred Stock or rights, warrants or options to acquire such junior stock;

(iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

(B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.

Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof.

Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Company, no distribution shall be made (A) to the holders of the Common Stock or of shares of any other stock of the Company ranking junior, upon liquidation, dissolution or winding up, to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $1000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not earned or declared, to the

date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (B) to the holders of shares of stock ranking on a parity upon liquidation, dissolution or winding up with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Company shall at any time after February 9, 1996 declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (A) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

Section 7. Consolidation, Merger, etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are converted into, exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly converted into, exchanged for or changed into an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is converted, exchanged or converted. In the event the Company shall at any time after February 9, 1996 declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the conversion, exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable from any holder.

Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Company, junior to all other series of Preferred Stock and senior to the Common Stock.

Section 10. Amendment. If any proposed amendment to the Certificate of Incorporation (including this Certificate of Designations) would alter, change or repeal any of the preferences, powers or special rights given to the Series A Preferred Stock so as to affect the Series A

Preferred Stock adversely, then the holders of the Series A Preferred Stock shall be entitled to vote separately as a class upon such amendment, and the affirmative vote of two-thirds of the outstanding shares of the Series A Preferred Stock, voting separately as a class, shall be necessary for the adoption thereof, in addition to such other vote as may be required by the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, this Amended Certificate of Designations is executed on behalf of the Company by its Executive Vice President and Chief Financial Officer and attested by its Secretary this 9th day of February, 1996.

/s/ H. Raymond Bingham
Executive Vice President and
Chief Financial Officer

EXHIBIT B

FORM OF RIGHT CERTIFICATE

Certificate No. R-___ ___ Rights

NOT EXERCISABLE AFTER FEBRUARY 9, 2006 OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS OWNED BY OR TRANSFERRED TO ANY PERSON WHO BECOMES AN ACQUIRING PERSON (AS DEFINED IN THE RIGHTS AGREEMENT) AND CERTAIN TRANSFEREES THEREOF WILL BECOME NULL AND VOID AND WILL NO LONGER BE TRANSFERABLE.

RIGHT CERTIFICATE

Cadence Design Systems, Inc.

This certifies that ___________ or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of February 9, 1996 and amended and restated as of January __, 2000, as the same may be amended from time to time (the "Rights Agreement"), between Cadence Design Systems, Inc., a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability company (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., New York City time, on February 9, 2006 at the office or agency of the Rights Agent designated for such purpose, or of its successor as Rights Agent, one one-thousandth of a fully paid non-assessable share of Series A Junior Participating Preferred Stock, par value $.01 per share (the "Preferred Stock"), of the Company, at a purchase price of $240 per one one-thousandth of a share of Preferred Stock (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Rights Certificate (and the number of one one-thousandths of a share of Preferred Stock which may be purchased upon exercise hereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of February 9, 1996, based on the Preferred Stock as constituted at such date. As provided in the Rights Agreement, the Purchase Price, the number of one one-thousandths of a share of Preferred Stock (or other securities or property) which may be purchased upon the exercise of the Rights and the number of Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events.

This Right Certificate is subject to all of the terms, covenants and restrictions of the Rights Agreement, which terms, covenants and restrictions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal executive offices of the Company and the above-mentioned office or agency of the Rights Agent. The Company will mail to the holder of this Right Certificate a copy of the Rights Agreement without charge after receipt of a written request therefor.

This Right Certificate, with or without other Right Certificates, upon surrender at the office or agency of the Rights Agent designated for such purpose, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of shares of Preferred Stock as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised.

Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate (i) may be redeemed by the Company at a redemption price of $.01 per Right or (ii) may be exchanged in whole or in part for shares of Preferred Stock or shares of the Company's Common Stock, par value $.01 per share.

No fractional shares of Preferred Stock will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement.

No holder of this Right Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Stock or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement) or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement.

This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent.

WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of _____________.

ATTEST:                                 CADENCE DESIGN SYSTEMS, INC.

By:                                     By:
   -----------------------------------     --------------------------------
Countersigned:
                                         ----------------------------------
                                                 as Rights Agent

                                        By:
                                           --------------------------------
                                                 Authorized Signature

Form of Reverse Side of Right Certificate

FORM OF ASSIGNMENT

(To be executed by the registered holder if such holder desires to transfer the Right Certificate)

FOR VALUE RECEIVED _________________________ hereby sells, assigns and transfer unto ___________________________________________________________
(Please print name and address of transferee)

Rights represented by this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ___________________ Attorney, to transfer said Rights on the books of the within-named Company, with full power of substitution.

Dated:

Signature

Signature Guaranteed:

Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States.

(To be completed)

The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by, were not acquired by the undersigned from, and are not being assigned to, an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement).

Signature

Form of Reverse Side of Right Certificate - continued

FORM OF ELECTION TO PURCHASE

(To be executed if holder desires to exercise Rights represented by the Rights Certificate)

To Cadence Design Systems, Inc.:

The undersigned hereby irrevocably elects to exercise _________________ Rights represented by this Right Certificate to purchase the shares of Preferred Stock (or other securities or property) issuable upon the exercise of such Rights and requests that certificates for such shares of Preferred Stock (or such other securities) be issued in the name of:

(Please print name and address)

If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivery to: Please insert social security or other identifying number

(Please print name and address)

Dated:

Signature

(Signature must conform to holder specified on Right Certificate)

Signature Guaranteed:

Signature must be guaranteed by a member of firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States.

Form of Reverse Side of Right Certificate - continued

(To be completed)

The undersigned certifies that the Rights evidenced by this Right Certificate are not beneficially owned by, and were not acquired by the undersigned from, an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement)

Signature

NOTICE

The signature in the Form of Assignment or Form of Election to Purchase, as the case may be, must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment or the Form of Election to Purchase, as the case may be, is not completed, such Assignment or Election to Purchase will not be honored.

Exhibit C

UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS OWNED BY OR TRANSFERRED TO ANY PERSON WHO BECOMES AN ACQUIRING PERSON (AS DEFINED IN THE RIGHTS AGREEMENT) AND CERTAIN TRANSFEREES THEREOF WILL BECOME NULL AND VOID AND WILL NO LONGER BE TRANSFERABLE.

SUMMARY OF RIGHTS TO PURCHASE
Shares of Preferred Stock

On February 9, 1996, the Board of Directors of Cadence Design Systems, Inc. (the "Company") declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, par value $.01 per share, of the Company (the "Common Stock"). The dividend is payable on February 20, 1996 (the "Record Date") to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share (the "Preferred Stock") of the Company at a price of $240 per one one-thousandth of a share of Preferred Stock (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as of February 9, 1996, as amended and restated as of January __, 2000, as the same may be amended from time to time (the "Rights Agreement"), between the Company and ChaseMellon Shareholders Services, L.L.C. (the "Rights Agent"). The rights issued under the old amended and restated rights agreement, dated as of June 20, 1989, between the Company and the Rights agent expired on February 9, 1996.

Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") have acquired beneficial ownership of 15% or more of the outstanding shares of Common Stock or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding shares of Common Stock (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced, with respect to any of the Common Stock certificates outstanding as of the Record Date, by such Common Stock certificate together with a copy of this Summary of Rights.

The Rights Agreement provides that, until the Distribution Date (or earlier redemption or expiration of the Rights), the Rights will be transferred with and only with the Common Stock. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Stock certificates issued after the Record Date upon transfer or new issuances of Common Stock will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for shares of Common Stock outstanding as of the Record Date, even without such notation or a copy of this Summary of Rights, will also constitute the transfer of the Rights associated with the shares of Common Stock represented by such certificate. As soon as

practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights.

The Rights are not exercisable until the Distribution Date. The Rights will expire on February 9, 2006 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case as described below.

The Purchase Price payable, and the number of shares of Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights or warrants to subscribe for or purchase Preferred Stock at a price, or securities convertible into Preferred Stock with a conversion price, less than the then-current market price of the Preferred Stock or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends or dividends payable in Preferred Stock) or of subscription rights or warrants (other than those referred to above).

The number of outstanding Rights are also subject to adjustment in the event of a stock split of the Common Stock or a stock dividend on the Common Stock payable in shares of Common Stock or subdivisions, consolidations or combinations of the Common Stock occurring, in any such case, prior to the Distribution Date.

Shares of Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each share of Preferred Stock will be entitled, when, as and if declared, to a minimum preferential quarterly dividend payment of $1 per share but will be entitled to an aggregate dividend of 1000 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Preferred Stock will be entitled to a minimum preferential liquidation payment of $1000 per share (plus any accrued but unpaid dividends) but will be entitled to an aggregate payment of 1000 times the payment made per share of Common Stock. Each share of Preferred Stock will have 1000 votes, voting together with the Common Stock. Finally, in the event of any merger, consolidation or other transaction in which shares of Common Stock are converted or exchanged, each share of Preferred Stock will be entitled to receive 1000 times the amount received per share of Common Stock. These rights are protected by customary antidilution provisions.

Because of the nature of the Preferred Stock's dividend, liquidation and voting rights, the value of the one one-thousandth interest in a share of Preferred Stock purchasable upon exercise of each Right should approximate the value of one share of Common Stock.

In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter have the right to receive upon

exercise of a Right at the then current exercise price of the Right, that number of shares of Common Stock having a market value of two times the exercise price of the Right.

In the event that, after a person or group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right (other than Rights beneficially owned by an Acquiring Person which will have become void) will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the person with whom the Company has engaged in the foregoing transaction (or its parent), which number of shares at the time of such transaction will have a market value of two times the exercise price of the Right.

At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding shares of Common Stock or the occurrence of an event described in the prior paragraph, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one share of Common Stock, or one one-thousandth of a share of Preferred Stock (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment).

With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional shares of Preferred Stock will be issued (other than fractions which are integral multiples of one one-thousandth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts) and in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Stock on the last trading day prior to the date of exercise.

At any time prior to the time an Acquiring Person becomes such, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption Price"). The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.

For so long as the Rights are then redeemable, the Company may, except with respect to the redemption price, amend the Rights in any manner. After the Rights are no longer redeemable, the Company may, except with respect to the redemption price, amend the Rights in any manner that does not adversely affect the interests of holders of the Rights.

Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends.

A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, as the same may be amended from time to time, which is hereby incorporated herein by reference.

The Rights have been issued in place of the Company's previous common share purchase rights issued in 1989. The principal differences between the old rights and the new Rights are (1) the new Rights are exercisable for shares of Preferred Stock instead of Common Stock, (2) an increase in the exercise price from $66.67 (as adjusted to reflect the Company's stock split) to $240 per share; (3) the reduction in the threshold percentage from 20% to 15%; and (4) the elimination of a provision in the old rights plan permitting redemption of the rights during the 10 days after a person or group becomes an Acquiring Person.

[LETTERHEAD]

EXHIBIT 10.36

AGREEMENT NO:EX92302

NECESSARY CADENCE SIGNATURES REQUIRED FOR ANY PAYMENTS TO BE MADE UNDER EACH SEPARATE CONSULTING SCHEDULE.

REQUESTER'S MANAGER - REQUIRED

Name: H. Raymond Bingham
(Print)

Signature: /S/ H. Raymond Bingham
           --------------------------------------

Date: February 26, 1999
      -------------------------------------------

FINANCIAL ANALYST - REQUIRED

Name: Christine Matthews
(Print)

Signature: /S/ Christine Matthews
           --------------------------------------

Date: March 30, 1999
      -------------------------------------------

VP OF FINANCE - IN EXCESS OF $50K OR 6 MONTHS TOTAL

Name: Mark White
(Print)

Signature: /S/ Mark White
           --------------------------------------

Date: March 30, 1999
      -------------------------------------------

THE FINAL SIGNATURE PAGE (AND THE ACCOMPANYING SCHEDULE) MUST BE FILED WITH THE SIGNED MASTER AGREEMENT. RETURN TO TERRI MEIER, MS5B1

[LETTERHEAD]

AGREEMENT NO:EX92302

MASTER INDIVIDUAL

CONSULTING AGREEMENT

WITH

CADENCE DESIGN SYSTEMS, INC.

THIS AGREEMENT IS A MASTER AGREEMENT. AS SUCH, IT IS INTENDED TO BE PUT INTO PLACE ONCE WITH A CONSULTING PARTY. THEREAFTER, AS MORE CONSULTING ACTIVITY IS DESIRED BY CADENCE WITH THE CONSULTING PARTY, ADDITIONAL SCHEDULES ARE WRITTEN UP, SIGNED BY THE PARTIES, AND FILED WITH THE MASTER AGREEMENT. PLEASE NOTE THAT THE CADENCE INTERNAL SIGNATURE SHEET IS REQUIRED TO BE ATTACHED TO AND ROUTED WITH EACH NEW ADDITIONAL SCHEDULE HEREAFTER PUT INTO PLACE UNDER THE SIGNED MASTER AGREEMENT.

THIS CONSULTING AGREEMENT, ("AGREEMENT"), is entered into this 23 day of February, 1999, ("EFFECTIVE DATE"), between Cadence Design Systems, Inc., at 555 River Oaks Parkway, San Jose, CA 95134, ("CADENCE"), and George Scalise, ("CONSULTANT").

NOW THEREFORE, the parties hereby agree as follows:

[LETTERHEAD]

1. CONSULTANCY.

1.1 CONSULTING PERIOD.

Consultant shall serve as a consultant to Cadence for a period commencing on the date of this Agreement and concluding on the date set forth in Section 3.0 of the applicable Schedule attached hereto, subject to the termination of this Agreement ("CONSULTING PERIOD"). This Consulting Agreement may be terminated at will by Cadence for any reason or no reason upon fifteen (15) days prior written notice to Consultant. However, if this Agreement is terminated pursuant to paragraph 1.3, no notice shall be required. Consultant may terminate this Agreement at will, upon fifteen (15) days prior written notice to Cadence, for no reason only at a time that no Schedule is in effect and no Work is being performed by Consultant. If a Schedule is in effect or Work is being performed, Consultant may only terminate this Agreement for material breach by Cadence that remains uncured for thirty (30) days following written notice thereof to Cadence. Termination of this Agreement shall terminate all Schedule(s) then in effect. Upon termination, each party shall, within ten (10) days, return or destroy all copies of the other party's materials in its possession or control and certify the same in writing.

1.2 ADDITIONAL SCHEDULES.

Additional Schedules may be attached to include other work projects or services which the parties agree Consultant shall provide to Cadence. The Schedule(s) may be amended from time to time by mutual written consent of the parties.

1.3 In order to serve as a Consultant to Cadence, Consultant must pass a background investigation conducted by Cadence. The investigation will consist of Cadence obtaining a report from a consumer reporting agency named Professional Resource Screening, Inc. for the purpose of evaluating Consultant's eligibility to consult with Cadence. The report may include information regarding Consultant's DMV records, educational verification, employment history, verification of social security number, criminal record (if any), credit and reference, and civil litigation records. Consultants failure to authorize this investigation or failure to pass the background investigation will result in immediate termination of this agreement.

2. DUTIES OF CONSULTANT.

2.1 SCOPE OF WORK.

Consultant shall perform the services and deliver the deliverables, if any, set forth in Section 4 of the applicable Schedule (together the "Work"). Consultant shall perform the Work under the general direction of Cadence and in accordance with the provisions of this Agreement and the applicable Schedule. If there is no deliverable under a Schedule, the provisions of Sections 4.3, 4.4 and 4.5 shall not apply to the Work under such Schedule. Consultant shall determine the manner and means by which the Work is accomplished.

2.2 COMPLIANCE WITH LAWS.

Consultant shall comply with all applicable federal, state and local laws and regulations, including, without limitation, immigration laws, in the performance of the Work hereunder.

3. WORK RULES.

Consultant shall abide by the working hours, rules, and policies of Cadence while working on Cadence's premises.

4. PROJECT MANAGEMENT.

4.1 CADENCE PROJECT MANAGER

Cadence shall designate a Project Manager for each of the projects set forth in Section 6 of the applicable Schedule, (the "PROJECT MANAGER"). Such person shall act as a liaison between Cadence and Consultant and have primary responsibility for managing Consultant's activities.

4.2 PROGRESS REPORTS AND MEETINGS.

Consultant shall submit a detailed Progress Report to the Project Manager on an agreed upon period during the term of each applicable Schedule. Progress reports will detail Work performed to date and estimated time to complete. If Cadence so requests, Consultant shall participate in status meetings with the Project Manager to review the status and progress of the Work.

4.3 CRITERIA FOR ACCEPTING DELIVERABLES.

Each deliverable, if any, shall be subject to acceptance by Cadence. When possible, but in no event later than thirty (30) days in advance of the date identified in the applicable Schedule for production of the deliverable involved, a set of Acceptance Criteria for each shall be jointly developed and mutually agreed to in writing ("ACCEPTANCE CRITERIA"). If the parties in good faith cannot agree to any of Acceptance Criteria, Cadence may terminate this Agreement, effective immediately, without incurring any further liability. If there is no required Acceptance Criteria then the applicable Schedule MUST SO STATE.

4.4 ACCEPTANCE TESTING.

[LETTERHEAD]

If acceptance testing for a deliverable is required, such testing shall commence within five (5) working days of the date on which Consultant notifies the Project Manager, in writing, that the deliverable has been satisfactorily completed, in Consultant's opinion, and is ready for acceptance testing by Cadence. Cadence will verify that the deliverable satisfies the mutually agreed upon Acceptance Criteria. Acceptance testing shall continue for the period of time specified in the Acceptance Criteria ("ACCEPTANCE PERIOD"). If no such time period has been agreed upon by the parties then the Acceptance Period shall be thirty (30) calendar days.

4.5 NON-CONFORMITY OF DELIVERABLES.

If any deliverable does not conform to the required Acceptance Criteria within the Acceptance Period, Cadence shall give Consultant notice thereof. Cadence shall cooperate with Consultant in identifying in what respects the deliverable has failed to conform to the Acceptance Criteria. Consultant shall, at no cost to Cadence, promptly correct any deficiencies which prevent such deliverable from conforming to the Acceptance Criteria. Upon completion of the corrective action by Consultant, and at no additional cost to Cadence, the acceptance test will be repeated until the deliverable has successfully conformed to the Acceptance Criteria. If the deliverable is not made to conform within thirty (30) calendar days after the end of the Acceptance Period, Cadence may terminate this Agreement, effective immediately, without any further obligation or liability. Cadence may require Consultant to continue to attempt to correct the deficiencies while reserving the right to terminate this Agreement at any time. When the deliverable has successfully conformed to or satisfied the Acceptance Criteria, Cadence shall give Consultant written notice thereof.

5. OTHER AFFILIATIONS.

5.1 EMPLOYMENT.

Consultant represents that Consultant is not prevented by any existing agreement or in any other way from entering into this Agreement and performing in accordance with this Agreement and the applicable Schedule.

5.2 CONFLICT OF INTEREST.

Consultant warrants that Consultant is not obligated under any other agreement which would adversely conflict with or affect Cadence's rights or Consultant's duties under this Agreement or applicable Schedule, other than those expressly identified in Section 5 of the applicable Schedule. Cadence understands and agrees that during the Consulting Period, Consultant may be retained by other companies, corporations, and/or commercial enterprises which are not engaged in the design, development, manufacture or marketing of products similar to those of Cadence.

5.3 SEGREGATION OF WORK.

Consultant shall not use, disclose or deliver any proprietary or confidential information of any third party in dealings with Cadence or in performing the Work hereunder. Consultant agrees to use best efforts to segregate Work done under this Agreement from all work done at, or for, any such other person, company, corporation, and/or other commercial enterprise. In any dealings with any such person, company, corporation, and/or commercial enterprise, Consultant shall protect and guard Cadence's Confidential Information (as defined herein) in accordance with the terms of this Agreement.

6. COMPENSATION.

6.1 PAYMENT BY CADENCE.

Cadence agrees to pay Consultant and Consultant agrees to accept for all Work hereunder consulting fees (the "CONSULTING FEES") as set forth in Section 9 of the applicable Schedule. Cadence will pay the Consulting Fees within thirty
(30) days after the receipt of Consultant's correct invoice.

6.2 REIMBURSEMENT FOR COSTS/EXPENSES.

Cadence agrees to reimburse Consultant for reasonable and necessary out-of-pocket costs and expenses actually incurred by Consultant in performance of the Work that have been pre-approved by the Project Manager in writing. Travel, lodging and related expenses must conform to Cadence's travel policy to be reimbursed. Consultant shall submit his or her expenses on expense report forms acceptable to Cadence. If requested by Cadence, Consultant shall submit supporting documentation in addition to the invoice and the expense report forms. No reimbursement will be made for any expenses submitted more than thirty (30) days after completion of Consultant's Work under the applicable Schedule. Reimbursement shall be made within thirty (30) days after submission to Cadence of the last of adequate and appropriate documentation of such costs and expenses, the expense report forms and a correct invoice.

6.3 PAYMENT FOR SERVICES.

Invoicing by Consultant shall include all services rendered and expenses incurred by Consultant during the period invoiced for payment. Consultant shall submit the invoice and the applicable time reports and expense reports to the Project Manager

[LETTERHEAD]

for review and approval prior to actually invoicing Cadence for payment.

6.4. MAXIMUM DOLLAR AMOUNT.

Notwithstanding anything to the contrary, Cadence shall not be liable for any charges or expenses under any applicable Schedule for Work done on a time and materials basis in excess of the maximum dollar amount specified in Section 10 of the applicable Schedule.

6.5 TAXES AND OTHER BENEFITS.

Consultant acknowledges and agrees that it shall be only Consultant's obligation to formally report as its income all compensation received by Consultant from Cadence for Consultant's services. Consultant agrees to indemnify Cadence and hold it harmless to the extent Cadence is alleged or determined to be obligated or liable to pay any tax, including but not limited to payroll, FICA and social security withholding, and unemployment, disability and/or worker's compensation insurance or similar item in connection with any payment made to Consultant. Consultant shall not be entitled to compensation from Cadence except as set forth in this Agreement and in no event shall Consultant be entitled to any fringe benefits available to employees of Cadence. Consultant waives any rights Consultant may now or in the future have in such fringe benefits even if Consultant is later deemed a "common law employee."

6.6 ACCOUNTING RECORDS.

Consultant shall maintain complete and accurate accounting records, in a form in accordance with generally accepted accounting principles, consistently applied, to substantiate Consultant's charges and expenses and shall retain such records for a period of at least one (1) year from the date of final payment made under the applicable Schedule.

7. CONFIDENTIALITY.

Consultant's work for Cadence creates a relationship of trust and confidence between Cadence and Consultant.

7.1 CONFIDENTIAL INFORMATION.

"CONFIDENTIAL INFORMATION" as used herein and in the attached Exhibit NDA includes marketing plans, product plans, business strategies, financial information, forecasts, personnel information, customer lists, trade secrets, Innovations (as defined in Section 8), other non-public technical or business information, third party information made available to Consultant, joint research agreements or agreements entered into by Cadence or any of its affiliates, whether in writing or given to Consultant orally, which Consultant knows or has reason to know Cadence would like to treat as confidential for any purpose, such as maintaining a competitive advantage or avoiding undesirable publicity.

7.2 ATTACHED NON-DISCLOSURE AGREEMENT.

Consultant's obligations with respect to maintaining the confidentiality of Cadence's Confidential Information disclosed to Consultant during the "Disclosing Period" (Section 7.3) shall be governed by the terms of the Non-Disclosure Agreement attached hereto as the "Exhibit NDA" which supersedes all prior agreements governing the exchange of such Confidential Information. In addition, if the Work is performed ultimately for a third party customer, Consultant agrees to comply with all use and disclosure restrictions and procedures imposed by such third party customer on its confidential information, and to execute all related documents requested by Cadence to implement such restrictions.

7.3 DISCLOSING PERIOD.

The provisions of the attached Exhibit NDA govern only that Confidential Information disclosed by Cadence to Consultant during the "Disclosing Period" "starting on the earlier of the commencement of the Work or the signing of this Agreement, and ending on the conclusion of the Consulting Period as defined in Section 1 above.

7.4 CONTINUING OBLIGATION.

After the Disclosing Period, Consultant has a continuing obligation to maintain the confidentiality of Cadence's Confidential Information and the Confidential Information of any third party for an indefinite period of time, except as and to the extent otherwise provided in the Exhibit NDA. In addition, Sections 6.5, 6.6, 7 (and the Exhibit NDA), 8, 9, 10, 13, 16 and 19 shall survive the termination of the Consulting Period.

8. INNOVATIONS AND DELIVERABLES.

8.1 DISCLOSURE OF INNOVATIONS.

Consultant shall disclose in writing to Cadence all inventions, discoveries, concepts, works of authorship, ideas, improvements and other innovations of any kind that Consultant may make, conceive, develop or reduce to practice, alone or jointly with others, in the course of performing Work for Cadence under this Agreement or as a result of that Work, whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection (collectively, "INNOVATIONS").

8.2 ASSIGNMENT OF INNOVATIONS.

[LETTERHEAD]

Consultant agrees that all deliverables and Innovations will be the sole and exclusive property of Cadence and Consultant hereby assigns to Cadence, and agrees to assign, all rights in the deliverables and Innovations and in all related patents, patent applications, copyrights, mask work rights, trademarks, trade secrets, rights of priority and other proprietary rights. At Cadence's request and expense and at Consultant's reasonable billing rates for such additional services, during and after the period during which Consultant acts as a consultant to Cadence, Consultant will assist and cooperate with Cadence in all respects and will execute documents, and subject to reasonable availability, give testimony and take further acts requested by Cadence to acquire, transfer, maintain and enforce patent, copyright, trademark, mask work, trade secret and other legal protections for such Innovation(s) and deliverables. Consultant hereby appoints an Officer of Cadence as Consultant's attorney-in-fact to execute such documents on Consultant's behalf for this specific purpose. It is understood that nothing contained therein shall affect the rights or obligations of Consultant with respect to any Innovations which would be protected by Section 2870 of the California Labor Code, if Consultant were an employee of Cadence instead of an independent contractor.

8.3 RIGHT TO CHANGE INNOVATIONS.

Consultant hereby agrees that Cadence (or a third party, as applicable) shall have the unlimited right to modify, alter or destroy any Innovation (but only if such act would not hinder or prevent Consultant from performing its obligations hereunder and under the applicable Schedule), and that any such act does not and will not violate any right of Consultant, if any exists, to keep such work intact. Consultant hereby irrevocably assigns and transfers to Cadence any right Consultant may have to object to such modification, alteration or destruction, or to claim authorship, or any other "moral" right, and if such right is not assignable, Consultant hereby forever waives and agrees never to assert any such right.

8.4 LICENSE TO CADENCE.

To the extent that Cadence's use or exploitation of any deliverables or Innovations made or contributed by Consultant hereunder may require a license from Consultant under any other proprietary rights held by Consultant, Consultant hereby grants Cadence a fully-paid, royalty-free, perpetual, worldwide license, with right to sublicense, to make, use, sell, copy, modify, distribute, perform, display and otherwise exploit such deliverables and Innovations.

8.5 NON-INFRINGEMENT.

Consultant represents and warrants that to the best of its knowledge the Work performed under this Agreement and the Innovations made or contributed by Consultant hereunder will not infringe on any rights of any third party.

8.6 INDEMNITY.

Consultant agrees to defend at its own cost and expense any claim or action against Cadence, its directors, officers and/or employees, for actual or alleged infringement of any patent, copyright or other property right (including, but not limited to, misappropriation of trade secrets) based on any software, program, service and/or other materials delivered or furnished to Cadence by Consultant. Consultant further agrees to indemnify and hold Cadence, its subsidiaries and/or affiliated companies, and their respective directors, officers and/or employees, harmless from and against any and all liabilities, damages, losses, and expenses associated with such claims or action.

9. INSURANCE AND INDEMNITY.

9.1 INSURANCE COVERAGES.

Consultant shall procure and maintain for itself and its employees all insurance coverages as required by Federal and/or State law, including workers' compensation and disability insurance, and automobile liability coverage. Upon request by Cadence, Consultant shall furnish to Cadence a certificate of insurance evidencing such coverage.

9.2 INDEMNITY.

Consultant agrees to indemnify Cadence, its subsidiaries and/or affiliated companies for any liability or expenses due to claims for personal injury or to property arising out of the performance of the Work or the use by Consultant of Cadence's materials, machines, or facilities.

10. NON-SOLICITATION.

Consultant agrees that, during the Consulting Period and for a period of two
(2) years after the expiration or earlier termination thereof, Consultant will not solicit or recruit Cadence employees for any other employers outside Cadence or employ any of the employees of Cadence without Cadence's prior written consent.

11. INDEPENDENT CONTRACTOR.

Consultant shall be an independent contractor with respect to Cadence and shall not be a representative or agent of Cadence. In addition, Consultant shall not be deemed for any purpose to be an employee of Cadence.

[LETTERHEAD]

12. NOTICE.

Any notice to be delivered pursuant to this Agreement shall be in writing and shall be deemed delivered upon service, if served personally, or three days after deposit in the United States Mail, if mailed by first class mail, postage prepaid, registered or certified with return receipt requested, and addressed to the other party at the following address, or such address as may be designated in accordance herewith:

To Cadence at:

CADENCE DESIGN SYSTEMS, INC.
Human Resources Department
2655 Seely Rd., Bldg. 5
San Jose, CA 95134

To Consultant at:
As set forth in the applicable Schedule.

13. INJUNCTIVE RELIEF.

Consultant acknowledges that disclosure or unauthorized use of any Confidential Information by Consultant will give rise to irreparable injury to Cadence, its subsidiaries and/or affiliated companies. Accordingly, Cadence or such other party may seek and obtain injunctive relief against the breach or threatened breach of the foregoing undertakings, in addition to any other legal remedies which may be available. Consultant acknowledges and agrees that the covenants contained herein are necessary for the protection of legitimate interests of Cadence.

14. SEVERABILITY.

If a court finds any provision of this Agreement invalid or unenforceable as applied to any circumstance, that provision shall be enforced to the maximum extent permitted by law, and the other provisions will remain in full force and effect.

15. BINDING EFFECT; NO ASSIGNMENT; AMENDMENT.

This Agreement shall be binding upon Consultant, and except as regards to personal services, upon Consultant's successors and assigns, and shall inure to the benefit of Cadence, its successors and assigns. This Agreement may not be assigned by Consultant and any attempted assignment by Consultant shall be void. This Agreement may only be modified or amended by mutual written consent of the parties.

16. GOVERNING LAW.

This Agreement shall be governed and enforced in accordance with the laws of the State of California, excluding that body of law known as conflicts of law.

17. WAIVER.

A failure of either party to exercise any right provided for herein shall not be deemed to be a waiver of any other right existing hereunder.

18. COUNTERPARTS.

This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one Agreement.

19. CONDUCT BUSINESS FAIRLY.

Consultant agrees to conduct business in a manner that at all times reflects favorably upon the products and the good name, goodwill and reputation of Cadence.

20. ENTIRE AGREEMENT.

This instrument and the attached Schedule(s) and Exhibits contain the entire agreement of the parties relating to the subject matter hereof, and supersede all prior and contemporaneous negotiations, correspondence, understanding and agreements of the parties relating to the subject matter hereof.

----- END OF TERMS ----

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.

CONSULTANT:                                      CADENCE DESIGN SYSTEMS, INC.

Signature: /S/ George M. Scalise                 Signature: /S/ H. Raymond Bingham
           ------------------------------                   ------------------------------
                                                 (Requester)

Name: George M. Scalise                          Name: H. Raymond Bingham
      -----------------------------------              -----------------------------------
(Print)                                          (Print)

                                                 Title: Executive Vice President
                                                        ----------------------------------


                                      7

[LETTERHEAD]


Date: March 22, 1999                             Date: February 26, 1999
      -----------------------------------              -----------------------------------

Social Security No. or Federal Tax I.D.# 000-00-0000
                                         ---------------------

[LETTERHEAD]

AGREEMENT NO:EX92302

SCHEDULE

ALL ITEMS BELOW MUST BE COMPLETELY FILLED IN.
DO NOT LEAVE ANY BLANK.

1. NAMES AND ADDRESS OF CONSULTANT:
George Scalise
181 Metro Drive, Ste. 450
San Jose, CA 95110 408 436-6600 phone 408 436-6646 Fax

2. NAME AND ADDRESS OF CONSULTANT FOR NOTICE PURPOSES

    (IF DIFFERENT FROM ABOVE): Same

3.  TERM OF CONSULTING PERIOD FOR THIS SCHEDULE:      START DATE     END DATE
                                                      ----------     --------
                                                          1/1/99     12/31/99

4. DUTIES OF CONSULTANT, (SEE Section 2.1): Advise on government relations issues as required.

5. IDENTIFY ALL CONFLICTING OR POTENTIALLY CONFLICTING AGREEMENTS OR OBLIGATIONS OF CONSULTANT AND THE NATURE OF THE CONFLICT INVOLVED: None

6. PROJECT MANAGER TO WHOM CONSULTANT REPORTS, (SEE Section 4.1): Ray Bingham

7. EXPECTED DAYS OF CONSULTING TO BE PERFORMED PER MONTH: as needed

8. DEPARTMENT/ACCOUNT NUMBER TO BE CHARGED: 41000

9. CONSULTING FEES, (SEE Section 6.1): $ 20,000/year (TO BE STATED AS DOLLARS PER HOUR OR DAY, OR OTHER AGREED UPON TERMS):

10. THE DOLLAR VALUE OF THIS CONSULTING SCHEDULE IS NOT TO EXCEED $20,000

11. IS THIS A RENEWAL SCHEDULE FROM A PREVIOUS AGREEMENT? YES ______ NO _XX_

IF SO, WHAT WAS THE START DATE OF THE PREVIOUS SCHEDULE? _________________

CONSULTANT:                                      CADENCE DESIGN SYSTEMS, INC.
            -----------------------------

SIGNATURE: /S/ George M. Scalise                 SIGNATURE: /S/ H. Raymond Bingham
           ------------------------------                   ------------------------------
                                                 (Requester)

NAME: George M. Scalise                          NAME: H. Raymond Bingham
      -----------------------------------              -----------------------------------
(Please Print)                                   (Please Print)

                                                 TITLE: Executive Vice President
                                                        ----------------------------------

DATE: March 8, 1999                              DATE: February 26, 1999
      -----------------------------------              -----------------------------------

MISSING INFORMATION COULD CAUSE A DELAY IN THE PROCESSING OF THIS CONSULTING AGREEMENT AND/OR PAYMENT TO THE CONSULTANT.

[LETTERHEAD]

EXHIBIT NDA

1. "CONFIDENTIAL INFORMATION" shall have the same meaning as defined Section 7 of the Master Consulting Agreement.

2. "DISCLOSING PERIOD" shall have the same meaning as defined in Section 7 of the Master Consulting Agreement.

3. OTHER SOURCES EXEMPTIONS: Consultant's obligations hereunder will not apply, or shall cease to apply, to that Confidential Information which Consultant can establish: (i) was not identified as confidential when disclosed or within thirty (30) days thereafter; or (ii) was in the public domain by acts not attributable to Consultant or otherwise available to the public other than by breach of this NDA; or (iii) was rightfully in possession of Consultant prior to receiving it from Cadence; or (iv) becomes available to Consultant from a source other than Cadence who is in rightful possession with the lawful right to provide it to Consultant; or (v) is independently developed by Consultant without use of or reference to the Confidential Information; or (vi) is otherwise agreed in writing to be no longer considered otherwise restricted by Cadence.

4. LIMITATIONS ON DUTY: Consultant's duty to maintain the confidentiality extends only to that disclosed Information which: (i) is identified as being Confidential at the time of disclosure by Cadence or within 30 days thereafter; or (ii) is marked Confidential, or with a similar legend, at the time of disclosure; or (iii) is summarized and designated as Confidential by Cadence in a written memorandum delivered to Consultant within thirty (30) days after the disclosure.

5. STANDARD OF CARE: Consultant shall protect the disclosed Confidential Information by using the same degree of care, but no less than a reasonable degree of care, as it uses to safeguard its own confidential or proprietary information of a like nature from unauthorized use, disclosure, or dissemination. Consultant shall not copy, distribute, or disseminate any of the Confidential Information to any unauthorized persons or entities without the Cadence's express prior written consent and Consultant shall limit access to the Confidential Information to only those authorized employees or agents having a need to know.

6. RETURN OF MATERIALS: Upon the earlier of fifteen (15) calendar days after: (i) Consultant's receipt of Cadence's written request for same, or
(ii) Consultant's completion of those stated purposes for which Cadence provided Consultant its Confidential Information; or (iii) the end of the Disclosing Period; all of Cadence's Confidential Information and all copies thereof in Consultant's possession or control shall be returned to Cadence or destroyed by Consultant at Cadence's instruction. At Cadence's request, Consultant shall then certify the same in writing and that no copies have been retained by Consultant, its employees or agents.

7. MANDATORY DISCLOSURE EXEMPTIONS: Nothing herein shall restrict Consultant's right to disclose the Confidential Information where such disclosure is required by written order of a judicial, legislative, or administrative authority of competent jurisdiction provided, however that, in each case, Consultant will first notify Cadence of such need or requirement and cooperate with Cadence in limiting the scope of the proposed disclosure. Consultant will assist Cadence in taking all reasonable steps for obtaining further appropriate means of limiting the scope of the required disclosure of Cadence's Confidential Information.

8. EQUITABLE RELIEF AVAILABILITY: Consultant acknowledges that an unauthorized disclosure of the Confidential Information may cause irreparable harm to Cadence for which no adequate remedy at law exists and that, in addition to any other remedies which may be available, Cadence shall be entitled to seek injunctive relief to enforce the terms of this NDA.

9. NO RIGHTS OR LICENSES EXTENDED: No rights or licenses whatsoever, either express or implied, are granted hereunder by one to the other as to any patents or patent applications, copyrights, trade marks, trade secrets, or other intellectual property now or hereafter acquired, developed, or controlled. Cadence retains all rights and remedies afforded under all U.S. and foreign patent, copyright, trade secret, and other applicable laws for protecting confidential, proprietary, or trade secret information.

10. NO WAIVER OF RIGHTS: If one Party breaches this Agreement then the failure of the other Party to enforce any rights under this NDA shall not be deemed a waiver of any such rights.

11. TRANSFER RESTRICTIONS: Consultant will not transfer any disclosed information received hereunder to any country prohibited from obtaining such data according to any national export regulation, (e.g., U.S. Department of Commerce Export Administration Regulations), without first obtaining all valid export licenses and authorizations.

EXHIBIT 10.56

INDEMNITY AGREEMENT

This Indemnity Agreement, dated as of _______________, is made by and between Cadence Design Systems, Inc., a Delaware corporation (the "COMPANY"), and ___________________ an _____________________ of the Company (the "INDEMNITEE").

RECITALS

A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors or officers of corporations unless they are protected by comprehensive liability insurance or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors and officers;

B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors and officers with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take;

C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so substantial (whether or not the case is meritorious), that the defense and/or settlement of such litigation is often beyond the personal resources of officers and directors;

D. The Company believes that it is unfair for its directors and officers and the directors and officers of its subsidiaries to assume the risk of large judgments and other expenses that may be incurred in cases in which the director or officer received no personal profit and in cases where the director or officer was not culpable;

E. The Company recognizes that the issues in controversy in litigation against a director or officer of a corporation such as the Company or a subsidiary of the Company are often related to the knowledge, motives and intent of such director or officer, that he is usually the only witness with knowledge of the essential facts and exculpating circumstances regarding such matters and that the long period of time which usually elapses before the trial or other disposition of such litigation often extends beyond the time that the director or officer can reasonably recall such matters; and may extend beyond the normal time for retirement for such director or officer with the result that he, after retirement or in the event of his death, his spouse, heirs, executors or administrators, may be faced with limited ability and undue hardship in maintaining an adequate defense, which may discourage such a director or officer from serving in that position;

F. Based upon their experience as business managers, the Board of Directors of the Company (the "BOARD") has concluded that, to retain and attract talented and experienced individuals to serve as officers and directors of the Company and its subsidiaries and to encourage such individuals to take the business risks necessary for the success of the Company and its subsidiaries, it is necessary for the Company to contractually indemnify its officers and directors and the officers and directors of its subsidiaries, and to assume for itself maximum liability for expenses and damages in connection with claims against such officers and directors in connection with their service to the Company and its subsidiaries, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and its subsidiaries and the Company's shareholders;

G. Section 145 of the General Corporation Law of Delaware, under which the Company is organized ("SECTION 145"), empowers the Company to indemnify by agreement its officers, directors, employees and agents, and persons who serve, at the request of the Company, as directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provided by Section 145 is not exclusive;

H. The Company, after reasonable investigation prior to the date hereof, has determined that the liability insurance coverage available to the Company and its subsidiaries as of the date hereof is inadequate and/or unreasonably expensive. The Company believes, therefore, that the interests of the Company's shareholders would best be served by a combination of such insurance as the Company may obtain, or request a subsidiary to obtain, pursuant to the Company's obligations hereunder, and the indemnification by the Company of the directors and officers of the Company and its subsidiaries.

I. The Company desires and has requested the Indemnitee to serve or continue to serve as a director or officer of the Company and/or the subsidiaries of the Company free from undue concern for claims for damages arising out of or related to such services to the Company and/or the subsidiaries of the Company; and

J. The Indemnitee is willing to serve, or to continue to serve, the Company and/or the subsidiaries of the Company, provided that he is furnished the indemnity provided for herein.

AGREEMENT

NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:

1. DEFINITIONS.

(a) AGENT. For the purposes of this Agreement, "agent" of the Company means any person who is or was a director, officer, employee or other agent of the Company or a subsidiary of the Company; or is or was serving at the request of, for the convenience of, or to represent the interest of the Company or a subsidiary of the Company as a director, officer,

employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company or a subsidiary of the Company, or was a director, officer, employee or agent of another enterprise at the request of, for the convenience of, or to represent the interests of such predecessor corporation.

(b) EXPENSES. For purposes of this Agreement, "expenses" includes all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements and other out-of-pocket costs) actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement, Section 145 or otherwise; provided, however, that expenses shall not include any judgments, fines, ERISA excise taxes or penalties or amounts paid in settlement of a proceeding.

(c) PROCEEDING. For the purposes of this Agreement, "proceeding" means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, investigative or any other type whatsoever.

(d) SUBSIDIARY. For the purposes of this Agreement, "subsidiary" means any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company, by the Company and one or more other subsidiaries, or by one or more other subsidiaries.

2. AGREEMENT TO SERVE. The Indemnitee agrees to serve and/or continue to serve as an agent of the Company, at its will (or under separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an agent of the Company, so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing, provided, however, that nothing contained in this Agreement is intended to create any right to continued employment by Indemnitee.

3. MAINTENANCE OF LIABILITY INSURANCE.

(a) The Company hereby covenants and agrees that, so long as the Indemnitee shall continue to serve as an agent of the Company and thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that the Indemnitee was an agent of the Company, the Company, subject to Section 3(b), shall use reasonable efforts to obtain and maintain in full force and effect director's and officer's liability ("D&O INSURANCE") in reasonable amounts from established and reputable insurers.

(b) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions

so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company.

4. MANDATORY INDEMNIFICATION. The Company shall indemnify the Indemnitee:

(a) THIRD PARTY ACTIONS. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the company) by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; and

(b) DERIVATIVE ACTIONS. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, against any amounts paid in settlement of any such proceeding and all expenses actually and reasonably incurred by him in connection with the investigation, defense, settlement, or appeal of such proceeding if he acted in good faith and in manner he reasonably believed to be in or not opposed to the best interests of the Company; except that no indemnification under this subsection shall be made in respect of any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction due to willful misconduct of a culpable nature in the performance of his duty to the Company unless and only to the extent that the Court of Chancery or the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such amounts which the Court of Chancery or such other court shall deem proper; and

(c) ACTIONS WHERE INDEMNITEE IS DECEASED. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, prior to, during the pendency or after completion of such proceeding Indemnitee is deceased, except that in a proceeding by or in the right of the Company no indemnification shall be due under the provisions of this subsection in respect of any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company, by a court of competent jurisdiction due to willful misconduct of a culpable nature in the performance of his duty to the Company, unless and only to the extent that the Court of Chancery or the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in

view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such amounts which the Court of Chancery or such other court shall deem proper; and

(d) EXCEPTION FOR AMOUNTS COVERED BY INSURANCE. Notwithstanding the foregoing, the Company shall not be obligated to indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by D&O Insurance.

5. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a proceeding but not entitled, however, to indemnification for all of the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for such total amount except as the portion thereof to which the Indemnitee is not entitled.

6. MANDATORY ADVANCEMENT OF EXPENSES. Subject to Section 10 below, the Company shall advance all expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an agent of the Company or by reason of anything done or not done by him in any such capacity. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to the Indemnitee within twenty
(20) days following delivery of a written request therefore by the Indemnitee to the Company.

7. NOTICE AND OTHER INDEMNIFICATION PROCEDURES.

(a) Promptly after receipt by the Indemnitee of notice of the commencement of or the threat of commencement of any proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof.

(b) If, at the time of receipt of a notice of the commencement of a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(c) In the event the Company shall be obligated to advance the expenses for any proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume

the defense of such proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that
(i) the Indemnitee shall have the right to employ his counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the company and the Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, the fees and expenses of Indemnitee's counsel shall be at the expense of the Company.

8. DETERMINATION OF RIGHT TO INDEMNIFICATION.

(a) To the extent the Indemnitee has been successful on the merits or otherwise in defense of any proceeding referred to in Section
4(a), 4(b), or 4(c) of this Agreement or in the defense of any claim, issue or matter described therein, the Company shall indemnify the Indemnitee against expenses actually and reasonably incurred by him in connection with the investigation, defense or appeal of such proceeding.

(b) In the event that Section 8(a) is inapplicable, the Company shall also indemnify the Indemnitee unless, and only to the extent that, the Company shall prove by clear and convincing evidence to a forum listed in
Section 8(c) below that the Indemnitee has not met the applicable standard of conduct required to entitle the Indemnitee to such indemnification.

(c) The Indemnitee shall be entitled to select the forum in which the validity of the Company's claim under Section 8(b) hereof that the Indemnitee is not entitled to indemnification will be heard from among the following:

(1) A quorum of the Board consisting of directors who are not parties to the proceeding for which indemnification is being sought;

(2) The stockholders of the Company;

(3) Legal counsel selected by the Indemnitee, and reasonably approved by the Board, which counsel shall make such determination in a written opinion.

(4) A panel of three arbitrators, one of whom is selected by the Company, another of whom is selected by the Indemnitee and the last of whom is selected by the first two arbitrators so selected.

(d) As soon as practicable, and in no event later than 30 days after written notice of the Indemnitee's choice of forum pursuant to
Section 8(c) above, the Company shall, at its own expense, submit to the selected forum in such manner as the Indemnitee or the

Indemnitee's counsel may reasonably request, its claim that the Indemnitee is not entitled to indemnification; and the Company shall act in the utmost good faith to assure the Indemnitee a complete opportunity to defend against such claim.

(e) If the forum listed in Section 8(c) hereof selected by Indemnitee determines that Indemnitee is entitled to indemnification with respect to a specific proceeding, such determination shall be final and binding on the Company. If the forum listed in Section 8(c) hereof selected by Indemnitee determines that Indemnitee is not entitled to indemnification with respect to a specific proceeding, the Indemnitee shall have the right to apply to the Court of Chancery of Delaware, the court in which that proceeding is or was pending or any other court of competent jurisdiction, for the purpose of enforcing the Indemnitee's right to indemnification pursuant to the Agreement.

(f) Notwithstanding any other provision in this Agreement to the contrary, the Company shall indemnify the Indemnitee against all expenses incurred by the Indemnitee in connection with any hearing or proceeding under this Section 8 involving the Indemnitee and against all expenses incurred by the Indemnitee in connection with any other proceeding between the Company and the Indemnitee involving the interpretation or enforcement of the rights of the Indemnitee under this Agreement unless a court of competent jurisdiction finds that each of the material claims and/or defenses of the Indemnitee in any such proceeding was frivolous or not made in good faith.

9. LIMITATION OF ACTIONS AND RELEASE OF CLAIMS. No proceeding shall be brought and no cause of action shall be asserted by or on behalf of the Company or any subsidiary against the Indemnitee, his spouse, heirs, estate, executors or administrators after the expiration of one year from the act or omission of the Indemnitee upon which such proceeding is based; however, in a case where the Indemnitee fraudulently conceals the facts underlying such cause of action, no proceeding shall be brought and no cause of action shall be asserted after the expiration of one year from the earlier of (i) the date the Company or any subsidiary of the Company discovers such facts, or (ii) the date the Company or any subsidiary of the Company could have discovered such facts by the exercise of reasonable diligence. Any claim or cause of action of the Company or any subsidiary of the Company, including claims predicated upon the negligent act or omission of the Indemnitee, shall be extinguished and deemed released unless asserted by filing of a legal action within such period. This
Section 9 shall not apply to any cause of action which has accrued on the date hereof and of which the Indemnitee is aware on the date hereof, but as to which the Company has no actual knowledge apart from the Indemnitee's knowledge.

10. EXPECTATIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

(a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise

as required under Section 145, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; or

(b) LACK OF GOOD FAITH. To indemnify the Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or

(c) UNAUTHORIZED SETTLEMENTS. To Indemnify the Indemnitee under this Agreement for any amounts paid in settlement of a proceeding unless the Company consents to such settlement; or

(d) CLAIMS BY THE COMPANY FOR WILLFUL MISCONDUCT. To indemnify or advance expenses to the Indemnitee under this Agreement for any expenses incurred by the Indemnitee with respect to any proceeding or claim brought by the Company against Indemnitee for willful misconduct, unless a court of competent jurisdiction determines that each of such claims was not made in good faith or was frivolous; or

(e) 16(b) ACTIONS. To indemnify the Indemnitee on account of any suit in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities and Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; or

(f) WILLFUL MISCONDUCT. To indemnify the Indemnitee on account of Indemnitee's conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct; or

(g) UNLAWFUL INDEMNIFICATION. To indemnify the Indemnitee if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful.

11. NON-EXCLUSIVITY. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the indemnitee may have under any provision of law, the Company's Certificate of Incorporation or Bylaws, the vote of the Company's shareholders or disinterested directors, other agreements, or otherwise, both as to action in his official capacity and to action in another capacity while occupying his position as an agent of the Company, and the Indemnitee's rights hereunder shall continue after the Indemnitee has ceased acting as an agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee.

12. INTERPRETATION OF AGREEMENT. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent now or hereafter permitted by law.

13. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever,
(i) the validity, legality and enforceability of the remaining provisions of the Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to Section 12 hereof.

14. MODIFICATION AND WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

15. SUCCESSORS AND ASSIGNS. The terms of this Agreement shall bind, and shall inure to the benefit of, the successors and assigns of the parties hereto.

16. NOTICE. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.

17. GOVERNING LAW. This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely with Delaware.

18. CONSENT TO JURISDICTION. The Company and the Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement.

The parties hereto have entered into this Indemnity Agreement effective as of the date first above written.

Address: Cadence Design Systems, Inc. 2655 Seely Rd.

San Jose, CA 95134

Its

INDEMNITEE:

Address:

EXHIBIT 10.57

CADENCE DESIGN SYSTEMS, INC.

EXECUTIVE RETENTION AGREEMENT

This Executive Retention Agreement ("Agreement") is entered into by and between _______________________, an individual (the "Executive") and Cadence Design Systems, Inc., a corporation (the "Company," and together with the Executive, the "Parties").

RECITALS

A. WHEREAS, the Executive is currently _________________________ of the Company;

B. WHEREAS, the Parties recognize that from time to time the Company may consider the possibility of a merger, acquisition by another company, strategic alliance or some other form of Change of Control (as defined below);

C. WHEREAS, the Company's Board of Directors (the "Board") recognizes that because of the uncertainty which can result upon the occurrence of a Change of Control, it is in the best interests of the Company and its stockholders to provide certain key employees, including the Executive, with an incentive to continue their employment with the Company and to motivate them to maximize the value of the Company for the benefit of stockholders;

D. WHEREAS, the Company has determined that it will provide certain key employees, including the Executive, with severance compensation and benefits upon termination of employment following a Change of Control, should such an event occur;

NOW, THEREFORE, in consideration of the foregoing premises and for the purposes hereinafter set forth and for other good and valuable consideration, the adequacy of which is specifically acknowledged, the Parties hereto agrees as follows:

AGREEMENT

ARTICLE I

1. PURPOSE. The purpose of this Agreement is to provide the Executive with specified compensation and benefits in the event of a Termination upon a Change of Control (as defined below).

2. NO EMPLOYMENT AGREEMENT. This Agreement does not constitute a contract of employment or impose upon the Executive or the Company any obligation to retain the Executive as an Employee, to change the status of the Executive's employment, or to change the

Company's policies regarding termination of employment. The Executive's employment is and shall continue to be at-will. Subject to the terms of any applicable written employment agreement between the Company and the Executive prior to the Change of Control, the Company may assign the Executive to other duties, or to another geographic location. If the Executive's employment with the Company or a Successor (as defined below) terminates as a result of a Termination Upon Change of Control (as defined below), the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement.

3. CONTRACTUAL RIGHTS TO BENEFITS. Subject to the terms of this Agreement, this Agreement establishes and vests in the Executive a contractual right to the benefits to which he is entitled pursuant to the terms hereof, enforceable by the Executive against the Company.

4. TAXATION OF PAYMENTS. All amounts paid pursuant to this Agreement shall be subject to regular payroll and withholding taxes.

ARTICLE II

DEFINITIONS AND CONSTRUCTION

1. DEFINITIONS. Capitalized terms used in this Agreement shall have the meanings set forth in this Article II or elsewhere in this Agreement, unless the context clearly requires a different meaning.

(a) BASE SALARY. "Base Salary" shall mean an amount equal to the sum of (i) 100% of the Executive's annual base salary as in effect immediately preceding a Change of Control.

(b) TARGET BONUS. "Target Bonus" shall mean the targeted annual cash bonus which the Executive is eligible to receive assuming the Company meets its Earnings Per Share target and assuming Executive's performance is satisfactory, pursuant to the applicable bonus plan as in effect immediately preceding the Change of Control.

(i) theft; a material act of dishonesty or fraud; intentional falsification of any employment or Company records; or the commission of any criminal act which impairs the Executive's ability to perform appropriate employment duties for the Company;

(ii) improper disclosure or use of the Company's confidential, business or proprietary information by the Executive;

(iii) The Executive's conviction, including any plea of guilty or NOLO CONTENDERE, for a crime involving moral turpitude causing material harm to the reputation and standing of the Company, as determined by the Company in good faith; or

(iv) gross negligence or willful misconduct in the performance of the Executive's assigned duties (but not mere unsatisfactory performance).

(d) CHANGE OF CONTROL. "Change of Control" shall mean the occurrence of any of the following events:

(i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes the "beneficial owner" (as defined in Rule 13d-3 under Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; or

(ii) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors (as defined below);

(iii) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or

(iv) The consummation of the sale or disposition by the Company of all or substantially all the Company's assets.

(e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended.

(f) COMPANY. "Company" shall mean Cadence Design Systems, Inc., and, following a Change of Control, any Successor (as defined below).

(g) COMPENSATION COMMITTEE. "Compensation Committee" shall mean the compensation committee of the Board.

(h) DISABILITY. "Disability" shall mean that the Executive has been unable to perform his or her duties as an Employee as the result of incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate the Executive's employment. In the event that the Executive resumes the performance of substantially all of his or her duties hereunder before the termination of his or her employment becomes effective, at notice of intent to terminate shall automatically be deemed to have been revoked.

(i) EFFECTIVE DATE. "Effective Date" shall mean the date this Agreement is executed by both the Parties.

(j) EMPLOYEE. "Employee" shall mean an individual employed by the Company.

(k) GOOD REASON. "Good Reason" shall mean the occurrence of any of the following conditions following a Change of Control, without the Executive's informed written consent, which condition(s) remain(s) in effect thirty (30) days after written notice to the Company from the Executive of such condition(s):

(i) a 10% or more decrease in the Executive's Base Salary and Target Bonus.

(ii) the relocation of the Executive's primary work place for the Company to a location more than fifty (50) miles from the location of the work place prior to the Change of Control;

(iii) a material reduction of the Executive's duties or responsibilities relative to the Executive's duties or responsibilities in effect immediately prior to such reduction. For purposes of this subparagraph, a material reduction of duties and responsibilities would include a change in assignment from one substantive area of competence to another (such as, from accounting to marketing), or assignment to a new position which connotes a materially lesser rank or status, or involves diminished managerial responsibilities;

(iv) a material reduction by the Company in the kind or level of employee benefits to which the Executive is entitled immediately prior to such reduction with the result that the Executive's overall benefits package is significantly reduced;

(v) the failure of the Company to obtain the assumption of this Agreement by any Successor (as defined below);

(vi) In the event the Executive, prior to the Change of Control, is identified as an executive officer of the Company for purposes of the rules promulgated under Section 16 of the Exchange Act and following a Change of Control in which the Company or any Successor remains a publicly-traded entity, the Executive is not identified as an executive officer for purposes of Section 16 of the Exchange Act.

(l) INCUMBENT DIRECTORS. "Incumbent Directors" shall mean directors who either (i) are directors of the Company as of the date hereof, or
(ii) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination, provided, however, that no individual shall be considered an Incumbent Director if the individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of

a person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest.

(m) EXECUTIVE. "Executive" shall mean ___________________ so long as he meets the eligibility requirements of Article III.

(n) SUCCESSOR. "Successor" means the Company as defined above, and any successor or assign, whether direct or indirect, by purchase of assets or stock, merger, consolidation or otherwise, to all or substantially all of the business and/or assets of the Company or a majority of the voting securities of the Company.

(o) TERMINATION UPON CHANGE OF CONTROL. "Termination Upon Change of Control" means:

(i) the termination of the employment of the Executive by the Company without Cause during the period commencing thirty (30) days prior to the earlier of (A) the date that the Company first publicly announces it is conducting negotiations leading to a Change of Control, or (B) the date that the Company enters into a definitive agreement that would result in a Change of Control (even those still subject to approval by the Company's stockholders and other conditions and contingencies); and ending on the date which is thirteen (13) months after the Change of Control; or

(ii) any resignation by the Executive for Good Reason, as defined in this Agreement, within thirteen (13) months after the occurrence of any Change of Control. In the event of a resignation by the Executive for Good Reason during the thirteen (13) month period following the occurrence of a Change of Control, the Executive shall give written notice of the occurrence of the event or events upon which he relies to resign for Good Reason within ninety (90) days following the date of such occurrence, shall indicate the specific provision(s) of this Agreement upon which the Executive relied to make such determination, and shall state in reasonable detail the facts and circumstances claimed to provide the basis for such determination. As set forth above, upon receipt of written notice from the Executive, the Company shall have thirty (30) days to cure the condition(s) giving rise to Executive's claimed right to resign for "Good Reason." Failure to comply with the notice requirement set forth herein shall preclude Executive from receiving the severance compensation and benefits described in this Agreement; but

(iii) "Termination Upon Change of Control" shall not include any termination of the employment of the Executive (A) by the Company for Cause; (B) by the Company as a result of the Disability of the Executive; (C) as a result of the death of the Executive; or (D) as a result of the voluntary termination of the employment of the Executive for reasons other than Good Reason (I.E., resignation).

ARTICLE III

ELIGIBILITY

The Executive remains eligible to receive the benefits provided under this Agreement so long as he remains an employee of the Company. Notwithstanding the foregoing, in the event the Executive tenders his resignation prior to the Change of Control, or is subject to a written performance improvement plan with the Company immediately prior to a Change of Control, the Executive is not eligible to receive the benefits under this Agreement.

ARTICLE IV

SEVERANCE COMPENSATION AND BENEFITS

1. BASIC COMPENSATION AT TIME OF TERMINATION. In the event of the Executive's Termination Upon Change of Control, the Executive shall be entitled to the basic severance compensation described below:

(a) SALARY. All salary and accrued vacation earned through the date of the Executive's termination of employment shall be paid to the Executive.

(b) EXPENSE REIMBURSEMENT. Within thirty (30) days of submission of proper expense reports, the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to the Executive's termination of employment.

(c) EMPLOYEE BENEFITS. The Executive shall receive the benefits, if any, under all Company benefit plans to which the Executive may be entitled pursuant to the terms of such plans.

2. ADDITIONAL CASH SEVERANCE BENEFIT. In the event of the Executive's Termination Upon Change of Control, the Executive shall be entitled to the additional severance benefit described below.

(a) CASH SEVERANCE PAYMENT. A lump sum cash severance payment shall be made to the Executive equal to the sum of 100% of the Executive's Base Salary and Target Bonus. The Target Bonus shall be paid in full, regardless of whether the Company actually met its Earnings Per Share target and regardless of whether Executive's performance was satisfactory.

The cash severance payments described herein shall be reduced by applicable federal and state withholding, and paid within thirty (30) days of termination of employment, unless determination of the amount due is not fixed or is in dispute on the date of termination of employment in which case it shall be paid within ten (10) days of the Company's receipt of Executive's written election of the amount due (as described in Article V, Paragraph 1) but, in

any event, not prior to the eighth day following the Executive's execution of the release of claims described in Article VI, paragraph 3.

3. STOCK OPTION ACCELERATION. The Executive shall receive stock option acceleration as described below.

(a) 100% STOCK ACCELERATION. In the event of the Executive's Termination Upon Change of Control, all outstanding stock options granted and restricted stock issued by the Company to the Executive prior to the Change of Control shall have their vesting fully accelerated so as to be 100% vested as of the date of such Termination Upon Change of Control, or ten (10) days following the Company's receipt of the Executive's written election (described in Article V, Paragraph 1), whichever occurs last, but in either event not prior to the eighth day following the Executive's execution of the release of claims described in Article VI, paragraph 3.

(b) ACCELERATION UPON NON-ASSUMPTION IN A CHANGE OF CONTROL. If there is a Change of Control transaction in which the outstanding stock options granted and restricted stock issued by the Company prior to the transaction are not fully assumed by the Successor, or replaced by fully equivalent substitute options or restricted stock, then all options and restricted stock shall have their vesting fully accelerated to be 100% vested immediately prior to the effective date of the Change of Control. The date such unexercised options will terminate and the period during which the Executive may exercise the fully vested options shall be governed by the applicable stock option plan under which the options were granted. Alternatively, the Company and the Executive may elect, with the consent of both, that the Company will deliver to the Executive on the effective date of the Change of Control a cash payment equal to the difference between (i) the aggregate exercise price of the Executive's unexercised options or restricted stock, and (ii) the value of the consideration deliverable for an equivalent number of shares as a result of the Change of Control transaction.

4. MEDICAL AND DENTAL BENEFITS PURSUANT TO COBRA. In the event of the Executive's Termination Upon Change of Control, the Executive shall be eligible for continued employee medical and dental insurance coverage to the extent provided by and subject to the terms of the Consolidated Budget Reconciliation Act of 1985 ("COBRA").

5. VOLUNTARY RESIGNATION; TERMINATION FOR CAUSE. If the Executive's employment terminates by reason of the Executive's voluntary resignation and is not a termination for Good Reason, or if the Executive is terminated involuntarily for Cause, then the Executive shall not be entitled to receive benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such termination other than under this Agreement or as specified in any individual written agreements by and between the Company and the Executive.

6. DISABILITY OR DEATH. If the Company terminates the Executive's employment as a result of the Executive's Disability, or the Executive's employment is terminated due to the death of the Executive, then the Executive shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance

and benefits plans and policies or as specified in any individual written agreements by and between the Company and the Executive at the time of such Disability or death.

7. TERMINATION APART FROM CHANGE OF CONTROL. In the event that the Executive's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the thirteen-month period following a Change of Control, then the Executive shall be entitled to receive severance benefits only as may then be established under the Company's existing severance and benefit plans and policies at the time of such termination other than this Agreement or as is specified in any individual written agreements by and between the Company and the Executive.

ARTICLE V

FEDERAL EXCISE TAX UNDER SECTION 280G OF THE CODE

1. ADJUSTMENT OF EXCESS PAYMENTS PAYABLE TO THE EXECUTIVE. If (a) any amounts payable to the Executive under this Agreement are characterized as excess parachute payments pursuant to Section 4999 of the Code, and (b) the Executive thereby would be subject to any United States Federal excise tax due to that characterization, then (c) the Executive may elect, in the Executive's sole discretion, to reduce the amounts payable under this Agreement or to have any portion of the applicable options or restricted stock not vest in order to avoid any "excess parachute payment" under Section 280G(b)(1) of the Code. If the Executive does not make an election within thirty (30) days of his termination upon Change of Control or within (5) days following the determination by Independent Public Accountants described in Article V, Section 2 below, whichever occurs latest, then the entire amount shall be paid to him and he will be responsible for payment of any excise taxes.

2. DETERMINATION BY INDEPENDENT PUBLIC ACCOUNTANTS. Unless the Company and the Executive otherwise agree in writing, any determination required under this Article V shall be made in writing by independent public accountants agreed to by the Company and the Executive (the "Accountants"), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this Article V, the Accountants may rely on reasonable, good faith interpretations concerning the applications of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountant such information and documents as the Accountants may reasonably request in order to make the required determination. The Company shall bear all fees and expenses the Accountants may reasonably charge in connection with the services contemplated by this Article V.

ARTICLE VI

EXCLUSIVE REMEDIES

1. SOLE REMEDY FOR TERMINATION UPON CHANGE OF CONTROL. The severance payments and benefits described in Article IV shall constitute the Executive's sole and exclusive remedy for any alleged injury or other damages arising out of the cessation of the employment relationship between the Executive and the Company in the event of the Executive's Termination Upon Change of Control.

2. NO OTHER BENEFITS PAYABLE. The Executive shall be entitled to no other compensation, benefits or other payments from the Company as a result of any termination of employment with respect to which the payments and/or benefits described in Article IV have been provided to the Executive, except as expressly set forth in a written agreement or in a duly executed employment agreement between the Company and the Executive.

3. RELEASE OF CLAIMS. The Executive acknowledges that the right to receive the cash severance compensation, stock option acceleration, and other benefits described in Article IV is expressly conditioned on the Executive executing, at the time of termination, a release and waiver of claims which is substantially similar to the one attached hereto as Exhibit A.

ARTICLE VII

PROPRIETARY AND CONFIDENTIAL INFORMATION

1. CONTINUED COMPLIANCE. The Executive agrees to continue to abide by the terms and conditions of the Company's Employee Invention and Confidential Information Agreement executed by the Executive on or about ________________ and attached hereto as Exhibit B.

2. RETURN OF COMPANY PROPERTY. The Executive agrees to return all Company property in his possession and under his control within ten (10) days of his employment termination.

3. NONSOLICITATION. If the Company has performed its obligations to deliver the severance benefits described in Article IV of the Agreement, then for a period of one (1) year after the Executive's Termination Upon Change of Control, the Executive will not, directly or indirectly, solicit the services or business of or in any other manner persuade any employee, distributor, vendor, representative or customer of the Company to discontinue that person's or entity's relationship with or to the Company.

4. OTHER AGREEMENTS NOT SUPERSEDED. This Article VII shall not supersede or limit the terms, including more restrictive terms, of any other agreement by the Executive to refrain from competition with or from soliciting the employees or customers of the Company.

ARTICLE VIII

DISPUTE RESOLUTION

1. DISPUTES SUBJECT TO ARBITRATION. Any claim, dispute or controversy arising in any way out of this Agreement, or the interpretation, validity, enforceability or breach thereof, shall

be submitted by the Executive and Company to confidential, final and binding arbitration conducted by JAMS/Endispute under the then-existing JAMS/Endispute rules, rather than by litigation in court, trial by jury, administrative proceeding, or any other forum; provided, however, that (a) the arbitrator shall have no authority to make any ruling or judgment that would confer any rights with respect to the trade secrets, confidential and proprietary information or other intellectual property of the Company upon the Executive or any third party; and (b) this arbitration provision shall not preclude the Company from seeking legal and equitable relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company's intellectual property. Judgment may be entered on the award of the arbitrator in any court having jurisdiction.

2. SITE OF ARBITRATION; EXPENSES AND FEES. The site of the arbitration proceeding shall be in Santa Clara County, California. The costs and expenses relating to the arbitration proceeding itself, including the fees of the arbitrator, shall be borne by the Company. The Executive and Company shall each be responsible for its own attorneys' fees, including any expert witness fees, incurred in connection with the arbitration proceeding.

ARTICLE IX

TERM, AMENDMENT

1. TERM. This Agreement shall continue for two years from the Effective Date, and shall be automatically renewed for successive one-year periods, unless, prior to a Change of Control and prior to the applicable automatic renewal date, action is taken by the Board to terminate this Agreement.

2. AMENDMENT. This Agreement may not be amended, modified, altered, or supplemented other than by means of a written instrument duly executed by the Company and the Executive.

ARTICLE X

MISCELLANEOUS PROVISIONS

1. NO DUTY TO MITIGATE. Other than offsets specifically provided for herein, the Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source.

2. NO LIMITATION OF REGULAR BENEFIT PLANS. This Agreement is not intended to and shall not affect, limit or terminate any plans, programs or arrangements of the Company that are regularly made available to a significant number of employees, officers or executives of the Company, including without limitation, the Company's stock option plans.

3. NONACCUMULATION OF BENEFITS. The Executive may not accumulate cash severance payments and/or stock option acceleration under both this Agreement and another agreement. If

the Executive has another binding written agreement with the Company which provides that upon a Change of Control or termination of employment, the Executive shall receive one or more of the benefits described in Article IV of this Agreement (I.E., the payment of cash compensation or acceleration of vesting of stock options or restricted stock rights), then with respect to those benefits the aggregate amounts payable under this Agreement shall be reduced by the amounts paid or payable under such other and separate agreements.

4. SEVERABILITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

5. SUCCESSORS OF THE COMPANY. The Company will require any Successor expressly and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place.

6. HEIRS OF THE EXECUTIVE. Rights and benefits under this Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees and legatees.

7. NOTICES. For purposes of this Agreement, notices and all other communications permitted or provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows:

If to the Company:

Cadence Design Systems, Inc.

Attn: General Counsel 2655 Seely Road, MS/5B1 San Jose, CA 95134

If to the Executive: At the most recent address recorded in the records of the Company. Either party may provide the other with notices of changes of address, which shall be effective upon receipt.

8. NO ASSIGNMENT OF BENEFITS. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection shall be void.

9. GOVERNING LAW. The Agreement shall be interpreted in accordance with and governed by the laws of the State of California as applied to contracts entered into and entirely to be performed within the State of California.

10. COOPERATION OF THE EXECUTIVE AFTER TERMINATION OF EMPLOYMENT. In the event the Executive's employment is terminated, as the result of a Change of Control or otherwise, the

Executive agrees to cooperate with the Company with respect to all matters relating to the completion of any pending work and the orderly transfer of such work to other Employees.

Dated:

CADENCE DESIGN SYSTEMS, INC.

By:

H. Raymond Bingham

Title: President and Chief Executive Officer

Dated:

EXHIBIT 21.01

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:

Accent S.r.l.(1).......................................................Italy
Ambit Design Systems, Inc. ............................................U.S.A.
Ambit Design Systems Limited ..........................................United Kingdom
Cadence (Barbados) FSC Inc. ...........................................Barbados
Cadence China Ltd. ....................................................Hong Kong
Cadence Credit Corporation, Inc. ......................................U.S.A.
Cadence Design Systems (Canada) Limited ...............................Canada
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 I B.V. .........................................Netherlands
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 Service Y.K. ..........................................Japan
Cadence Design Systems, Ltd ...........................................United Kingdom
Cadence Design Systems S.A.S. .........................................France
Cadence Design Systems S.r.l. .........................................Italy
Cadence International Sales Corporation................................U.S. Virgin Islands
Cadence Korea Ltd. ....................................................Korea
Cadence Receivables Corporation .......................................U.S.A.
Cadence Receivables Consolidation Corporation .........................U.S.A.
Cadence Taiwan, Inc. ..................................................Taiwan
Castlewilder ..........................................................Ireland
Cooper & Chyan Technology GmbH.........................................Germany
Cooper & Chyan Technology, Inc. .......................................U.S.A.
Cooper & Chyan Technology, Ltd. .......................................United Kingdom
Detente Technology, Inc. ..............................................U.S.A.

(1) Change in ownership from 51% to 49% on March 1, 1999.

EXHIBIT 21.01 (CONTINUED)

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:

Esperan Limited .......................................................United Kingdom
Esperan (US) Limited ..................................................United Kingdom
High Level Design Systems, Ltd. .......................................United Kingdom
Innotech Company ......................................................Japan
Integrated Measurement Systems, Inc. ..................................U.S.A.
River Oaks Place Association ..........................................U.S.A.
Seeley Properties, Inc. ...............................................U.S.A.
Simon Software, Inc. ..................................................U.S.A.
Symbionics Group Limited ..............................................United Kingdom
Symbionics Limited ....................................................United Kingdom
Synthesia AB ..........................................................Sweden
Telos Venture Partners ................................................U.S.A.
Unicad, Inc. ..........................................................U.S.A.
UVW Ltd ...............................................................United Kingdom
Valid Europe BVBA .....................................................Belgium
3005353 Nova Scotia ...................................................Nova Scotia
Quickturn Design Systems, Inc..........................................U.S.A.
Quickturn Design Systems International, Inc. ..........................U.S.A.
Quickturn Design Systems Belgium S.A. .................................Belgium
Quickturn Design Systems Israel Ltd. ..................................Israel
Quickturn Design Systems AB Sweden ....................................Sweden
Quickturn Design Systems (UK) Ltd. ....................................United Kingdom
Quickturn Design Systems S.A.R.L. .....................................France
Quickturn Design Systems GmbH .........................................Germany
Quickturn Design Systems, Asia, Inc. ..................................U.S.A.
Quickturn Design Systems KK............................................Japan
PiE S.A.R.L. ..........................................................France
Quickturn Design Systems FSC Limited...................................Barbados
Speedsim, Inc. ........................................................U.S.A.
Orcad, Inc. ...........................................................U.S.A.
Microsim Corporation ..................................................U.S.A.
Orcad Japan K.K. ......................................................Japan
Orcad UK Limited ......................................................United Kingdom
Orcad Foreign Sales Corporation .......................................Guam
Design Acceleration, Inc. .............................................U.S.A.
1Chip Silicon Systems, Inc.............................................U.S.A.
RO Seely Corporation ..................................................U.S.A.
Daffodil Acquisition, Inc. ............................................U.S.A.
Daffodil Acquisition II, Inc. .........................................U.S.A.

Daffodil Acquisition LLC ..............................................U.S.A.
Diablo Research Company LLC............................................U.S.A.
Diablo Lighting, Inc. .................................................U.S.A.
Sibford Limited .......................................................Ireland
Cadence China Technologies PTE Limited(2)..............................Singapore

(2) Cadence Design Systems (Ireland) Limited owns 19% of this entity.

Exhibit 23.01

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, and 333-69589) on Form S-8.

                                            /S/ ARTHUR ANDERSEN LLP
                                           -------------------------
                                              Arthur Andersen LLP

San Jose, California


March 27, 2000

Exhibit 23.02

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-43025, 44-48371, 33-53913, 333-18963, 333-27109, 333-34599, 333-40047, 333-61029, 333-65529, 333-71717, 333-85591, 333-93609 and 333-69589) of Cadence Design Systems, Inc. of our report dated January 15, 1999 relating to the financial statements, which appears in this Form 10-K.

/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP

San Jose, California


March 27, 2000

ARTICLE 5

THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CADENCE DESIGN SYSTEMS, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

MULTIPLIER: 1,000


PERIOD TYPE	YEAR
FISCAL YEAR END	JAN 01 2000
PERIOD START	JAN 03 1999
PERIOD END	JAN 01 2000
CASH	111,401
SECURITIES	7,357
RECEIVABLES	248,034
ALLOWANCES	44,588
INVENTORY	19,872
CURRENT ASSETS	479,912
PP&E	602,955
DEPRECIATION	272,546
TOTAL ASSETS	1,459,659
CURRENT LIABILITIES	421,558
BONDS	0
PREFERRED MANDATORY	0
PREFERRED	0
COMMON	617,212
OTHER SE	368,937
TOTAL LIABILITY AND EQUITY	1,459,659
SALES	0
TOTAL REVENUES	1,093,303
CGS	0
TOTAL COSTS	386,631
OTHER EXPENSES	719,422
LOSS PROVISION	9,070
INTEREST EXPENSE	3,296
INCOME PRETAX	(11,380)
INCOME TAX	2,695
INCOME CONTINUING	(14,075)
DISCONTINUED	0
EXTRAORDINARY	0
CHANGES	0
NET INCOME	(14,075)
EPS BASIC	(0.06)
EPS DILUTED	(0.06)

ARTICLE 5

RESTATED:

MULTIPLIER: 1,000


PERIOD TYPE	YEAR	YEAR	3 MOS	6 MOS 9-MOS
FISCAL YEAR END	JAN 03 1998	JAN 02 1999	JAN 02 1999	JAN 02 1999 JAN-02-1999
PERIOD START	DEC 29 1996	JAN 04 1998	JAN 04 1998	JAN 04 1998 JAN-04-1998
PERIOD END	JAN 03 1998	JAN 02 1999	APR 04 1998	JUL 04 1998 OCT-03-1998
CASH	221,030	209,074	195,929	152,135 232,326
SECURITIES	115,399	40,403	136,225	144,820 50,840
RECEIVABLES	236,601	305,143	221,038	247,426 254,030
ALLOWANCES	26,080	22,989	20,420	13,328 15,564
INVENTORY	10,899	9,903	11,244	5,008 6,932
CURRENT ASSETS	695,333	666,152	652,163	640,273 641,982
PP&E	365,486	487,689	405,488	432,272 460,835
DEPRECIATION	156,947	213,481	173,988	187,817 199,979
TOTAL ASSETS	1,153,247	1,481,916	1,183,614	1,229,574 1,499,664
CURRENT LIABILITIES	303,926	371,824	278,306	290,148 591,423
BONDS	0	0	0	0 0
PREFERRED MANDATORY	0	0	0	0 0
PREFERRED	0	0	0	0 0
COMMON	495,884	598,561	546,958	520,234 512,745
OTHER SE	325,479	349,269	322,038	380,813 302,363
TOTAL LIABILITY AND EQUITY	1,153,247	1,481,916	1,183,614	1,229,574 1,499,664
SALES	0	0	0	0 0
TOTAL REVENUES	1,036,773	1,320,180	293,788	609,524 943,708
CGS	0	0	0	0 0
TOTAL COSTS	228,086	337,164	70,695	156,867 243,972
OTHER EXPENSES	584,981	893,528	206,544	357,184 674,458
LOSS PROVISION	438	7,687	0	2,010 3,724
INTEREST EXPENSE	2,780	3,735	443	734 1,699
INCOME PRETAX	252,096	100,046	19,867	102,156 34,023
INCOME TAX	74,698	74,922	21,821	44,148 56,468
INCOME CONTINUING	177,398	25,124	(1,954)	58,008 (22,445)
DISCONTINUED	0	0	0	0 0
EXTRAORDINARY	0	0	0	0 0
CHANGES	12,276	0	0	0 0
NET INCOME	165,122	25,124	(1,954)	58,008 (22,445)
EPS BASIC	0.76	0.11	(0.01)	0.25 (0.10)
EPS DILUTED	0.68	0.10	(0.01)	0.22 (0.10)

ARTICLE 5

RESTATED:

MULTIPLIER: 1,000


PERIOD TYPE	3 MOS
FISCAL YEAR END	JAN 01 2000
PERIOD START	JAN 03 1999
PERIOD END	APR 03 1999
CASH	238,177
SECURITIES	22,303
RECEIVABLES	278,161
ALLOWANCES	28,479
INVENTORY	8,111
CURRENT ASSETS	655,005
PP&E	514,513
DEPRECIATION	225,322
TOTAL ASSETS	1,549,544
CURRENT LIABILITIES	308,148
BONDS	0
PREFERRED MANDATORY	0
PREFERRED	0
COMMON	658,652
OTHER SE	403,018
TOTAL LIABILITY AND EQUITY	1,549,544
SALES	0
TOTAL REVENUES	335,191
CGS	0
TOTAL COSTS	91,408
OTHER EXPENSES	166,383
LOSS PROVISION	2,019
INTEREST EXPENSE	1,222
INCOME PRETAX	77,534
INCOME TAX	24,672
INCOME CONTINUING	52,862
DISCONTINUED	0
EXTRAORDINARY	0
CHANGES	0
NET INCOME	52,862
EPS BASIC	0.22
EPS DILUTED	0.20