CADENCE DESIGN SYSTEMS INC (Form: 10-Q, Received: 08/10/2004 14:56:17)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2004
OR
	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10606

CADENCE DESIGN SYSTEMS, INC.

(Exact name of Registrant as Specified in Its Charter)


Delaware		77-0148231
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
2655 Seely Avenue, Building 5, San Jose, California		95134
(Address of Principal Executive Offices)		(Zip Code)
(408) 943-1234 Registrant’s Telephone Number, including Area Code

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No

On July 3, 2004, 269,681,400 shares of the registrant’s common stock, $0.01 par value, were outstanding.

CADENCE DESIGN SYSTEMS, INC.

INDEX


			Page

PART I.		FINANCIAL INFORMATION

	Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheets: July 3, 2004 and January 3, 2004		1
		Condensed Consolidated Statements of Operations: Three and Six Months Ended July 3, 2004 and June 28, 2003		2
		Condensed Consolidated Statements of Cash Flows: Six Months Ended July 3, 2004 and June 28, 2003		3
		Notes to Condensed Consolidated Financial Statements		4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		54

	Item 4.	Controls and Procedures		57

PART II.		OTHER INFORMATION

	Item 1.	Legal Proceedings		58

	Item 2.	Changes in Securities and Use of Proceeds		59

	Item 3.	Defaults Upon Senior Securities		60

	Item 4.	Submission of Matters to a Vote of Security Holders		60

	Item 5.	Other Information		60

	Item 6.	Exhibits and Reports on Form 8-K		61

		Signatures		62
EXHIBIT 10.01
EXHIBIT 10.02
EXHIBIT 10.16
EXHIBIT 10.32
EXHIBIT 10.78
EXHIBIT 10.79
EXHIBIT 10.80
EXHIBIT 10.81
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02

PART I. FINANCIAL INFORMATION


	Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

ASSETS


			July 3,			January 3,
			2004			2004

Current Assets:
	Cash and cash equivalents		$	389,721		$	384,525
	Short-term investments			21,989			33,898
	Receivables, net of allowance for doubtful accounts of $9,328 and $9,067, respectively			347,631			348,680
	Inventories			24,144			16,926
	Prepaid expenses and other			71,227			58,212

		Total current assets		854,712			842,241
Property, plant and equipment, net				398,535			403,847
Goodwill				984,690			922,797
Acquired intangibles, net				244,503			237,508
Installment contract receivables, net				74,354			121,627
Other assets				239,059			289,882

Total Assets			$	2,795,853		$	2,817,902

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable and accrued liabilities		$	261,516		$	243,450
	Current portion of deferred revenue			242,580			238,478

		Total current liabilities		504,096			481,928

Long-Term Liabilities:
	Long-term portion of deferred revenue			14,588			16,287
	Convertible notes			420,000			420,000
	Other long-term liabilities			290,050			327,406

		Total long-term liabilities		724,638			763,693

Stockholders’ Equity:
	Common stock and capital in excess of par value			1,047,415			1,034,190
	Deferred stock compensation			(56,592	)		(48,856	)
	Retained earnings			561,402			566,354
	Accumulated other comprehensive income			14,894			20,593

		Total stockholders’ equity		1,567,119			1,572,281

Total Liabilities and Stockholders’ Equity			$	2,795,853		$	2,817,902

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



			Three Months Ended						Six Months Ended

			July 3,			June 28,			July 3,			June 28,
			2004			2003			2004			2003

Revenue:
	Product		$	165,286		$	160,774		$	320,023		$	309,232
	Services			37,253			34,801			69,617			67,189
	Maintenance			84,540			81,006			163,163			163,212

		Total revenue		287,079			276,581			552,803			539,633

Costs and Expenses:
	Cost of product			15,043			16,881			33,557			34,245
	Cost of services			23,295			24,456			46,394			48,851
	Cost of maintenance			13,465			14,533			27,170			30,133
	Marketing and sales			80,172			82,620			161,395			166,235
	Research and development			91,090			88,376			178,241			173,498
	General and administrative			20,205			20,107			39,973			46,784
	Amortization of acquired intangibles			16,021			15,066			31,931			29,906
	Amortization of deferred stock compensation (A)			8,194			7,851			16,152			13,932
	Restructuring and other charges			2,929			1,352			8,364			1,352
	Write-off of acquired in-process technology			7,000			3,800			7,000			5,500

		Total costs and expenses		277,414			275,042			550,177			550,436

Income (loss) from operations				9,665			1,539			2,626			(10,803	)
	Interest expense			(1,699	)		(640	)		(3,256	)		(1,314	)
	Other expense, net			(3,215	)		(7,898	)		(5,844	)		(11,407	)

Income (loss) before provision (benefit) for income taxes				4,751			(6,999	)		(6,474	)		(23,524	)
	Provision (benefit) for income taxes			948			(1,695	)		(1,522	)		(5,182	)

Net income (loss)			$	3,803		$	(5,304	)	$	(4,952	)	$	(18,342	)

Basic net income (loss) per share			$	0.01		$	(0.02	)	$	(0.02	)	$	(0.07	)

Diluted net income (loss) per share			$	0.01		$	(0.02	)	$	(0.02	)	$	(0.07	)

Weighted average common shares outstanding				272,362			267,887			272,210			268,128

Weighted average common and potential common shares outstanding – – assuming dilution				278,645			267,887			272,210			268,128


(A) Amortization of deferred stock compensation would be further classified as follows:
Cost of services			$	894		$	1,081		$	1,771		$	1,699
Marketing and sales				1,626			2,230			3,859			4,240
Research and development				3,355			4,031			7,877			6,601
General and administrative				2,319			509			2,645			1,392

			$	8,194		$	7,851		$	16,152		$	13,932

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



					Six Months Ended

								Restated
					July 3,			June 28,
					2004			2003

Cash and Cash Equivalents at Beginning of Period					$	384,525		$	371,327

Cash Flows from Operating Activities:
	Net loss					(4,952	)		(18,342	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation and amortization				92,870			95,215
		Amortization of deferred stock compensation				16,152			13,932
		Equity in loss from investments, net				12,370			5,382
		Gain on sale of investments				(7,297	)		- - - -
		Write-off of investment securities				1,924			4,460
		Write-off of acquired in-process technology				7,000			5,500
		Proceeds from the sale of receivables				5,149			27,880
		Provisions for losses on trade accounts receivable and sales returns				1,268			13,582
		Other non-cash items				(263	)		3,249
		Changes in operating assets and liabilities, net of effect of acquired businesses:
			Receivables			(174	)		(5,078	)
			Inventories			(7,218	)		(1,663	)
			Prepaid expenses and other			(5,968	)		(2,859	)
			Installment contract receivables			43,741			(33,529	)
			Other assets			1,050			20,953
			Accounts payable and accrued liabilities			(12,789	)		(89,712	)
			Deferred revenue			1,885			(6,802	)
			Other long-term liabilities			16,272			8,393

				Net cash provided by operating activities		161,020			40,561

Cash Flows from Investing Activities:
	Proceeds from sale and maturities of short-term investments – – available-for-sale					3,557			- - - -
	Proceeds from the sale of long-term investments					6,942			- - - -
	Proceeds from sale of equipment					3,625			- - - -
	Purchases of property, plant and equipment					(33,688	)		(40,105	)
	Purchases of software licenses					(650	)		(2,282	)
	Investment in venture capital partnerships and equity investments					(13,417	)		(9,402	)
	Cash paid in business combinations, net of cash acquired					(96,803	)		(102,353	)

				Net cash used for investing activities		(130,434	)		(154,142	)

Cash Flows from Financing Activities:
	Proceeds from credit facility					- - - -			45,000
	Principal payments on credit facility and capital leases					(321	)		(63,247	)
	Payment of convertible notes issuance costs					(1,920	)		- - - -
	Proceeds from issuance of common stock					45,866			28,796
	Purchases of treasury stock					(69,846	)		(61,964	)

				Net cash used for financing activities		(26,221	)		(51,415	)

Effect of exchange rate changes						831			882

Increase (decrease) in cash and cash equivalents						5,196			(164,114	)

Cash and Cash Equivalents at End of Period					$	389,721		$	207,213

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


NOTE 1.	BASIS OF PRESENTATION

The Condensed Consolidated Financial Statements included in this Quarterly Report have been prepared by Cadence Design Systems, Inc., or Cadence, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements are meant to be, and should be, read in conjunction with the Consolidated Financial Statements and the notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004, or the 2003 Annual Report.

The unaudited Condensed Consolidated Financial Statements included in this Quarterly Report reflect all adjustments (which include only normal, recurring adjustments and those items discussed in these Notes) that are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year.

Preparation of the Condensed 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 Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


	Restatement

In Cadence’s 2003 Annual Report, Cadence restated its Consolidated Financial Statements as of and for the fiscal year ended December 28, 2002, and for the first three quarters of fiscal 2003. The accompanying Condensed Consolidated Financial Statements present restated results for the three and six months ended June 28, 2003. For the three and six months ended June 28, 2003, adjustments were made to income (loss) on equity investments, amortization of deferred stock compensation, revenue, amortization of internally developed software, foreign currency transaction gains (losses), Other expense, net, and the tax effect of these restatement adjustments. Adjustments were also made to reclassify amortization of certain intangible assets from Amortization of acquired intangibles to Cost of product, Cost of services and Cost of maintenance.


NOTE 2.	STOCK-BASED COMPENSATION

The table below provides a pro forma illustration of the financial results of operations as if Cadence had accounted for its grants of employee stock options under the fair value method of Statement of Financial Accounting Standards, or SFAS, No. 123, “Accounting for Stock – Based Compensation”. The impact of employee stock options on the pro forma financial results of operations was estimated at the date of grant using the Black-Scholes option pricing model. Cadence used expected volatility, as well as other economic data, to estimate the volatility for the option grants during the three and six months ended July 3, 2004 and June 28, 2003, because management believes the amount yielded by this method is representative of prospective trends. Cadence determined the estimated fair values of its options granted and shares purchased under its employee

stock purchase plans, or ESPPs, for the three and six months ended July 3, 2004 and June 28, 2003 using the following weighted average assumptions assuming a dividend yield of zero for all periods:

Stock Options

Three Months Ended

Six Months Ended

July 3,

June 28,

July 3,

June 28,

2004

2003

2004

2003

Risk-free interest rate

3.62%

3.36%

3.34%

3.36%

Volatility of the expected market price of Cadence’s common stock

35%

38%

39%

38%

Weighted average expected life of an option

5 Years



	Employee Stock
	Purchase Plans

	July 3,		June 28,
	2004		2003

Risk-free interest rate, based on weighted average		1.01%		1.10%
Volatility of the expected market price of Cadence’s common stock		41%		38%
Weighted average expected life of ESPP shares		0.5 Years		0.5 Years

The following table illustrates the effect on net income (loss) and net income (loss) per share as if Cadence had applied the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” to stock-based compensation:



		Three Months Ended						Six Months Ended

					Restated						Restated
		July 3,			June 28,			July 3,			June 28,
		2004			2003			2004			2003

Net income (loss):
	As reported	$	3,803		$	(5,304	)	$	(4,952	)	$	(18,342	)
	Add: Stock-based employee compensation expense included in reported Net income (loss), net of related tax effects		6,467			5,574			12,713			9,892
	Deduct: Stock-based employee compensation expense determined under fair-value method for all awards, net of related tax effects		(16,330	)		(22,581	)		(40,097	)		(57,119	)

	Pro forma	$	(6,060	)	$	(22,311	)	$	(32,336	)	$	(65,569	)

Basic and diluted net income (loss) per share:
	As reported	$	.01		$	(.02	)	$	(0.02	)	$	(0.07	)

	Pro forma	$	(.02	)	$	(.08	)	$	(0.12	)	$	(0.24	)


NOTE 3.	ACQUISITIONS


	Neolinear, Inc.

In April 2004, Cadence acquired Neolinear, Inc., or Neolinear, a privately-held developer of rapid analog design technology. Cadence purchased Neolinear to acquire key personnel and technology. As discussed in Note 5, prior to the acquisition Cadence held an equity investment in Neolinear of approximately $3 million, representing a 12% ownership. In accordance with SFAS No. 141, “Business Combinations,” Cadence accounted for the acquisition of Neolinear as a step acquisition. The aggregate initial purchase price was $78.1 million, which included the payment of cash, the fair value of assumed options and acquisition costs. The purchase price and goodwill will increase if certain performance goals related to revenue targets and

product development are achieved over a period of approximately four years following the acquisition. Neolinear’s results of operations and the estimated fair values of the assets acquired and liabilities assumed have been included in Cadence’s Condensed Consolidated Financial Statements from the date of acquisition.

The following table summarizes the preliminary allocation of the purchase price for Neolinear and the estimated amortization period for the acquired intangibles:


				(In thousands)
Current assets				$	13,383
Property, plant and equipment					288
Other assets					46
Acquired intangibles:
	Existing technology (five-year weighted-average useful life)				19,600
	Backlog (three-year weighted-average useful life)				1,700
	Patents (five-year weighted-average useful life)				4,700
	In-process technology				7,000
	Non-compete agreements (three-year weighted-average useful life)				1,200
	Trademarks (five-year weighted-average useful life)				1,400
Goodwill					38,319

		Total assets acquired			87,636

Current liabilities					1,762
Long-term liabilities					7,783

		Total liabilities assumed			9,545

			Net assets acquired	$	78,091

The $7.0 million of purchase price allocated to acquired in-process technology was determined through established valuation techniques. The acquired in-process technology was immediately expensed because technological feasibility had not been established, and no future alternative use exists. The write-off of acquired in-process technology is a component of operating expenses in the Condensed Consolidated Statements of Operations.

The $38.3 million of goodwill was assigned to the Product segment. The goodwill is not expected to be deductible for income tax purposes.

Comparative pro forma financial information for the acquisition of Neolinear has not been presented because the results of operations were not material to Cadence’s Consolidated Financial Statements.


	Acquisition-Related Earnouts

For a number of Cadence’s acquisitions, payment of a portion of the purchase price is contingent upon the acquired entity’s achievement of certain performance goals, which relate to one or more of the following criteria: revenue, bookings, product proliferation, product development, and employee retention. The specific performance goal levels, and amounts and timing of contingent purchase price payments, vary with each acquisition.

In the three months ended July 3, 2004, Cadence recorded $18.4 million of goodwill as contingent purchase price to stockholders of acquired companies. The $18.4 million of goodwill consisted of $9.6 million of cash payments, $2.3 million of accrued cash payments, and the issuance of shares of common stock valued at $6.5 million.

In the six months ended July 3, 2004, Cadence recorded $28.3 million of goodwill as contingent purchase price to stockholders of acquired companies. The $28.3 million of goodwill consisted of $9.6 million of cash payments, $2.3 million of accrued cash payments and the issuance of shares of common stock valued at $16.4 million. In addition, during the six months ended July 3, 2004, Cadence recognized deferred stock compensation of $1.3 million in connection with these acquisitions and in accordance with Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB No. 25)”.


NOTE 4.	GOODWILL AND ACQUIRED INTANGIBLES


	Goodwill

The changes in the carrying amount of goodwill for the six months ended July 3, 2004 were as follows:


	Product			Services
	Segment			Segment		Total


	(In thousands)
Balance as of January 3, 2004	$	792,656		$	130,141	$	922,797
Goodwill resulting from acquisitions during the year		38,319			- - - -		38,319
Additions due to earnouts		28,323			- - - -		28,323
Other		(4,749	)		- - - -		(4,749	)

Balance as of July 3, 2004	$	854,549		$	130,141	$	984,690

During the six months ended July 3, 2004, Cadence recorded other adjustments of $4.7 million in the carrying amount of goodwill, primarily as a result of a decrease in the initial purchase price totaling $3.8 million related to the 2003 acquisition of Celestry Design Technologies, Inc. and $0.8 million related to the 2003 acquisition of Get2Chip.com, Inc.


	Acquired Intangibles, net

Acquired intangibles with finite lives as of July 3, 2004 and January 3, 2004 were as follows:



	As of July 3, 2004							As of January 3, 2004

						Weighted							Weighted
						Average							Average
	Gross Carrying		Accumulated			Remaining		Gross Carrying		Accumulated			Remaining
	Amount		Amortization			Useful Life		Amount		Amortization			Useful Life


	(In thousands)							(In thousands)
Existing technology and backlog	$	584,107	$	(396,061	)		2.9 Years	$	528,857	$	(352,727	)		2.9 Years
Agreements and relationships		42,246		(17,385	)		4.6 Years		41,046		(12,139	)		4.9 Years
Distribution rights		30,100		(3,010	)		9.0 Years		30,100		(1,505	)		9.5 Years
Tradenames/ trademarks/ patents		7,034		(2,528	)		3.5 Years		5,634		(1,758	)		3.3 Years

Total acquired intangibles	$	663,487	$	(418,984	)		3.8 Years	$	605,637	$	(368,129	)		3.9 Years

For the three months ended July 3, 2004, amortization of acquired intangibles was $26.4 million as compared to $26.0 million for the same period in 2003. For the six months ended July 3, 2004, amortization of acquired intangibles was $52.6 million as compared to $51.3 million for the same period in 2003.


Estimated future amortization expense is as follows (in thousands):
	2004 – remaining periods	$	49,477
	2005		84,566
	2006		47,375
	2007		27,660
	2008		15,239
	Thereafter		20,186

Total estimated amortization expense		$	244,503

Amortization of costs from existing technology is included in Cost of product and Cost of services. Amortization of costs from acquired maintenance contracts is included in Cost of maintenance.


NOTE 5.	MARKETABLE AND NON-MARKETABLE INVESTMENT SECURITIES

Marketable Securities

Cadence accounts for its marketable securities as available-for-sale and classifies them as Short-term investments in the Condensed Consolidated Balance Sheets. There were no net recognized gains or losses from sales of marketable securities during the three months ended July 3, 2004. Net recognized gains from the sale of marketable securities were $3.3 million for the six months ended July 3, 2004. There were no net recognized gains or losses from sales of marketable securities for the three and six months ended June 28, 2003.

There were no recognized losses from other-than-temporary declines in the market value of marketable securities for the three months ended July 3, 2004. Recognized losses from other-than-temporary declines in the market value of marketable securities totaled $0.7 million in the six months ended July 3, 2004. There were no recognized losses from other-than-temporary declines in market value of marketable securities in the three and six months ended June 28, 2003.


	Non-Marketable Securities

Cadence uses either the cost or equity method of accounting for its long-term, non-marketable investment securities included in Other assets in the Condensed Consolidated Balance Sheets. Cadence recorded net gains of $2.7 million and $4.0 million from the sale of non-marketable investment securities during the three and six months ended July 3, 2004, respectively. There were no recognized gains or losses on the sale of non-marketable investment securities during the three and six months ended June 28, 2003. If Cadence determines that an other-than-temporary decline in fair value exists for a non-marketable equity security, Cadence writes down the investment to its fair value and records the related write-down as an investment loss in its Condensed Consolidated Statements of Operations.

The following table presents the carrying value of Cadence’s non-marketable securities made directly by Cadence or indirectly through Telos Venture Partners L.P., Telos Venture Partners II, L.P., and Telos Venture Partners III, L.P.


		July 3,		January 3,
		2004		2004


		(In thousands)
Non-Marketable Securities – Application of Cost Method		$	34,688	$	34,756
Non-Marketable Securities – Application of Equity Method			15,308		18,526

	Total	$	49,996	$	53,282


	Cost Method Investments

Cadence recorded no write-downs due to other-than-temporary declines in value of its cost method investments during the three months ended July 3, 2004. Cadence recorded write-downs due to other-than-temporary declines in value of its cost method investments of $1.2 million during the six months ended July 3, 2004. Cadence recorded write-downs due to other-than-temporary declines in value of $3.0 million and $4.5 million during the three and six months ended June 28, 2003, respectively. These write-downs are included in Other expense, net, in the Condensed Consolidated Statements of Operations.


	Equity Method Investments

During the first six months of 2004, Cadence’s voting interest ranged from approximately 10% to 49% of the following privately-held companies, which Cadence accounted for under the equity method of accounting: Accent S.r.l., Ammocore Technology, Inc., Clear Shape Technologies, Inc., Coventor, Inc., CoWare, Inc., E-Z-CAD, Inc., Fyre Storm, Inc., Hierarchical Design, Inc., Integrated Memory Logic, Inc., iReady Corporation, Neolinear, Inc., Rio Design Automation, Inc., Theta Microelectronics, Inc. and ZCIST Co., Ltd. On April 15, 2004, Cadence acquired all of the outstanding capital stock of Neolinear, Inc., as more fully described in Note 3.

During the first six months of 2003, Cadence’s voting interest ranged from approximately 10% to 49% of the following privately-held companies, which Cadence accounted for under the equity method of accounting: Accent S.r.l., Ammocore Technology, Inc., Coventor, Inc., Fyre Storm, Inc., Hierarchical Design, Inc., Integrated Memory Logic, Inc., iReady Corporation, Neolinear, Inc., Theta Microelectronics, Inc., and ZCIST Co., Ltd.

The following table presents summary financial data of our equity method investments for the three and six months ended July 3, 2004:


	Three Months			Six Months
	Ended			Ended


	(In thousands)
Net sales	$	8,285		$	19,318
Costs and expenses		(24,053	)		(52,610	)
Operating loss		(15,768	)		(33,292	)
Net loss		(13,746	)		(29,258	)

In accordance with the equity method of accounting, Cadence records its proportional share of the investee gains or losses in Other expense, net. Cadence records its interest in equity method gains and losses in the quarter following occurrence because it is not practicable to obtain investee financial statements prior to the issuance of Cadence’s Condensed Consolidated Financial Statements. Cadence’s proportional share of net losses was $6.1 million and $12.4 million for the three and six months ended July 3, 2004, respectively. Cadence’s proportional share of net losses was $3.6 million and $5.4 million for the three and six months

ended June 28, 2003, respectively. As of July 3, 2004, the difference between the carrying value of Cadence’s investments in the investee companies and Cadence’s share of the underlying net assets of the investee companies was immaterial.


NOTE 6.	RESTRUCTURING AND OTHER CHARGES

Cadence initiated a separate plan of restructuring in each year beginning in 2001, in an effort to reduce operating expenses and improve operating margins and cash flows.

The restructuring plans initiated in 2001 through 2003, or the 2001 Restructuring, 2002 Restructuring and 2003 Restructuring, were intended to decrease costs by reducing workforce and consolidating facilities and resources, to align Cadence’s cost structure with expected revenues. The 2001 and 2002 Restructurings primarily related to Cadence’s design services business and certain other business/infrastructure groups throughout the world. The 2003 Restructuring was targeted at reducing costs throughout the company.

During the first quarter of 2004, Cadence commenced a new plan of restructuring, or the 2004 Restructuring, which was also intended to decrease costs and realize efficiencies by reducing workforce and resources throughout the company to align Cadence’s cost structure with projected revenues.

The asset-related portion of the 2004 Restructuring was accounted for in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” The severance and benefits charges under this restructuring plan were accounted for in accordance with SFAS No. 112 “Employers’ Accounting for Postemployment Benefits – An Amendment of Financial Accounting Standards Board, or FASB, Statements No. 5 and 43.”

Closure and space reduction costs included in restructuring were comprised of payments required under leases less any applicable estimated sublease income after the properties were abandoned, lease buyout costs and costs to maintain facilities during the period after abandonment. To estimate the lease loss, which is the loss after Cadence’s cost recovery efforts from subleasing a building, certain assumptions were made related to the time period over which the relevant building would remain vacant and sublease terms, including sublease rates and contractual common area charges.

Since 2001, Cadence has recorded facilities consolidation charges of $84.1 million related to space reductions or closures of 32 sites. As of July 3, 2004, 22 of these sites had been vacated and space reductions occurred at the remaining ten sites.

As of July 3, 2004, Cadence’s best estimate of the lease loss related to all worldwide restructuring activities initiated since 2001 is $17.5 million. This amount will be adjusted in the future based upon changes in the assumptions used to estimate the lease loss. The lease loss could range as high as $41.4 million if sublease rental rates decrease in applicable markets or if it takes longer than currently expected to find a suitable tenant to sublease the facilities.

Restructuring and other charges incurred by plan of restructuring for the three months ended July 3, 2004 were as follows:


		Severance
		and			Asset-			Excess
		Benefits			Related			Facilities		Total


		(In thousands)
2004 Plan		$	2,403		$	- - -		- $	- - - -	$	2,403
2003 Plan			(239	)		669			- - - -		430
2002 Plan			- - - -			(559	)		449		(110	)
2001 Plan			- - - -			- - - -			206		206

	Total	$	2,164		$	110		$	655	$	2,929

Restructuring and other charges incurred by plan of restructuring for the six months ended July 3, 2004 were as follows:


		Severance
		and			Asset-			Excess
		Benefits			Related			Facilities		Total


		(In thousands)
2004 Plan		$	6,975		$	91		$	- - - -	$	7,066
2003 Plan			(299	)		1,075			156		932
2002 Plan			- - - -			(584	)		449		(135	)
2001 Plan			- - - -			- - - -			501		501

	Total	$	6,676		$	582		$	1,106	$	8,364

Total restructuring and other costs accrued as of July 3, 2004 were $51.2 million, consisting of $23.4 million in Accounts payable and accrued liabilities and $27.8 million in Other long-term liabilities in the Condensed Consolidated Balance Sheets. Cadence expects to pay substantially all of the asset-related and severance and benefits-related restructuring liabilities for all its restructuring plans prior to 2006 and all of the facilities-related restructuring liabilities for all its restructuring plans prior to 2016.

Activity for the second quarter of 2004 and the six months ended July 3, 2004 associated with each plan of restructuring is discussed below.


	*2004 Restructuring*

The 2004 Restructuring is expected to result in the termination of approximately 121 employees. Costs resulting from this restructuring include severance payments, severance-related benefits and outplacement services. All terminations and termination benefits associated with this restructuring were communicated to the affected employees prior to July 3, 2004, with all termination benefits expected to be paid by January 1, 2005.

The following table presents the activity associated with restructuring and other charges related to the 2004 Restructuring for the three months ended July 3, 2004:


		Severance
		and			Asset-			Excess
		Benefits			Related			Facilities		Total


		(In thousands)
Balance, April 3, 2004		$	2,263		$	32		$	- - - -	$	2,295
	Restructuring and other charges, net		2,403			- - - -			- - - -		2,403
	Non-cash charges		- - - -			- - - -			- - - -		- - - -
	Cash payments		(2,669	)		(30	)		- - - -		(2,699	)
	Effect of foreign currency translation		12			(2	)		- - - -		10

Balance, July 3, 2004		$	2,009		$	- - - -		$	- - - -	$	2,009

The following table presents the activity associated with restructuring and other charges related to the 2004 Restructuring for the six months ended July 3, 2004:


		Severance
		and			Asset-			Excess
		Benefits			Related			Facilities		Total


		(In thousands)
Balance, January 3, 2004		$	- - - -		$	- - - -		$	- - - -	$	- - - -
	Restructuring and other charges, net		6,975			91			- - - -		7,066
	Non-cash charges		- - - -			(59	)		- - - -		(59	)
	Cash payments		(4,980	)		(30	)		- - - -		(5,010	)
	Effect of foreign currency translation		14			(2	)		- - - -		12

Balance, July 3, 2004		$	2,009		$	- - - -		$	- - - -	$	2,009


	*2003 Restructuring*

Cadence incurred $0.4 million and $0.9 million of expense in the three and six months ended July 3, 2004, respectively, related to the 2003 Restructuring. These expenses were primarily comprised of contract termination charges as well as storage and disposal charges associated with facilities vacated as part of the 2003 Restructuring.

The following table presents the activity associated with restructuring and other charges related to the 2003 Restructuring for the three months ended July 3, 2004:


		Severance
		and			Asset-			Excess
		Benefits			Related			Facilities			Total


		(In thousands)
Balance, April 3, 2004		$	2,674		$	7,375		$	9,033		$	19,082
	Restructuring and other charges, net		(239	)		669			- - - -			430
	Non-cash charges		- - - -			- - - -			13			13
	Cash payments		(1,207	)		(253	)		(859	)		(2,319	)
	Effect of foreign currency translation		(17	)		(101	)		(87	)		(205	)

Balance, July 3, 2004		$	1,211		$	7,690		$	8,100		$	17,001

The following table presents the activity associated with restructuring and other charges related to the 2003 Restructuring for the six months ended July 3, 2004:


		Severance
		and			Asset-			Excess
		Benefits			Related			Facilities			Total


		(In thousands)
Balance, January 3, 2004		$	4,573		$	7,006		$	9,632		$	21,211
	Restructuring and other charges, net		(299	)		1,075			156			932
	Non-cash charges		- - - -			15			(80	)		(65	)
	Cash payments		(3,023	)		(610	)		(1,606	)		(5,239	)
	Effect of foreign currency translation		(40	)		204			(2	)		162

Balance, July 3, 2004		$	1,211		$	7,690		$	8,100		$	17,001

2002 Restructuring

During the second quarter of 2004, Cadence incurred $0.4 million of facilities expenses related to the 2002 Restructuring, primarily comprised of changes in lease loss estimates and other expenses incurred to sublease facilities. The facilities expenses were offset by the release of $0.5 million related to the reversal of accrued contract termination costs not incurred. The following table presents activity associated with restructuring and other charges related to the 2002 Restructuring for the three months ended July 3, 2004:


		Severance
		and			Asset-			Excess
		Benefits			Related			Facilities			Total


		(In thousands)
Balance, April 3, 2004		$	731		$	1,140		$	14,163		$	16,034
	Restructuring and other charges, net		- - - -			(559	)		449			(110	)
	Non-cash charges		- - - -			- - - -			- - - -			- - - -
	Cash payments		(11	)		- - - -			(1,109	)		(1,120	)
	Effect of foreign currency translation		(2	)		(9	)		(67	)		(78	)

Balance, July 3, 2004		$	718		$	572		$	13,436		$	14,726

The following table presents activity associated with restructuring and other charges related to the 2002 Restructuring for the six months ended July 3, 2004:


		Severance
		and			Asset-			Excess
		Benefits			Related			Facilities			Total


		(In thousands)
Balance, January 3, 2004		$	1,361		$	1,146		$	14,845		$	17,352
	Restructuring and other charges, net		- - - -			(584	)		449			(135	)
	Non-cash charges		- - - -			- - - -			- - - -			- - - -
	Cash payments		(625	)		(7	)		(1,933	)		(2,565	)
	Effect of foreign currency translation		(18	)		17			75			74

Balance, July 3, 2004		$	718		$	572		$	13,436		$	14,726


	*2001 Restructuring*

Cadence recorded facilities-related charges under the 2001 Restructuring of $0.2 million and $0.5 million in the three and six months ended July 3, 2004, respectively, primarily due to changes in lease loss estimates and costs associated with facilities vacated as part of the 2001 Restructuring plan.

The following table presents the activity associated with restructuring and other charges related to the 2001 Restructuring for the three months ended July 3, 2004:


		Severance
		and		Asset-		Excess
		Benefits		Related		Facilities			Total


		(In thousands)
Balance, April 3, 2004		$	- - - -	$	- - - -	$	20,106		$	20,106
	Restructuring and other charges, net		- - - -		- - - -		206			206
	Non-cash charges		- - - -		- - - -		- - - -			- - - -
	Cash payments		- - - -		- - - -		(2,612	)		(2,612	)
	Effect of foreign currency translation		- - - -		- - - -		(244	)		(244	)

Balance, July 3, 2004		$	- - - -	$	- - - -	$	17,456		$	17,456

The following table presents the activity associated with restructuring and other charges related to the 2001 Restructuring for the six months ended July 3, 2004:


		Severance
		and		Asset-			Excess
		Benefits		Related			Facilities			Total


		(In thousands)
Balance, January 3, 2004		$	- - - -	$	96		$	20,903		$	20,999
	Restructuring and other charges, net		- - - -		- - - -			501			501
	Non-cash charges		- - - -		- - - -			- - - -			- - - -
	Cash payments		- - - -		(96	)		(4,315	)		(4,411	)
	Effect of foreign currency translation		- - - -		- - - -			367			367

Balance, July 3, 2004		$	- - - -	$	- - - -		$	17,456		$	17,456


NOTE 7.	CONVERTIBLE NOTES

In August 2003, Cadence issued $420.0 million principal amount of Zero Coupon Zero Yield Senior Convertible Notes due 2023, or the Notes, to two initial purchasers in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. Cadence received net proceeds of approximately $406.4 million after transaction fees of approximately $13.6 million that were recorded in other long-term assets and are being amortized to interest expense using the straight-line method over five years, which is the duration of the first redemption period. The Notes were issued by Cadence at par and bear no interest. The Notes are convertible into Cadence common stock initially at a conversion price of $15.65 per share, which would result in an aggregate of 26.8 million shares issued upon conversion, subject to adjustment upon the occurrence of specified events. Cadence may redeem for cash all or any part of the Notes on or after August 15, 2008 for 100.00% of the principal amount. The holders may require Cadence to repurchase for cash all or any portion of their Notes on August 15, 2008 for 100.25% of the principal amount, on August 15, 2013 for 100.00% of the principal amount or on August 15, 2018 for 100.00% of the principal amount. The Notes do not contain restrictive financial covenants.

On July 2, 2004 the Emerging Issues Task Force of the FASB, or EITF, reached a tentative conclusion on Issue 04-08, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share”, or EITF 04-08. If the EITF were to reach a consensus in agreement with the tentative conclusion on EITF 04-08, it would require Cadence to include in diluted earnings per share, on the “if-converted” method, the aggregate of approximately 26.8 million shares of Cadence common stock into which the Notes may be converted, regardless of whether the conversion threshold has been met. If

a consensus is reached on EITF 04-08, adoption may require Cadence to restate previously reported diluted earnings per share for all periods in which the Notes were outstanding. Cadence believes that, if adopted in its current form, EITF 04-08 would have a material adverse effect on its diluted earnings per share.

In November 2003, Cadence filed with the SEC a resale registration statement with respect to the Notes. This registration statement was declared effective by the SEC on April 29, 2004.

Concurrently with the issuance of the Notes, Cadence entered into convertible notes hedge transactions with JP Morgan Chase Bank whereby Cadence has the option to purchase up to 26.8 million shares of Cadence’s common stock at a price of $15.65 per share. These options expire on August 15, 2008 and must be settled in net shares. The cost of the convertible notes hedge transactions to Cadence was approximately $134.6 million.

In addition, Cadence sold warrants to JP Morgan Chase Bank for the purchase of up to 26.8 million shares of Cadence’s common stock at a price of $23.08 per share. The warrants expire on various dates from February 2008 through May 2008 and must be settled in net shares. Cadence received approximately $56.4 million in cash proceeds for the sales of these warrants.


NOTE 8.	CONTINGENCIES


	Legal Proceedings

From time to time, Cadence is involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contract law, distribution arrangements and employee relations matters. Periodically, Cadence reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, Cadence accrues a liability for the estimated loss at the low end of the range. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based only on the best information available at the time. As additional information becomes available, Cadence reassesses the potential liability related to pending claims and litigation matters and may revise estimates.

While the outcome of these litigation matters cannot be predicted with any certainty, management does not believe that the outcome of any current matters will have a material adverse effect on Cadence’s consolidated financial position or results of operations.


	Other Contingencies

Cadence provides its customers with a warranty on sales of hardware products for a 90-day period. These warranties are accounted for in accordance with SFAS No. 5, “Accounting for Contingencies.” To date, Cadence has not incurred any significant costs related to warranty obligations.

Cadence’s product license and services agreements include a limited indemnification provision for claims from third parties relating to Cadence’s intellectual property. Such indemnification provisions are accounted for in accordance with SFAS No. 5. The indemnification is generally limited to the amount paid by the customer. To date, claims under such indemnification provisions have not been significant.

From time to time, Cadence has provided, and may in the future provide, guarantees to third parties on behalf of a foreign subsidiary. These guarantees are generally related to maintaining operations in a certain locality or to secure leases or other operating obligations of a subsidiary. The maximum exposure on these guarantees is not significant, either individually or in the aggregate.


NOTE 9.	STOCKHOLDERS’ EQUITY


	Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) during the period, the numerator, by the weighted average number of shares of common stock outstanding, the denominator. Diluted

net income (loss) per share gives effect to equity instruments considered to be potential common shares, if dilutive, computed using the treasury stock method of accounting. During the six months ended July 3, 2004 and during the three and six months ended June 28, 2003, dilutive net loss per share is computed without the effect of equity instruments considered to be potential common shares because the impact would have been antidilutive.

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



		Three Months Ended				Six Months Ended

		July 3,		June 28,		July 3,		June 28,
		2004		2003		2004		2003


		(In thousands)
Weighted average common shares used to calculate basic net income (loss) per share			272,362		267,887		272,210		268,128
	Options		5,532		- - - -		- - - -		- - - -
	Restricted Stock and ESPP shares		751		- - - -		- - - -		- - - -

Weighted average common and potential common shares used to calculate diluted net income (loss) per share			278,645		267,887		272,210		268,128

The following table presents the potential shares of Cadence common stock outstanding at July 3, 2004 and June 28, 2003 which were not included in the computation of diluted net income (loss) per share for the six months ended July 3, 2004 and for the three and six months ended June 28, 2003, because the effect of including these shares would have been antidilutive:



	Three Months Ended				Six Months Ended

			Restated				Restated
	July 3,		June 28,		July 3,		June 28,
	2004		2003		2004		2003


	(In thousands)
Options to purchase shares of common stock (various expiration dates through 2014)		34,304		69,632		67,418		69,632
Warrants to purchase shares of common stock (various expiration dates through 2008)		26,829		- - - -		26,829		- - - -
Potential common shares in connection with convertible notes (expiring in 2018)		26,837		- - - -		26,837		- - - -
Restricted Stock awards		- - - -		1,277		3,195		1,277

Total potential common shares outstanding		87,970		70,909		124,279		70,909


	Stock Repurchase Plan

In August 2001, Cadence authorized a stock repurchase program under which repurchased shares with a value of up to $500.0 million are used for general corporate purposes, including the share issuance requirements of Cadence’s employee stock option and purchase plans and acquisitions. Cadence spent $69.8 million to repurchase 5.0 million shares during the three months ended July 3, 2004. Cadence did not repurchase any shares of its common stock during the three months ended June 28, 2003. Cadence spent $69.8 million to repurchase 5.0 million shares during the six months ended July 3, 2004, as compared to $62.0 million to repurchase 6.2 million shares during the six months ended June 28, 2003. As of July 3, 2004, the remaining repurchase authorization under this program totaled $147.2 million.


	Stock-Based Compensation


	Employee Stock Purchase Plans

The following table presents the common shares issued under Cadence’s ESPPs:



	Six Months Ended

			Restated
	July 3,		June 28,
	2004		2003

Cadence shares issued under the ESPPs		1,990,174		932,245
Weighted average purchase price	$	8.50	$	8.43

Weighted average fair value	$	16.57	$	9.92

The purchase dates under Cadence’s ESPPs are in February and August, accordingly Cadence did not issue shares under its ESPPs during the three months ended July 3, 2004 or the three months ended June 28, 2003.


	Other Stock-Based Compensation

At July 3, 2004, Cadence had six other stock-based employee compensation plans (excluding director plans). Cadence accounts for these plans under the recognition and measurement principles of Accounting Principles Board, or APB, Opinion No. 25 “Accounting for Stock Issued to Employees,” and related interpretations. Under APB Opinion No. 25, compensation expense is recognized if an option’s exercise price on the measurement date is below the fair value of Cadence’s common stock. The compensation, if any, is amortized to expense over the vesting period.

Using the Black-Scholes option pricing model, the weighted average fair value of options granted during the three months ended July 3, 2004 was $4.92 as compared to $5.96 during the three months ended June 28, 2003. The weighted average fair value of options granted during the six months ended July 3, 2004 was $5.15 as compared to $5.63 during the six months ended June 28, 2003.

For fixed awards, Cadence amortizes deferred stock compensation to expense using the straight-line method over the period that the stock options and restricted stock vest, which is generally three to four years. For variable awards, stock-based compensation expense is recognized on an accelerated basis in accordance with FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans”. For the three months ended July 3, 2004 and June 28, 2003 Cadence recorded amortization of deferred stock compensation of $8.2 million and $7.9 million, respectively. For the six months ended July 3, 2004 and June 28, 2003 Cadence recorded amortization of deferred stock compensation of $16.2 million and $13.9 million, respectively.

The following table presents the activity recorded in deferred compensation included in the accompanying Condensed Consolidated Balance Sheet as of July 3, 2004:


		Deferred Stock
		Compensation

		(In thousands)
Balance as of January 3, 2004		$	(48,856	)
	Amortization of deferred stock compensation		16,152
	Warrants and stock options		(2,060	)
	Restricted stock related to acquisitions		(4,131	)
	Restricted stock related to incentive stock awards		(19,632	)
	Forfeitures		1,935

Balance as of July 3, 2004		$	(56,592	)

During the six months ended July 3, 2004, Cadence issued 1.4 million shares of restricted stock to certain employees. Cadence recorded deferred stock compensation of $19.6 million in the accompanying Condensed Consolidated Balance Sheets in connection with these incentive stock awards.


NOTE 10.	COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) includes foreign currency translation gains and losses and unrealized gains and losses on marketable securities that are available-for-sale, net of related tax effects. These transactions have been excluded from Net income (loss) and are reflected instead in Stockholders’ Equity.

The following table sets forth the activity in Other comprehensive income (loss):



		Three Months Ended						Six Months Ended

					Restated						Restated
		July 3,			June 28,			July 3,			June 28,
		2004			2003			2004			2003


		(In thousands)
Net income (loss)		$	3,803		$	(5,304	)	$	(4,952	)	$	(18,342	)
Translation gain (loss)			(1,063	)		2,000			831			882
Unrealized gain (loss) on investments, net of related tax effects			(3,143	)		7,403			(6,530	)		5,946

	Comprehensive income (loss)	$	(403	)	$	4,099		$	(10,651	)	$	(11,514	)


NOTE 11.	SEGMENT AND GEOGRAPHY REPORTING

Cadence’s chief operating decision maker is its President and Chief Executive Officer, or CEO. Cadence’s CEO reviews Cadence’s consolidated results within three segments: Product, Services and Maintenance.

The Product segment includes revenue and associated costs from software licensing, and sales and leases of hardware technology and intellectual property. The Services segment includes revenue and associated costs to provide methodology and design services either to assist companies in developing electronic designs or to assume responsibility for the design effort for customers that outsource this work. The Maintenance segment includes revenue and associated costs primarily for a technical support organization. Maintenance agreements are offered to customers either as part of Cadence’s product license agreements or separately.

Segment income (loss) from operations is defined as gross margin less operating expenses (Marketing and sales, Research and development and General and administrative), Amortization of deferred stock

compensation, Restructuring and other charges, Write-off of acquired in-process technology, Interest expense and Other expense, net. Information about the profitability of Cadence’s segments is available only to the extent of gross margin by segment and write-off of acquired in-process technology. Operating expenses, Amortization of deferred stock compensation, Restructuring and other charges, Interest expense and Other expense, net, are managed on a functional basis. Cadence does not identify or allocate Operating expenses, Amortization of deferred stock compensation, Restructuring and other charges, Interest expense and Other expense, net, because the information is not available by segment and is not reviewed by Cadence’s CEO in making decisions about resources to be allocated among the segments or to assess their performance. 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 only.

Cadence does not identify or allocate its assets 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 CEO in making decisions about resources to be allocated among the segments or to assess their performance. Depreciation and amortization of purchased software is allocated among the segments to determine each segment’s gross margin.

The following tables present information about reported segments for the three months ended July 3, 2004 and June 28, 2003:



		For the Three Months Ended July 3, 2004

												Consolidated
		Product			Services		Maintenance		Other			Total


		(In thousands)
Revenue		$	165,286		$	37,253	$	84,540	$	- - - -		$	287,079
Cost of revenue			15,043			23,295		13,465		- - - -			51,803

	Gross margin		150,243			13,958		71,075		- - - -			235,276
Operating expenses and amortization of deferred stock compensation			- - - -			- - - -		- - - -		(215,682	)		(215,682	)
Restructuring and other charges			- - - -			- - - -		- - - -		(2,929	)		(2,929	)
Write-off of acquired in-process technology			(7,000	)		- - - -		- - - -		- - - -			(7,000	)
Interest expense and Other expense, net			- - - -			- - - -		- - - -		(4,914	)		(4,914	)

Segment income (loss) from operations		$	143,243		$	13,958	$	71,075	$	(223,525	)	$	4,751



		For the Three Months Ended June 28, 2003 – Restated

												Consolidated
		Product			Services		Maintenance		Other			Total


		(In thousands)
Revenue		$	160,774		$	34,801	$	81,006	$	- - - -		$	276,581
Cost of revenue			16,881			24,456		14,533		- - - -			55,870

	Gross margin		143,893			10,345		66,473		- - - -			220,711
Operating expenses and amortization of deferred stock compensation			- - - -			- - - -		- - - -		(214,020	)		(214,020	)
Restructuring and other charges			- - - -			- - - -		- - - -		(1,352	)		(1,352	)
Write-off of acquired in-process technology			(3,800	)		- - - -		- - - -		- - - -			(3,800	)
Interest expense and Other expense, net			- - - -			- - - -		- - - -		(8,538	)		(8,538	)

Segment income (loss) from operations		$	140,093		$	10,345	$	66,473	$	(223,910	)	$	(6,999	)

The following tables present information about reported segments for the six months ended July 3, 2004 and June 28, 2003:



		For the Six Months Ended July 3, 2004

												Consolidated
		Product			Services		Maintenance		Other			Total


		(In thousands)
Revenue		$	320,023		$	69,617	$	163,163	$	- - - -		$	552,803
Cost of revenue			33,557			46,394		27,170		- - - -			107,121

	Gross margin		286,466			23,223		135,993		- - - -			445,682
Operating expenses and amortization of deferred stock compensation			- - - -			- - - -		- - - -		(427,692	)		(427,692	)
Restructuring and other charges			- - - -			- - - -		- - - -		(8,364	)		(8,364	)
Write-off of acquired in-process technology			(7,000	)		- - - -		- - - -		- - - -			(7,000	)
Interest expense and Other expense, net			- - - -			- - - -		- - - -		(9,100	)		(9,100	)

Segment income (loss) from operations		$	279,466		$	23,223	$	135,993	$	(445,156	)	$	(6,474	)



		For the Six Months Ended June 28, 2003 – Restated

												Consolidated
		Product			Services		Maintenance		Other			Total


		(In thousands)
Revenue		$	309,232		$	67,189	$	163,212	$	- - - -		$	539,633
Cost of revenue			34,245			48,851		30,133		- - - -			113,229

	Gross margin		274,987			18,338		133,079		- - - -			426,404
Operating expenses and amortization of deferred stock compensation			- - - -			- - - -		- - - -		(430,355	)		(430,355	)
Restructuring and other charges										(1,352	)		(1,352	)
Write-off of acquired in-process technology			(5,500	)		- - - -		- - - -		- - - -			(5,500	)
Interest expense and Other expense, net			- - - -			- - - -		- - - -		(12,721	)		(12,721	)

Segment income (loss) from operations		$	269,487		$	18,338	$	133,079	$	(444,428	)	$	(23,524	)

Internationally, Cadence markets and supports its products and services primarily through its subsidiaries. Revenue is attributed to geography based on the country in which the customer is domiciled. Long-lived assets are attributed to geography based on the country where the assets are located. Until June 28, 2003, Cadence licensed most of its software products in Japan through a distributor, Innotech Corporation, of which Cadence is an approximately 15% stockholder. In June 2003, Cadence purchased certain assets from Innotech, including distribution rights for certain customers in Japan. Since June 2003, Cadence has directly licensed its software products to customers for which Cadence acquired the distribution rights from Innotech.

In the three months ended July 3, 2004, no one customer accounted for more than 10% of total revenue, while during the three months ended June 28, 2003, one customer accounted for 12% of total revenue. In the six months ended July 3, 2004, and the six months ended June 28, 2003, no one customer accounted for more than 10% of total revenue.

The following table presents a summary of revenue by geography:



				For the				For the
				Three Months Ended				Six Months Ended

						Restated				Restated
				July 3,		June 28,		July 3,		June 28,
				2004		2003		2004		2003


				(In thousands)				(In thousands)
North America:
	United States			$	156,396	$	145,854	$	291,680	$	282,301
	Other				6,396		5,256		12,309		11,533

		Total North America			162,792		151,110		303,989		293,834

Europe:
	Germany				18,154		10,443		31,666		26,179
	United Kingdom				9,355		10,897		16,444		19,301
	Other Europe				26,500		20,366		47,632		40,971

		Total Europe			54,009		41,706		95,742		86,451

Japan and Asia:
	Japan				41,472		59,641		99,700		113,040
	Asia				28,806		24,124		53,372		46,308

		Total Japan and Asia			70,278		83,765		153,072		159,348

			Total	$	287,079	$	276,581	$	552,803	$	539,633

The following table presents a summary of long-lived assets by geography:



				As of

				July 3,		January 3,
				2004		2004


				(In thousands)
North America:
	United States			$	1,494,130	$	1,457,982
	Other				3,152		3,401

		Total North America			1,497,282		1,461,383

Europe					85,667		87,793

Japan and Asia:
	Japan				35,103		35,085
	Asia				12,956		12,656

		Total Japan and Asia			48,059		47,741

			Total	$	1,631,008	$	1,596,917


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

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 3, 2004, referred to as the 2003 Annual Report. Certain of such statements, including, without limitation, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “should,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including but not limited to, those expressed in these statements. We refer you to the “Factors That May Affect Future Results,” “Results of Operations,” “Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report on Form 10-Q, and the risks discussed in our other SEC filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.

Overview


	General

We license electronic design automation, or EDA, software, sell or lease hardware technology and intellectual property and provide design and methodology services throughout the world to help manage and accelerate electronic product development processes. Our broad range of products and services are used by the world’s leading electronics companies to design and develop complex integrated circuits, or ICs, and personal and commercial electronic systems.

As part of our strategy, we have acquired companies, businesses and third party intellectual property to obtain technology and key personnel, and we expect to continue making acquisitions in the future.

Over the last several years IC manufacturers and electronics companies experienced a downturn in demand and production, which resulted in reduced research and development spending by many of our customers. In the second half of 2003 and the first half of 2004, IC manufacturers and electronics companies appear to have experienced a gradual recovery but they have continued their focus on cost containment. In response to the general downturn in the economy, and in the electronics industry in particular, we have initiated significant restructuring activities over the past several years, including during the first half of 2004, to better align our cost structure with projected demand for our products and services and their resulting projected revenues.

We have identified certain items that management uses as performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items more fully in the “Results of Operations” below.

We continue to experience a customer preference for renewable license types, term and subscriptions, and expect the timing of license renewals to continue to impact our results of operations. Product revenue recognized from backlog comprised approximately 60% of total product revenue in 2003, 45% in 2002, and 30% in 2001. This trend is primarily due to increasing customer preference for subscription licenses and customer requirements for more flexible payment terms.


	Restatement

In our 2003 Annual Report, we restated our Consolidated Financial Statements as of and for the fiscal year ended December 28, 2002, and for the first three quarters of fiscal 2003. The accompanying Condensed Consolidated Financial Statements present restated results for the three and six months ended June 28, 2003. For the three and six months ended June 28, 2003, adjustments were made to income (loss) on equity investments, amortization of deferred stock compensation, revenue, amortization of internally developed software, foreign currency transaction gains (losses), Other expense, net and the tax effect of these restatement adjustments. Adjustments were also made to reclassify amortization of certain intangible assets from Amortization of acquired intangibles to Cost of product, Cost of services and Cost of maintenance.


	Acquisitions

In April 2004, we acquired Neolinear, Inc., or Neolinear, a privately-held developer of rapid analog design technology. We purchased Neolinear to acquire key personnel and technology. Prior to the acquisition we held an equity investment in Neolinear of approximately $3 million, representing a 12% ownership interest. In accordance with Statement of Financial Accounting Standards, or SFAS, No. 141, “Business Combinations,” we accounted for the acquisition of Neolinear as a step acquisition. The aggregate initial purchase price was $78.1 million, which included the payment of cash, the fair value of assumed options and acquisition costs. The purchase price and goodwill will increase if certain performance goals related to revenue targets and product development are achieved over a period of approximately four years following the acquisition. Neolinear’s results of operations and the estimated fair values of the assets acquired and liabilities assumed have been included in our Condensed Consolidated Financial Statements from the date of acquisition.


	Acquisition-Related Earnouts

For a number of our acquisitions, payment of a portion of the purchase price is contingent upon the acquired entity’s achievement of certain performance goals, which relate to one or more of the following criteria: revenue, bookings, product proliferation, product development, and employee retention. The specific performance goal levels, and amounts and timing of contingent purchase price payments, vary with each acquisition.

In the three months ended July 3, 2004, we recorded $18.4 million of goodwill as contingent purchase price to stockholders of acquired companies. The $18.4 million of goodwill consisted of $9.6 million of cash payments, $2.3 million of accrued cash payments, and the issuance of shares of common stock valued at $6.5 million.

In the six months ended July 3, 2004, we recorded $28.3 million of goodwill as contingent purchase price to stockholders of acquired companies. The $28.3 million of goodwill consisted of $9.6 million of cash payments, $2.3 million of accrued cash payments, and the issuance of shares of common stock valued at $16.4 million. In addition, during the six months ended July 3, 2004, we recognized deferred stock compensation of $1.3 million, in accordance with Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB No. 25)”.

In connection with our acquisitions completed prior to July 3, 2004, we may be obligated to pay up to an aggregate of $55.2 million in cash during the next 12 months and an additional $48.6 million in cash during the three years following the next twelve months if certain performance goals related to one or more of the following criteria are achieved in full: revenue, bookings, product proliferation, product development and employee retention.

Critical Accounting Estimates

In preparing our Condensed Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income (loss) and net income (loss), as well as on the value of certain assets and liabilities on our Condensed Consolidated Balance Sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to

be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, accounting for income taxes, valuation of long-lived and intangible assets and goodwill, and restructuring charges have the greatest potential impact on our Condensed Consolidated Financial Statements, so we consider these to be our critical accounting estimates. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results.

Our critical accounting estimates are as follows:

• revenue recognition;

• accounting for income taxes;

• valuation of long-lived and intangible assets, including goodwill; and

• restructuring charges.


	*Revenue recognition*

We apply the provisions of Statement of Position, or SOP, 97-2, “Software Revenue Recognition,” as amended by Statement of Position 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,” to all product revenue transactions where the software is not incidental. We also apply the provisions of SFAS, No. 13, “Accounting for Leases,” to all hardware lease transactions. We recognize revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, collection of the resulting receivable is probable, and vendor-specific objective evidence of fair value, or VSOE, exists.

Persuasive evidence of an arrangement – For subscription and term licenses and hardware leases, Cadence uses the signed contract as evidence of an arrangement. For perpetual licenses, hardware sales, maintenance renewals and small fixed-price service projects, such as training classes and small, standard methodology service engagements of approximately $10,000 or less, Cadence uses a purchase order as evidence of an arrangement. For all other service engagements, Cadence uses a signed professional services agreement and a statement of work to evidence an arrangement. Sales through Cadence’s Japanese distributor, Innotech, are evidenced by a master agreement governing the relationship, together with binding purchase orders from the distributor on a transaction-by-transaction basis.

Product delivery – Software and the corresponding access keys are generally delivered to customers electronically. Occasionally, Cadence will deliver the software on a compact disc with standard transfer terms of free-on-board shipping point. Cadence’s software license agreements generally do not contain acceptance provisions. With respect to hardware, delivery of an entire system is deemed to occur upon installation.

Fee is fixed or determinable – We assess whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. We generally use installment contracts for term and subscription licenses and we have established a history of collecting under the original contract without providing concessions on payments, products or services. Our installment contracts generally have payment periods that are equal to or less than the term of the licenses, the payments are generally collected quarterly, and periodic payments are generally made in equal or nearly equal installments. Significant judgment is involved in this determination, including determining whether a contract amendment constitutes a concession. Our experience has been that we are able to determine whether a fee is fixed or determinable. While we do not expect that experience to change, if we no longer had a history of collecting under the original contract without providing concessions on term licenses, revenue from term licenses would be required to be recognized when payments under the installment contract become due and payable. These changes would have a material impact on our results of operations.

Collection is probable – We assess collectibility at the outset of the arrangement based on a number of factors, including the customer’s past payment history and its current creditworthiness. If in our judgment collection of a fee is not probable, we defer the revenue until the uncertainty is removed, which generally

means revenue is recognized upon our receipt of cash payment. Our experience has been that we are able to estimate whether collection is probable. While we do not expect that experience to change, if we were to determine that collection is not probable for any license arrangement with installment payment terms, revenue from this license would be recognized generally upon the receipt of cash payment. These changes could have a material impact on our results of operations.

Vendor-Specific Objective Evidence – Our VSOE for certain product elements of an arrangement is based upon the pricing in comparable transactions when the element is sold separately. VSOE for maintenance is generally based upon the customer’s stated annual renewal rates. VSOE for services is generally based on the price charged when the services are sold separately. For multiple element arrangements, VSOE must exist to allocate the total fee among all delivered and undelivered elements in the arrangement. If VSOE does not exist for all elements to support the allocation of the total fee among all delivered and undelivered elements of the arrangement, revenue is deferred until such evidence does exist for the undelivered elements, or until all elements are delivered, whichever is earlier. If VSOE of all undelivered elements exists but VSOE does not exist for one or more delivered elements, revenue is recognized using the residual method. Under the residual method, the VSOE of the undelivered elements is deferred, and the remaining portion of the arrangement fee is recognized as revenue. Our experience has been that we are able to estimate VSOE. While we do not expect that experience to change, if we could no longer support VSOE for undelivered elements of multiple element arrangements, revenue would be deferred until we have VSOE for the undelivered elements or all elements are delivered, whichever is earlier. This change could have a material impact on our results of operations.

Services revenue – Services revenue consists primarily of revenue received for performing methodology and design services. Revenue from service contracts is recognized either on the time and materials method, as work is performed, or on the percentage-of-completion method. For contracts with fixed or not-to-exceed fees on a monthly basis, we estimate the percentage-of-completion, which is based on the completion of milestones relating to the arrangement. We have a history of accurately estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. If different conditions were to prevail such that accurate estimates could not be made, then the use of the completed contract method would be required and the recognition of all revenue and costs would be deferred until the project was completed. This change could have a material impact on our results of operations.


	*Accounting for income taxes*

We provide for the effect of income taxes in our Condensed Consolidated Financial Statements in accordance with SFAS No. 109, “Accounting for Income Taxes” and Financial Accounting Standards Board Interpretation No. 18, or FIN No. 18, “Accounting For Income Tax in Interim Periods (An Interpretation of APB Opinion No. 28)”. Under SFAS No. 109, income tax expense (benefit) is recognized for the amount of taxes payable or refundable for the current year, and for deferred tax assets and liabilities for the tax consequences of events that have been recognized in an entity’s financial statements or tax returns. FIN No. 18 specifies that tax payable (or tax benefit) for an interim period related to ordinary income (or loss) shall be computed at an estimated annual effective tax rate and the tax payable (or tax benefit) related to all other items shall be individually computed and recognized when items occur. Estimates of the annual effective tax rate at the end of interim periods are based on our evaluations of possible future events and transactions and may be subject to subsequent refinement or revision.

We must make significant assumptions, judgments and estimates to determine our current provision for income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against our deferred tax assets. Our judgments, assumptions and estimates relating to the current provision for income taxes take into account estimates of the annual pre-tax book income and the geographic mix of income, current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in our estimates of the geographic mix of income or the annual pre-tax income, tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our results of operations, financial position or cash flows. Our assumptions, judgments and estimates, relating to the value of our net deferred tax assets, take into

account predictions of the amount and category of future taxable income from potential sources including tax planning strategies that would, if necessary, be implemented to prevent a loss carryforward or tax credit carryforward from expiring unused. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate, thus materially affecting our results of operations and financial position.

See the factors affecting future results below entitled “Our operating results could be adversely affected as a result of changes in our effective tax rates”, “We have received an examination report from the Internal Revenue Service proposing a tax deficiency in certain of our tax returns, and the outcome of the examination or any future examinations involving similar claims may have a material adverse effect on our results of operations and cash flows” and “Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and material differences between forecasted and actual tax rates could have a material impact on our results of operations”.

Valuation of long-lived and intangible assets, including goodwill

At least annually we review goodwill resulting from business combinations for impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” We completed our most recent annual impairment review during the third quarter of 2003. We did not identify any impairment to our goodwill as a result of this review. We review long-lived assets, including certain identifiable intangibles, for impairment whenever events or changes in circumstances indicate that we will not be able to recover the asset’s carrying amount in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

For long-lived assets to be held and used, including acquired intangibles, we initiate our 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 comparing its carrying amount to the expected future undiscounted cash flows expected to result from the use and eventual disposition of that asset, excluding future interest costs that would be recognized as an expense when incurred. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in:

• identifying a triggering event that arises from a change in circumstances;

• forecasting future operating results; and

• estimating the proceeds from the disposition of long-lived or intangible assets.

Material impairment charges could be necessary should different conditions prevail or different judgments be made.

Restructuring charges

We account for restructuring charges in accordance with SEC Staff Accounting Bulletin No. 100 “Restructuring and Impairment Charges.” Beginning in fiscal 2001, we have undertaken significant restructuring initiatives. All restructuring activities initiated prior to fiscal 2003 were accounted for in accordance with Emerging Issues Task Force of the Financial Accounting Standards Board, or EITF, No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and EITF No. 88-10 “Costs Associated with Lease Modifications or Terminations.” For restructuring activities initiated after fiscal 2002, we accounted for the facilities and asset-related portions of these restructurings in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, respectively. The severance and benefits charges were accounted for in accordance with SFAS No. 112 “Employers’ Accounting for Postemployment Benefits – An Amendment of Financial Accounting Standards Board, or FASB, Statements No. 5 and 43.”

These restructuring initiatives have required us to make a number of estimates and assumptions related to losses on excess facilities vacated or consolidated, particularly estimating when, if at all, we will be able to sublet vacated facilities and if we do, the sublease terms. Closure and space reduction costs that are part of our

restructuring charges include payments required under leases, less any applicable estimated sublease income after the facilities are abandoned, lease buyout costs and costs to maintain facilities during the abandonment period.

In addition, we have recorded estimated provisions for termination benefits and outplacement costs, long-term asset write-downs, and other restructuring costs. We regularly evaluate the adequacy of our restructuring accrual, and adjust the balance based on changes in estimates and assumptions. We may incur future charges for new restructuring activities as well as changes in estimates to amounts previously recorded.

Results of Operations

We primarily generate revenue from licensing our EDA software and selling or leasing hardware technology and intellectual property, providing maintenance for the software and hardware and providing design and methodology services. We principally employ three license types: subscription, term and perpetual. The different license types provide a customer with different rights to use our products such as (i) the right to access new technology, (ii) the duration of the license, and (iii) payment terms. Customer decisions regarding these aspects of license transactions determine the license type, timing of revenue recognition and potential future business activity. For example, if a customer chooses a fixed term of use, this will result in either a subscription or term license. A business implication of that decision is that at the expiration of the license period the customer must decide whether to continue using the technology and therefore renew the license agreement. Because larger customers generally use products from two or more of our five product groups, rarely will a large customer completely terminate its relationship with us at expiration of the license. See “Critical Accounting Estimates” for additional discussion of licenses types and timing of revenue recognition.

To the extent a customer obtains rights to remix to new technology or more flexible payment terms, revenue is recognized over the life of the agreement. This distinction is a critical determinant of revenue recognition. For example, a $3.0 million, 3-year product subscription license would result in $1.0 million of revenue recognized per year, or $250,000 per quarter. However, a $3.0 million, 3-year product term license, assuming equal or near equal payments, would result in $3.0 million of revenue recognized upon delivery which is generally in the first quarter of the arrangement, and no revenue recognized in succeeding quarters. Because of our model under which we recognize revenue over multiple periods, we do not believe that pricing volatility is a material component of the change in our product revenue from period to period, and we do not analyze changes in pricing from one period to the next.

The amount of product revenue in future periods will depend, among other things, on the terms and timing of our contract renewals or additional product sales with existing customers, the size of such transactions or renewals, and sales to new customers. Product revenue in any period is also affected by the extent to which customers prefer subscription, term or perpetual licenses, and the extent to which contracts contain flexible payment terms. Revenue is also affected by changes in the extent to which existing contracts contain flexible payment terms and changes in license types (e.g., subscription to term) for existing customers. Contract renewals, and consequently product revenues, are also affected by the competitiveness of our products.

Revenue



		Three Months Ended						Six Months Ended

		July 3,		June 28,				July 3,		June 28,
		2004		2003		% Change		2004		2003		% Change


		(In millions, except percentages)
Product		$	165.3	$	160.8		3%	$	320.0	$	309.2		3%
Services			37.3		34.8		7%		69.6		67.2		4%
Maintenance			84.5		81.0		4%		163.2		163.2		0%

	Total revenue	$	287.1	$	276.6		4%	$	552.8	$	539.6		2%

Product revenue was higher in the three months ended July 3, 2004, as compared to the same period in 2003, primarily because of increased revenue due to our sale of certain intellectual property and Functional Verification products, partially offset by a decline in revenue from our Custom IC Design products. Product revenue was higher in the six months ended July 3, 2004, as compared to the same period in 2003, primarily because of increased revenue due to our sale of certain intellectual property.

Maintenance revenue increased in the three months ended July 3, 2004, as compared to the same period in 2003, due to an increase in the renewal rate of existing maintenance contracts and an increase in customers that renewed their previously cancelled maintenance contracts. Services revenue increased in the three and six months ended July 3, 2004 due to an increase in the market demand for our services offerings.

Additional financial information about our segments can be found in Note 11 to our Condensed Consolidated Financial Statements.

Revenue Mix by Product Group

We analyze our business by product groups, combining revenues for both product and maintenance because of their interrelationship. We have formulated a design solution strategy that combines our design technologies into “platforms”. We introduced our first platform in September 2002. The data for product groups before the introduction of a corresponding platform aggregates the revenues for the individual products associated with a particular platform.

Listed below is a description of our product groups:

Functional Verification: Products in this group, which include the Incisive ^TM functional verification platform, are used to verify that the high level, logical specification of an integrated circuit design is correct.

Digital IC Design: Products in this group, which include the Encounter digital IC design platform, are used to accurately convert the high-level, logical specification of a digital integrated circuit into a detailed physical blueprint of the integrated circuit, which is used for creation of the photomasks used in chip manufacture.

Custom IC Design: Our custom design products, led by our Virtuoso® custom design platform introduced in September 2003, are used for integrated circuits that must be designed at the transistor level, including analog, radio frequency, memories, high performance digital blocks, and standard cell libraries.

Design for Manufacturing: Included in this product group are our physical verification and analysis products. These products are used to analyze and verify that the physical blueprint of the integrated circuit has been constructed correctly and can be manufactured successfully.

System Interconnect: This product group includes our printed circuit board and integrated circuit package design products. In March 2004, we introduced the new Allegro® system interconnect design platform, which enables consistent co-design of integrated circuits, IC packages, and printed circuit boards.

The following table shows the percentage of product and maintenance revenue contributed by each of the five product groups, and services and other:



		Three Months Ended

		July 3,		April 3,		January 3,		September 27,		June 28,
		2004		2004		2003		2003		2003

Functional Verification			20%		20%		20%		18%		18%
Digital IC Design			21%		25%		20%		27%		22%
Custom IC Design			24%		27%		27%		27%		28%
Design for Manufacturing			9%		6%		13%		7%		10%
System Interconnect			9%		10%		10%		8%		9%
Services and other			17%		12%		10%		13%		13%

	Total		100%		100%		100%		100%		100%

The percentage of revenue from a particular platform will vary from quarter to quarter due to the timing and extent of term license renewals for existing customers and the particular technologies they elect to purchase.

As a percentage of total revenue, Design for Manufacturing and Services and other both increased in the second quarter of 2004. The increase in Design for Manufacturing comes from higher revenues in our electrical verification and extraction products.

In the three months ended July 3, 2004, we recognized $11.0 million of revenue from the sale of intellectual property, or IP. This sale of IP is included in Services and other in the preceding table and in Product revenue in the accompanying Condensed Consolidated Statement of Operations.

The declines as a percentage of revenue in Digital IC Design and Custom IC Design in the second quarter of 2004 are principally the offsetting effect of the higher revenues in Design for Manufacturing and Services and other.

Services revenue increased $2.5 million to $37.3 million in the second quarter of 2004, as compared to the second quarter of 2003, and increased $2.4 million to $69.6 million in the six months ended July 3, 2004, as compared to the same period of 2003. For the three and six months ending July 3, 2004, the increase in services revenue was due to an increase in the market demand for our services offerings.

Revenue by Geography



		Three Months Ended						Six Months Ended

		July 3,		June 28,				July 3,		June 28,
		2004		2003		% Change		2004		2003		% Change


		(In millions, except percentages)
U.S.		$	156.4	$	145.9		7%	$	291.7	$	282.3		3%
Non-U.S.			130.7		130.7		0%		261.1		257.3		1%

	Total revenue	$	287.1	$	276.6		4%	$	552.8	$	539.6		2%


	*Revenue by Geography as a Percent of Total Revenue*


U.S.	54%	53%	53%	52%
Non-U.S.	46%	47%	47%	48%

Non-U.S. revenue remained relatively flat in the three months ended July 3, 2004, as compared to the three months ended June 28, 2003. Increases of $12.3 million in revenue in Europe and $4.7 million in revenue in Asia were offset by a $18.1 million decrease in revenue in Japan.

Non-U.S. revenue increased $3.8 million in the six months ended July 3, 2004, as compared to the same period in 2003, due to increases of $9.3 million in revenue in Europe along with a $7.0 million increase in revenue in Asia, partially offset by a decrease of $13.3 million in revenue in Japan.

The rate of revenue change varies geographically due to differences in the timing and extent of term license renewals for existing customers in those regions. In addition, both our domestic and international businesses have been affected by the revenue trends discussed above in this section.

Changes in foreign currency exchange rates caused our revenue to increase by $4.7 million in the three months ended July 3, 2004, as compared to the three months ended June 28, 2003, primarily due to strengthening of the Japanese yen in relation to the U.S. dollar. Changes in foreign currency exchange rates caused revenue to increase by $10.1 million in the six months ended July 3, 2004, as compared to the six months ended June 28, 2003, also primarily due to strengthening of the Japanese yen in relation to the U.S. dollar.


	*Cost of Revenue*



	Three Months Ended							Six Months Ended

	July 3,		June 28,					July 3,		June 28,
	2004		2003		% Change			2004		2003		% Change


	(In millions, except percentages)
Product	$	15.0	$	16.9		(11	)%	$	33.6	$	34.2		(2	)%
Services		23.3		24.5		(5	)%		46.4		48.9		(5	)%
Maintenance		13.5		14.5		(7	)%		27.1		30.1		(10	)%


	*Cost of Revenue as a Percent of Related Revenue*


Product	9%	10%	10%	11%
Services	63%	70%	67%	73%
Maintenance	16%	18%	17%	18%

Cost of product revenue includes costs associated with the sale or lease of our hardware and licensing of our software products. Cost of product revenue primarily includes the cost of employee salary and benefits, amortization of intangible assets directly related to Cadence products, documentation and royalties payable to third-party vendors. Cost of product revenue associated with our Cadence Verification Acceleration, or CVA, hardware products also includes materials, assembly labor and overhead. These additional manufacturing costs make our cost of hardware product higher, as a percentage of revenue, than our cost of software product.

A summary of Cost of product revenue is as follows:



		Three Months Ended				Six Months Ended

		July 3,		June 28,		July 3,		June 28,
		2004		2003		2004		2003


		(In millions)
Product related costs		$	5.7	$	7.0	$	15.1	$	15.2
Amortization of acquired intangibles			9.3		9.9		18.5		19.0

	Total Cost of product	$	15.0	$	16.9	$	33.6	$	34.2

Cost of product revenue decreased $1.9 million in the second quarter of 2004, as compared to the second quarter of 2003, primarily due to a decrease of $5.3 million in royalty expense, partially offset by an increase of $4.3 million in cost of goods sold for our hardware business. Cost of product revenue decreased $0.6 million for the six months ended July 3, 2004, as compared to the same period in 2003, primarily due to decreases of $2.3 million in royalty expenses and $3.6 million in amortized software costs, partially offset by a $5.1 million increase in cost of goods sold for our hardware business.

Cost of product revenue in the future will primarily depend upon the actual mix of hardware and software product contracts in any given period and the degree to which we license and incorporate third-party technology in our products licensed or sold in the quarter.

Cost of services revenue primarily includes costs of employee salary and benefits, costs to maintain the infrastructure necessary to manage a services organization and provisions for contract losses, if any. Cost of services revenue decreased $1.2 million in the three months ended July 3, 2004, as compared to the same period in 2003, primarily due to decreases in employee salary and benefit costs of $2.3 million resulting primarily from a reduction in the number of services professionals, partially offset by a $1.2 million increase in costs related to outside contractors engaged to support the services business. Cost of services decreased $2.4 million in the six months ended July 3, 2004, as compared to the same period in 2003 primarily due to a decrease of $2.0 million in salary and benefit costs. As a result, services gross margin as a percentage of services revenue increased over the same periods in 2003, primarily due to a reduction in the number of services professionals.

Cost of maintenance revenue includes the cost of customer services, such as hot-line and on-site support, production employees and documentation of maintenance updates. Cost of maintenance revenue decreased $1.0 million in the three months ended July 3, 2004, as compared to same period in 2003, due to lower information technology costs and other general operating expenses. Cost of maintenance revenue decreased $3.0 million in the six months ended July 3, 2004, as compared to the same period in 2003, primarily due to a $0.9 million decrease in salary and benefits resulting primarily from a reduced number of employees, and a $2.1 million decrease in information technology, facilities and general operating expenses. Gross margin as a percentage of maintenance revenue increased for the same periods in 2004 as compared to 2003, due to decreased costs of maintenance.


	*Operating Expenses*



	Three Months Ended						Six Months Ended

	July 3,		June 28,				July 3,		June 28,
	2004		2003		% Change		2004		2003		% Change


	(In millions, except percentages)
Marketing and sales	$	80.2	$	82.6		(3)%	$	161.4	$	166.2		(3)%
Research and development		91.1		88.4		3%		178.2		173.5		3%
General and administrative		20.2		20.1		0%		40.0		46.8		(15)%


	*Expenses as a Percent of Total Revenue*


Marketing and sales	28%	30%	29%	31%
Research and development	32%	32%	32%	32%
General and administrative	7%	7%	7%	9%

Operating Expenses

Overall operating expenses remained flat in the three months ended July 3, 2004, as compared to the same period in 2003. Overall operating expenses decreased by $6.9 million in the six months ended July 3, 2004, as compared to the same period in 2003, primarily as a result of cost reductions from our 2003

restructuring activities described more fully below in “Restructuring and Other Charges”. We expect our operating expenses to be up slightly during the remainder of 2004 as compared to the first half of 2004.

Foreign currency exchange rates increased operating expenses by $2.9 million in the three months ended July 3, 2004, and $6.2 million in the six months ended July 3, 2004, as compared to the same periods in 2003, primarily due to the strengthening of the euro, British pound and Japanese yen in relation to the U.S. dollar.

Marketing and Sales

Marketing and sales expense decreased $2.4 million in the three months ended July 3, 2004, as compared to the same period in 2003, primarily due to a $2.9 million decrease in commission payments to Innotech as a result of our acquisition during 2003 from Innotech of the distribution rights to certain of its customers. Marketing and sales expense decreased $4.8 million in the six months ended July 3, 2004, as compared to the same period in 2003, primarily due to a $7.1 million decrease in commission payments to Innotech as a result of our acquisition from it of distribution rights to certain of its customers and a $2.1 million reduction in depreciation due to prior year restructuring activities, partially offset by a $6.8 million increase in salaries and benefits.

Research and Development

Research and development expense increased $2.7 million in the three months ended July 3, 2004, as compared to the same period in 2003, primarily due to a $5.6 million increase in salaries and benefits, partially offset by a $1.5 million reduction in discretionary spending and a $1.2 million reduction in depreciation due to prior years’ restructuring activities. Research and development expense increased $4.7 million in the six months ended July 3, 2004, as compared to the same period in 2003, primarily due to a $9.7 million increase in salaries and benefits, partially offset by a $2.1 million reduction in outside development costs and a $2.1 million reduction in depreciation due to prior year restructuring activities.

General and Administrative

General and administrative expense increased $0.1 million in the three months ended July 3, 2004, as compared to the same period in 2003, primarily due to a $1.8 million increase in salaries and benefits, offset by a $1.8 million reduction in legal expenses. General and administrative expenses decreased $6.8 million in the six months ended July 3, 2004, as compared to the same period in 2003, primarily due to a $8.0 million reduction in legal expenses, partially offset by a $1.3 million increase in salaries and benefits.


	*Amortization of Acquired Intangibles*



	Three Months Ended				Six Months Ended

	July 3,		June 28,		July 3,		June 28,
	2004		2003		2004		2003


	(In millions)
Amortization of acquired intangibles	$	16.0	$	15.1	$	31.9	$	29.9

Amortization of acquired intangibles increased $0.9 million in the three months ended July 3, 2004 and increased $2.0 million in the six months ended July 3, 2004, as compared to the same periods in 2003, primarily due to the amortization of intangibles acquired in connection with acquisitions. We expect to continue to complete acquisitions in the second half of 2004, which would result in an increase in amortization of acquired intangibles in 2004 on an annual basis as compared to 2003.


	*Amortization of Deferred Stock Compensation*



	Three Months Ended				Six Months Ended

	July 3,		June 28,		July 3,		June 28,
	2004		2003		2004		2003


	(In millions)
Amortization of deferred stock Compensation	$	8.2	$	7.9	$	16.2	$	13.9

We amortize deferred stock compensation related to fixed awards using the straight-line method over the period that the stock options and restricted stock vest. We recognize stock compensation expense related to variable awards using an accelerated method over the period that the stock options and restricted stock are earned. Amortization of deferred stock compensation increased $0.3 million for the three months ended July 3, 2004, as compared to the same period in 2003, primarily due to a $3.5 million increase in the amortization of deferred stock compensation related to incentive stock grants, certain stock options and compensation expense related to warrants issued to a third-party. This increase was partially offset by a $3.2 million decrease in the amortization of deferred stock compensation related primarily to our acquisition of Silicon Perspective Corporation. Amortization of deferred stock compensation increased $2.3 million for the six months ended July 3, 2004, as compared to the same period in 2003, primarily due to a $6.1 million increase in the amortization of deferred stock compensation related to incentive stock grants, certain stock options and compensation expense related to warrants issued to a third-party. This increase was partially offset by a $3.8 million decrease in the amortization of deferred stock compensation related primarily to our acquisition of Silicon Perspective Corporation. We expect the amortization of deferred stock compensation expense to increase during the remainder of 2004 as a result of the issuance of 1.4 million shares of restricted stock to certain employees during the three months ended July 3, 2004.


	*Restructuring and Other Charges*

We initiated a separate plan of restructuring in each year beginning in 2001 in an effort to reduce operating expenses and improve operating margins and cash flows.

The restructuring plans initiated in 2001 through 2003, or the 2001 Restructuring, 2002 Restructuring and 2003 Restructuring, were intended to decrease costs by reducing workforce and consolidating facilities and resources, to align our cost structure with expected revenues. The 2001 and 2002 Restructurings primarily related to our design services business and certain other business/infrastructure groups throughout the world. The 2003 Restructuring was targeted at reducing costs throughout the company.

During the first quarter of 2004, we commenced a new plan of restructuring, or the 2004 Restructuring, which was also intended to decrease costs and realize efficiencies by reducing workforce and resources throughout the company to align our cost structure with expected revenues.

A summary of restructuring and other charges by plan of restructuring for the three months ended July 3, 2004 is as follows:


		Severance
		and			Asset-			Excess
		Benefits			Related			Facilities		Total


		(In millions)
2004 Plan		$	2.4		$	- - -		- $	- - - -	$	2.4
2003 Plan			(0.2	)		0.6			- - - -		0.4
2002 Plan			- - - -			(0.5	)		0.4		(0.1	)
2001 Plan			- - - -			- - - -			0.2		0.2

	Total	$	2.2		$	0.1		$	0.6	$	2.9

A summary of restructuring and other charges by plan of restructuring for the six months ended July 3, 2004 is as follows:


		Severance
		and			Asset-			Excess
		Benefits			Related			Facilities		Total


		(In millions)
2004 Plan		$	7.0		$	0.1		$	- - - -	$	7.1
2003 Plan			(0.3	)		1.1			0.1		0.9
2002 Plan			- - - -			(0.6	)		0.5		(0.1	)
2001 Plan			- - - -			- - - -			0.5		0.5

	Total	$	6.7		$	0.6		$	1.1	$	8.4

We did not incur any restructuring charges during the first quarter of 2003. As such, restructuring and other charges by plan of restructuring for the three and six months ended June 28, 2003 is as follows:


		Severance
		and		Asset-		Excess
		Benefits		Related		Facilities			Total


		(In millions)
2004 Plan		$	- - - -	$	- - -	- $	- - - -		$	- - - -
2003 Plan			- - - -		- - - -		- - - -			- - - -
2002 Plan			0.8		0.4		1.4			2.6
2001 Plan			- - - -		- - - -		(1.2	)		(1.2	)

	Total	$	0.8	$	0.4	$	0.2		$	1.4

Frequently, asset write-downs are based on significant estimates and assumptions, particularly regarding remaining useful life and utilization rates. We may incur other charges in the future if management determines that the useful life or utilization of certain long-lived assets has been reduced.

Closure and space reduction costs included payments required under leases less any applicable estimated sublease income after the properties were abandoned, lease buyout costs, and costs to maintain facilities during the abandonment period. To determine the lease loss, which is the loss after our cost recovery efforts from subleasing a building, certain assumptions were made related to the time period over which the relevant building would remain vacant and sublease terms, including sublease rates and contractual common area charges.

As of July 3, 2004, our best estimate of the lease loss related to all worldwide restructuring activities initiated since 2001 is estimated to be $17.5 million. This amount will be adjusted in the future based upon changes in the assumptions used to estimate the lease loss. The lease loss could range as high as $41.4 million if sublease rental rates decrease in applicable markets or if it takes longer than currently expected to find a suitable tenant to sublease the facilities. Since 2001, we have recorded facilities consolidation charges under the 2001 through 2004 Restructurings of $84.1 million related to reducing space or the closing of 32 sites, of which 22 have been vacated and ten have been downsized.

Because the restructuring charges and related benefits are derived from management’s estimates made during the formulation of the restructurings, based on then-currently available information, our restructuring activities may not achieve the benefits anticipated on the timetable or at the level contemplated. Demand for our products and services and, ultimately, our future financial performance, is difficult to predict with any degree of certainty. Accordingly, additional actions, including further restructuring of our operations, may be required in the future.

The following is further discussion of the activity under each restructuring plan:

2004 Restructuring – The 2004 Restructuring is expected to result in the termination of approximately 121 employees. Costs resulting from this restructuring included severance payments, severance-related benefits and outplacement services. All terminations and termination benefits associated with this restructuring were communicated to the affected employees prior to July 3, 2004, with all termination benefits expected to be paid by January 1, 2005.

We project annualized savings in employee salary and benefits costs of approximately $16.2 million resulting from employee terminations under the 2004 Restructuring.

2003 Restructuring – During the second quarter of 2004, we incurred $0.4 million of expense related to the 2003 Restructuring, primarily comprised of contract termination charges as well as storage and disposal charges associated with facilities vacated as part of the 2003 Restructuring. We incurred a total of $0.9 million during the first six months of 2004 related to the 2003 plan, related primarily to contract termination charges as well as storage and disposal charges associated with facilities vacated as part of the 2003 Restructuring.

We expect to incur an additional $4 million to $6 million of future costs in connection with the 2003 Restructuring, primarily for facilities-related charges, which will be expensed as incurred.

2002 Restructuring – During the second quarter of 2004, we incurred $0.4 million of facilities expenses related to the 2002 Restructuring, primarily comprised of changes in lease loss estimates and other expenses incurred to sublease facilities. The facilities expenses were offset by the release of $0.5 million related to the reversal of accrued contract termination costs not incurred.

2001 Restructuring – Facilities-related charges recorded during the second quarter of 2004 under the 2001 Restructuring were $0.2 million, for a total of $0.5 million incurred during the first six months of 2004. These additional charges are primarily the result of changes in lease loss estimates and costs associated with facilities vacated as part of the 2001 Restructuring.


	*Write-off of Acquired In-process Technology*

Upon consummation of our acquisition of Neolinear in April 2004, we immediately charged to expense $7.0 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility had not been established. The value was determined by estimating 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 of 28%, which was assumed in this calculation, included a factor that reflects the uncertainty surrounding successful development of the acquired in-process technology. The in-process technology is expected to be commercially viable in December 2004. As of July 3, 2004, expenditures to complete the in-process technology totaled $0.4 million and aggregate expenditures to complete the remaining in-process technology are expected to be approximately $1.0 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require additional research and development after they have reached a state of technological and commercial feasibility.


	*Interest Expense*



	Three Months Ended						Six Months Ended

	July 3,			June 28,			July 3,			June 28,
	2004			2003			2004			2003


	(In millions)
Interest expense	$	(1.7	)	$	(0.6	)	$	(3.3	)	$	(1.3	)

Interest expense increased $1.1 million in the three months ended July 3, 2004, as compared to the three months ended June 28, 2003, primarily due to a $0.8 million increase in imputed interest on acquisition-related payments and $0.7 million of amortization expense related to the issuance of our Notes in August 2003 as described in “Liquidity and Capital Resources” below, partially offset by a decrease of $0.5 million in interest expense related to our now-terminated credit facilities. Interest expense increased $2.0 million in the six months ended July 3, 2004, as compared to the six months ended June 28, 2003, primarily due to a $1.6 million increase in imputed interest on acquisition-related payments and $1.4 million of amortization expense related to the issuance of our Notes, partially offset by a decrease of $1.0 million in interest expense related to our now-terminated credit facilities. After the issuance of our Notes, we terminated our credit facilities.


	*Other Expense, net*

Other expense, net, for the six months ended July 3, 2004 and June 28, 2003 is as follows:



		Three Months Ended						Six Months Ended

		July 3,			June 28,			July 3,			June 28,
		2004			2003			2004			2003


		(In millions)
Interest income		$	1.2		$	0.8		$	2.2		$	1.8
Gain on foreign exchange			(0.6	)		(3.4	)		0.4			0.1
Equity in loss from investments, net			(6.1	)		(3.0	)		(12.4	)		(5.4	)
Other			2.3			(2.3	)		4.0			(7.9	)

	Other expense, net	$	(3.2	)	$	(7.9	)	$	(5.8	)	$	(11.4	)

In the three months ended July 3, 2004, Other income of $2.3 million was comprised of $2.7 million of gains on the sale of short-term investments, partially offset by $0.4 million of Other loss, net. In the three months ended June 28, 2003, Other loss of $2.3 million was comprised of $2.1 million of impairment of investments and $0.2 million of Other loss, net. In the six months ended July 3, 2004, Other income of $4.0 million was comprised of $7.3 million of gains on the sale of short-term investments, partially offset by $2.1 million of impairment of investments and $1.2 million of Other loss, net. In the six months ended June 28, 2003, Other loss of $7.9 million was comprised of $4.2 million of impairment of investments, $1.3 million of losses on the sales of receivables and $2.4 million of Other loss, net. Equity in loss from investments, net, reflects our proportional share of the net losses of the investee companies for which we account for our investment using the equity method of accounting. Additional information about our investments that we account for using the equity method of accounting can be found in Note 5 to our Condensed Consolidated Financial Statements.


	*Income Taxes*

The following table presents the provision (benefit) for income taxes and the effective tax rate for the three and six months ended July 3, 2004 and June 28, 2003:



	Three Months Ended					Six Months Ended

	July 3,		June 28,			July 3,			June 28,
	2004		2003			2004			2003

Provision (Benefit) for Income Taxes (in millions)	$	0.9	$	(1.7	)	$	(1.5	)	$	(5.2	)
Effective Tax Rate		20%		24%			24%			22%

Our effective tax rate decreased for the three months ended July 3, 2004, compared to the three months ended June 28, 2003, due to an expected decrease in non-deductible stock compensation, partially offset by an expected decrease in tax benefits from foreign income taxed at a lower rate than the U.S. statutory rate and lower research and development tax credits.

Our effective tax rate reflects tax benefits derived from expected earnings outside the United States which are generally taxed at rates lower than the U.S. statutory rate of 35% and which we intend to invest indefinitely outside of the United States. During the three months ended July 3, 2004, we changed our projected annual effective tax rate for the year ending January 1, 2005 to 24%. As of April 3, 2004, we projected this rate to be 22%. This change is primarily a result of projecting increased amounts of non-deductible expenses related to stock compensation and write-offs of acquired in-process technology. The annual effective tax rate for the year ended January 3, 2004 was 42.5%. The projected annual effective tax rate for the year ending January 1, 2005 is lower primarily due to a projected decrease in non-deductible stock compensation, and a greater benefit from foreign income taxed at a lower rate than the U.S. statutory rate.

The IRS and other tax authorities regularly examine our income tax returns. In November 2003, the IRS completed its field examination of our federal income tax returns for the tax years ended 1997 through 1999 and issued a Revenue Agent’s Report, referred to as the RAR, in which the IRS proposes to assess an aggregate tax deficiency for the three-year period of approximately $143 million, plus interest, which interest will accrue until the matter is resolved. This interest is compounded daily at rates published by the IRS, which rates have been between four and nine percent since 1997, and adjusts quarterly. The IRS may also make similar claims for years subsequent to 1999 in future examinations. The RAR is not a final Statutory Notice of Deficiency, and we have protested certain of the proposed adjustments with the IRS.

The most significant of the disputed adjustments relates to transfer pricing arrangements that we have with a foreign subsidiary. We believe that the proposed IRS adjustments are inconsistent with applicable tax laws, and that we have meritorious defenses to the proposed adjustments.

The IRS is currently examining our federal income tax returns for the tax years ended 2000 through 2002.

Significant judgment is required in determining our provision for income taxes. In determining the adequacy of our provision for income taxes, we have assessed the likelihood of adverse outcomes resulting from these examinations, including the current IRS examination and the IRS RAR for 1997 through 1999. However, the ultimate outcome of tax examinations cannot be predicted with certainty, including the total amount payable or the timing of any such payments upon resolution of these issues. In addition, we cannot be certain that such amount will not be materially different than that which is reflected in our historical income tax provisions and accruals. Should the IRS or other tax authorities assess additional taxes as a result of a current or a future examination, we may be required to record charges to operations in future periods that could have a material adverse effect on our results of operations, financial position or cash flows in the period or periods recorded.


	Liquidity and Capital Resources

At July 3, 2004, our principal sources of liquidity consisted of $411.7 million of Cash and cash equivalents and Short-term investments, compared to $418.4 million at January 3, 2004. The primary sources of our cash for the six months ended July 3, 2004 were receipts from software licenses and the sale or lease of our hardware products and intellectual property, proceeds from the exercise of stock options and common stock purchases under our employee stock purchase plans. In the first six months of 2004, our primary uses of cash consisted of payroll costs, product and services and general and administrative expenses, purchases of treasury stock and cash paid in business combinations.

At July 3, 2004, we had net working capital of $350.6 million, as compared with $360.3 million at January 3, 2004. The decrease in net working capital was primarily due to an increase in Accounts payable and accrued liabilities of $18.1 million. This increase was partially offset by a $7.2 million increase in Inventories.

Net cash provided by operating activities increased $120.4 million, to $161.0 million, during the first six months of 2004 as compared to $40.6 million net cash provided by operating activities during the first six months of 2003. The increase is primarily related to a larger reduction in Accounts payable and accrued liabilities in the first six months of 2003 as compared to the first six months of 2004, primarily due to larger payments of accrued severance and other accrued restructuring-related expenses in the first six months of 2003 as compared to the first six months of 2004. In addition, cash provided by operating activities increased due to greater collections of installment contract receivables in the first six months of 2004 as compared to the first six months of 2003.

We have entered into agreements whereby we may transfer qualifying accounts receivable to certain financing institutions on a non-recourse basis. These transfers are recorded as sales and accounted for in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” During the first six months of 2004, we transferred accounts receivable totaling $5.1 million, which approximated fair value, to financing institutions on a non-recourse basis, as compared to $27.9 million transferred during the first six months of 2003.

Our primary investing activities consisted of business combinations and purchasing property, plant and equipment, which combined represented $130.5 million of cash used for investing activities in the first six months of 2004, as compared to $142.5 million in the first six months of 2003.

As part of our overall investment strategy, we are a limited partner in three venture capital funds, Telos Venture Partners, L.P., or Telos I, Telos Venture Partners II, L.P., or Telos II, and Telos Venture Partners III, L.P., or Telos III (Telos I, Telos II and Telos III are referred to collectively as Telos). We and certain of our deferred compensation trusts are the sole limited partners of Telos I and Telos III, and we are the sole limited partner of Telos II. The partnership agreements governing Telos I, Telos II and Telos III, which are substantially the same, require us to meet capital calls principally for the purpose of funding investments that are recommended by the applicable Telos general partner, and approved by the Telos advisory committee as being consistent with the partnership’s limitations and stated purposes. The Telos general partner, which is not affiliated with us, manages the partnerships and may be removed by us without cause. For all three partnerships, the advisory committee is comprised solely of the members of the Venture Committee of our Board of Directors, the current members of which are our Chairman of the Board of Directors and two independent members of our Board of Directors. As of July 3, 2004, we had contributed $90.6 million to these partnerships and are contractually committed to contribute to them up to an additional $86.9 million. Our commitments expire concurrently with the termination date of each partnership, which, in the case of Telos I is December 31, 2005, in the case of Telos II, is July 3, 2012, and, in the case of Telos III, is June 1, 2012. Our investments in the Telos partnerships are recorded in Other assets in the accompanying Condensed Consolidated Balance Sheets.

Net cash used for financing activities for the first six months of 2004 was $26.2 million compared to $51.4 million for the first six months of 2003. This change was primarily attributable to the termination of our credit facilities in August 2003 and lower proceeds from the issuance of our common stock in the first six months of 2003. In the first six months of 2004, our primary use of cash for financing activities was

$69.8 million for purchases of our common stock, which was partially offset by $45.9 million in proceeds we received from the issuance of our common stock. In the first six months of 2003, our primary use of cash for financing activities was $62.0 million used for purchases of our common stock and $63.2 million used for payments on our now-terminated credit facilities, partially offset by $45.0 million in proceeds we received from those credit facilities and $28.8 million of proceeds we received from the issuance of our common stock.

As compared to January 3, 2004, Other long-term liabilities decreased $37.3 million to $290.1 million at July 3, 2004. The decrease was primarily attributable to $20.9 million of reductions in Other long-term liabilities that are now reflected as Accounts payable and accrued liabilities relating to indemnity holdbacks from purchase price payments for business acquisitions. The components of Other long-term liabilities are $50.2 million of deferred compensation, $27.8 million of accrued restructuring charges and $212.1 million relating to indemnity holdbacks from acquisitions, deferred payments relating to acquisitions and deferred tax liabilities.

We received the RAR from the IRS in which the IRS proposes to assess an aggregate tax deficiency for the tax years from 1997 to 1999 of approximately $143 million, plus interest, which interest will accrue until the matter is resolved. The RAR is not a final Statutory Notice of Deficiency, and we have filed a protest with the IRS to certain of the proposed adjustments. We are challenging these proposed adjustments vigorously. The IRS may also make similar claims for tax returns filed for years subsequent to 1999. While we are protesting certain of the proposed adjustments, we cannot predict with certainty the ultimate outcome of the tax examination, including the amount payable, or timing of such payments, which may materially impact our cash flows in the period or periods resolved.

We expect to incur an additional $4 million to $6 million of future costs in connection with our restructuring activities, primarily for facilities-related charges connected with the 2003 Restructuring, which will be expensed as incurred. We expect annualized cost reductions resulting from the 2004 Restructuring of approximately $16.2 million in employee salary and benefits costs, related to employee terminations under the restructuring plan.

In August 2003, we issued $420.0 million principal amount of Zero Coupon Zero Yield Senior Convertible Notes due 2023, or the Notes, to two initial purchasers in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. We received net proceeds of approximately $406.4 million after transaction fees of approximately $13.6 million that were recorded in Other long-term assets and are being amortized to interest expense using the straight-line method over five years, which is the duration of the first redemption period. We issued the Notes at par and the Notes bear no interest. The Notes are convertible into our common stock initially at a conversion price of $15.65 per share, which would result in an aggregate of 26.8 million shares issued upon conversion, subject to adjustment upon the occurrence of specified events. We may redeem for cash all or any part of the Notes on or after August 15, 2008 for 100.00% of the principal amount. The holders may require us to repurchase for cash all or any portion of their Notes on August 15, 2008 for 100.25% of the principal amount, on August 15, 2013 for 100.00% of the principal amount or on August 15, 2018 for 100.00% of the principal amount. The Notes do not contain restrictive financial covenants.

In November 2003, we filed with the SEC a resale registration statement with respect to the Notes. This registration statement was declared effective by the SEC on April 29, 2004.

Concurrently with the issuance of the Notes, we entered into convertible notes hedge transactions whereby we have the option to purchase up to 26.8 million shares of our common stock at a price of $15.65 per share. These options expire on August 15, 2008 and must be settled in net shares. The cost of the convertible notes hedge transactions to us was approximately $134.6 million.

In addition, we sold warrants to purchase up to 26.8 million shares of our common stock at a price of $23.08 per share. The warrants expire on various dates from February 2008 through May 2008 and must be settled in net shares. We received approximately $56.4 million in cash proceeds for the sales of these warrants.

In connection with our acquisitions completed prior to July 3, 2004, we may be obligated to pay up to an aggregate of $55.2 million in cash during the next 12 months if certain performance goals related to one or more of the following criteria are achieved in full: revenue, bookings, product development, product

proliferation, and employee retention. In addition, we may be required to pay an additional $48.6 million in cash during the next four years if certain performance goals related to one or more of the following criteria are achieved in full: revenue, bookings, product development, product proliferation, and employee retention.

We expect that current cash and short-term investment balances and cash flow from operations will be sufficient to meet our working capital and other capital requirements for at least the next 12 months. Also, while we have no committed lines of credit, we believe our good credit and strong banking relationships will provide us with access to bank debt and opportunities to raise debt in the public markets if additional liquidity is needed.

New Accounting Standards

On July 2, 2004 the EITF reached a tentative conclusion on Issue 04-08, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share”, or EITF 04-08. If the EITF were to reach a consensus in agreement with the tentative conclusion on EITF 04-08, it would require us to include in diluted earnings per share, on the “if-converted” method, the aggregate of approximately 26.8 million shares of our common stock into which the Notes may be converted, regardless of whether the conversion threshold has been met. If a consensus is reached on EITF 04-08, adoption may require us to restate previously reported diluted earnings per share for all periods in which the Notes were outstanding. We believe that, if adopted in its current form, EITF 04-08 would have a material adverse effect on our diluted earnings per share.

Factors That May Affect Future Results

Our business faces many risks. Described below are what we believe to be the material risks that we face. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer.


	Risks Related to Our Business

We are subject to the cyclical nature of the integrated circuit and electronics systems industries, and any downturn may reduce our revenue.

Purchases of our products and services are dependent upon the commencement of new design projects by IC manufacturers and electronics systems companies. The IC industry is cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand.

The IC and electronics systems industries have experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both these industries’ and their customers’ products and a decline in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices.

Over the past several years, IC manufacturers and electronics systems companies have experienced a downturn in demand and production which has resulted in reduced research and development spending by many of our customers. While many of these companies appear to have experienced a gradual recovery in the second half of 2003 and the first half of 2004, they have continued their focus on cost containment. Any economic downturn could harm our business, operating results and financial condition.

Our failure to respond quickly to technological developments could make our products uncompetitive and obsolete.

The industries in which we compete experience rapid technology developments, changes in industry standards, changes in customer requirements and frequent new product introductions and improvements. Currently, the industries we serve are experiencing several revolutionary trends:

• Migration to nanometer design: the size of features such as wires, transistors and contacts on ICs is shrinking due to advances in semiconductor manufacturing processes. Process feature sizes refer to

the width of the transistors and the width and spacing of the interconnect on the IC. Feature size is normally identified by the headline transistor length, which is shrinking from 180 nanometers to 130 nanometers and smaller. This is commonly referred to in the semiconductor industry as the migration to nanometer design. It represents a major challenge for participants in the semiconductor industry, from IC design and design automation to design of manufacturing equipment and the manufacturing process itself. Shrinkage of transistor length to such infinitesimal proportions is challenging fundamental laws of physics and chemistry.

• The ability to design System-on-Chip, or SoC, ICs increases the complexity of managing a design that at the lowest level is represented by billions of shapes on the fabrication mask. In addition, SoCs typically incorporate microprocessors and digital signal processors that are programmed with software, requiring simultaneous design of the IC and the related software embedded on the IC.

• Increased capability of Field-Programmable Gate Array technologies creates an alternative to IC implementation for some electronics companies. This could reduce demand for Cadence’s IC implementation products and services.

• A growing number of low-cost design services businesses could reduce the need for some IC companies to invest in EDA products.

• The challenges of nanometer design are leading some customers to work with older, less risky manufacturing processes. This may reduce their need to upgrade their EDA products and design flows.

If we are unable to respond quickly and successfully to these developments and the evolution of these changes, we may lose our competitive position, and our products or technologies may become uncompetitive or obsolete. To compete successfully, we must develop or acquire new products and improve our existing products and processes on a schedule that keeps pace with technological developments in our industries. We must also be able to support a range of changing computer software, hardware platforms and customer preferences. We cannot guarantee that we will be successful in this effort.

We have experienced varied quarterly operating results, and our operating results for any particular fiscal period are affected by the timing of significant orders for our software products, fluctuations in customer preferences for license types and the timing of recognition of revenue under those license types.

We have experienced, and may continue to experience, varied quarterly operating results. In particular, we have experienced quarterly net losses for four of the past five quarters, and we may experience net losses in future periods. Various factors affect our quarterly operating results and some of them are not within our control. Our quarterly operating results are affected by the timing of significant orders for our software products because a significant number of licenses for our software products are in excess of $5.0 million. The failure to complete a license for one or more orders for our software products in a particular quarter could seriously harm our operating results for that quarter.

Our operating results are also affected by the mix of license types executed in any given period. We license software using three different license types: term, subscription and perpetual. Product revenue associated with term and perpetual licenses is generally recognized at the beginning of the license period, whereas product revenue associated with subscription licenses is recognized over multiple periods over the term of the license. Revenue may also be deferred under term and perpetual licenses until payments become due and payable from customers with nonlinear payment terms or as cash is collected from customers with lower credit ratings.

We continue to experience increasing customer preference for our subscription licenses and requests for more flexible payment terms. We expect revenue recognized from backlog to increase as a percentage of product revenue, on an annual basis, assuming that customers continue to prefer subscription licenses, or continue to request more flexible payment terms, both of which cause revenue to be recognized over time. In addition, revenue is impacted by the timing of license renewals, the extent to which contracts contain flexible payment terms and the mix of license types (i.e., perpetual, term or subscription) for existing customers, which changes could have the effect of accelerating or delaying the recognition of revenue from the timing of recognition under the original contract.

We plan operating expense levels primarily based on forecasted revenue levels. These expenses and the impact of long-term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.

You should not view our historical results of operations as reliable indicators of our future performance. If revenue or operating results fall short of the levels expected by public market analysts and investors, the trading price of our common stock could decline dramatically.

Our future revenue is dependent in part upon our installed customer base continuing to license additional products, renew maintenance agreements and purchase additional services.

Our installed customer base has traditionally generated additional new license, service and maintenance revenues. In future periods, customers may not necessarily license additional products or contract for additional services or maintenance. Maintenance is generally renewable annually at a customer’s option, and there are no mandatory payment obligations or obligations to license additional software. If our customers decide not to renew their maintenance agreements or license additional products or contract for additional services, or if they reduce the scope of the maintenance agreements, our revenue could decrease, which could have an adverse effect on our results of operations.

We may not receive significant revenue from our current research and development efforts for several years, if at all.

Internally developing software products and integrating acquired software products into existing platforms is expensive, and these investments often require a long time to generate returns. Our strategy involves significant investments in software research and development and related product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we cannot predict that we will receive significant revenue from these investments, if at all.

We have acquired and expect to acquire other companies and businesses and may not realize the expected benefits of these acquisitions.

We have acquired and expect to acquire other companies and businesses in the future. While we expect to carefully analyze all potential acquisitions before committing to the transaction, we cannot assure you that our management will be able to integrate and manage acquired products and businesses effectively or that the acquisitions will result in long-term benefits to us or our stockholders. In addition, acquisitions involve a number of risks. If any of the following events occurs after we acquire another business, it could seriously harm our business, operating results and financial condition:

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

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

• The discovery, after completion of the acquisition, of liabilities assumed from the acquired business or of assets acquired that are not realizable;

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

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

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

• Unanticipated costs;

• Customer dissatisfaction with existing license agreements with Cadence which may preclude access to products acquired by Cadence after the effective date of the license; and

• Failure to understand and compete effectively in markets in which we have limited previous experience.

In a number of our acquisitions, we have agreed to make future cash or stock payments based on the performance of the businesses we acquired. The performance goals pursuant to which these future payments

may be made generally relate to achievement by the acquired business of certain specified bookings, revenue, product proliferation, product development or employee retention goals during a specified period following completion of the applicable acquisition. Future acquisitions may involve issuances of stock as payment of the purchase price for the acquired business and also incentive stock or option grants to employees of the acquired businesses (which may be dilutive to existing stockholders), expenditure of substantial cash resources or the incurrence of material amounts of debt.

The specific performance goal levels and amounts and timing of contingent purchase price payments vary with each acquisition. In fiscal 2004 to date, we have recorded 1.1 million shares to former stockholders of acquired companies, as contingent earnout purchase price. In addition, in fiscal 2004 to date, we made cash payments of $9.6 million and accrued an additional $2.3 million of cash payments to former stockholders of acquired companies, as contingent earnout purchase price.

The additional goodwill and deferred stock compensation resulting from acquisitions related to the achievement of certain performance goals tied to one or more of the following criteria: revenue, bookings, product proliferation, product development and employee retention. The goodwill is not expected to be deductible for income tax purposes.

Future acquisitions may result in increased goodwill and other intangible assets, in addition to acquisition-related charges. These assets may eventually be written down to the extent they are deemed to be impaired, and any such write-downs would adversely affect our results.

Our failure to attract, train, motivate and retain key employees may make us less competitive in our industries and therefore harm our results of operations.

Our business depends on the efforts and abilities of our senior management, our research and development staff, and a number of other key management, sales, support, technical and services employees. The high cost of training new employees, not fully utilizing these employees, or losing trained employees to competing employers could reduce our gross margins and harm our business and operating results. Even in the current economic climate, competition for highly skilled employees can be intense, particularly in geographic areas recognized as high technology centers such as the Silicon Valley area, where our principal offices are located, and the other locations where we maintain facilities. If economic conditions improve and job opportunities in the technology industry become more plentiful, we may experience increased employee attrition and increased competition for skilled employees. To attract, retain and motivate individuals with the requisite expertise, we may be required to grant large numbers of stock options or other stock-based incentive awards, which may be dilutive to existing stockholders. We may also be required to pay key employees significant base salaries and cash bonuses, which could harm our operating results. Additionally, if certain proposed accounting standards were adopted we would be required to record a charge to compensation expense for option grants which may affect our ability to provide equity compensation to employees.

In addition, regulations adopted by the NYSE and NASDAQ require stockholder approval for new stock option plans and significant amendments to existing plans, including increases in options, and prohibit NYSE and NASDAQ member organizations from giving a proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions. These regulations could make it more difficult for us to grant equity compensation to employees in the future. To the extent that these regulations make it more difficult or expensive to grant equity compensation to employees, we may incur increased compensation costs or find it difficult to attract, retain and motivate employees, which could materially and adversely affect our business.

The competition in our industries is substantial and we cannot assure you that we will be able to continue to successfully compete in our industries.

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

• The development by others of competitive EDA products or platforms and design and methodology services could result in a shift of customer preferences away from our products and services and significantly decrease revenue;

• Decisions by electronics manufacturers to perform design and methodology services internally, rather than purchase these services from outside vendors due to budget constraints or excess engineering capacity;

• The challenges of developing (or acquiring externally-developed) technology solutions which are adequate and competitive in meeting the requirements of next-generation design challenges;

• The significant number of current and potential competitors in the EDA industry and the low cost of entry;

• Intense competition to attract acquisition targets, which may make it more difficult for us to acquire companies at an acceptable price or at all; and

• The combination of or collaboration among many EDA companies to deliver more comprehensive offerings than they could individually.

We currently compete in the EDA market primarily with Synopsys, Inc., Mentor Graphics Corporation and Magma Design Automation, Inc. We also compete with numerous smaller EDA companies, with manufacturers of electronic devices that have developed or have the capability to develop their own EDA products, and with numerous electronics design and consulting companies. Manufacturers of electronic devices may be reluctant to purchase services from independent vendors such as us because they wish to promote their own internal design departments.

We may need to change our pricing models to compete successfully.

The intensely competitive markets in which we compete can put pressure on us to reduce our prices. If our competitors offer deep discounts on certain products in an effort to recapture or gain market segment share or to sell other software or hardware products, we may then need to lower prices or offer other favorable terms to compete successfully. Any such changes would be likely to reduce margins and can adversely affect operating results. Any broadly-based changes to our prices and pricing policies could cause sales and software license revenues to decline or be delayed as our sales force implements and our customers adjust to the new pricing policies. Some of our competitors may bundle products for promotional purposes or as a long-term pricing strategy or provide guarantees of prices and product implementations. These practices could, over time, significantly constrain the prices that we can charge for our products. If we cannot offset price reductions with a corresponding increase in the number of sales or with lower spending, then the reduced license revenues resulting from lower prices could have an adverse affect on our results of operations.

We rely on our proprietary technology as well as software and other intellectual property rights licensed to us by third parties, and we cannot assure you that the precautions taken to protect our rights will be adequate or that we will continue to be able to adequately secure such intellectual property rights from third parties.

Our success depends, in part, upon our proprietary technology. We generally rely on patents, copyrights, trademarks, trade secret laws, licenses and restrictive agreements to establish and protect our proprietary

rights in technology and products. Despite precautions we may take to protect our intellectual property, we cannot assure you that third parties will not try to challenge, invalidate or circumvent these safeguards. We also cannot assure you that the rights granted under our patents or attendant to our other intellectual property will provide us with any competitive advantages, or that patents will be issued on any of our pending applications, or that future patents will be sufficiently broad to protect our technology. Furthermore, the laws of foreign countries may not protect our proprietary rights in those countries to the same extent as applicable law protects these rights in the United States. Many of our products include software or other intellectual property licensed from third parties. We may have to seek new or renew existing licenses for such software and other intellectual property in the future. Our design services business holds licenses to certain software and other intellectual property owned by third parties. Our failure to obtain, for our 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 our business, operating results and financial condition.

Intellectual property infringement by or against us could result in our loss of key technology.

There are numerous patents in the EDA industry and new patents are being issued at a rapid rate. It is not always 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, we may be forced to respond to or prosecute intellectual property infringement claims to protect our 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 our business, operating results and financial condition. In settling these claims, we 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 favorable to us. Being forced to enter into a license agreement with unfavorable terms could seriously harm our business, operating results and financial condition. Any potential intellectual property litigation could force us to do one or more of the following:

• Pay damages, license fees or royalties to the party claiming infringement;

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

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

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

If we were forced to take any of these actions, our business and results of operations may suffer.

We may not be able to effectively implement our restructuring activities, and our restructuring activities may not result in the expected benefits, which would negatively impact our future results of operations.

The EDA market and the commercial electronics design and methodology services industries are highly competitive and change quickly. We have responded to increased competition and changes in the industries in which we compete by restructuring our operations and reducing the size of our workforce. Despite our restructuring efforts over the last few years, we cannot assure you that we will achieve all of the operating expense reductions and improvements in operating margins and cash flows currently anticipated from these restructuring activities in the periods contemplated, or at all. Our inability to realize these benefits, and our failure to appropriately structure our business to meet market conditions, could negatively impact our results of operations.

As part of our recent restructuring activities, we have reduced the workforce in certain revenue-generating portions of our business, particularly in our services business. This reduction in staffing levels could require us to forego certain future strategic opportunities due to limited resources, which could negatively affect our long-term revenues.

In addition, these workforce reductions could result in a lack of focus and reduced productivity by remaining employees due to changes in responsibilities or concern about future prospects, which in turn may negatively affect our future revenues. Further, we believe our future success depends, in large part, on our

ability to attract and retain highly skilled personnel. Our restructuring activities could negatively affect our ability to attract such personnel as a result of perceived risk of future workforce reductions.

We also cannot assure you that we will not be required to implement further restructuring activities or reductions in our workforce based on changes in the markets and industries in which we compete or that any future restructuring efforts will be successful.

The lengthy sales cycle of our products and services makes the timing of our revenue difficult to predict and may cause our operating results to fluctuate unexpectedly.

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

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

• The timing of customers’ competitive evaluation processes; or

• Customers’ budgetary constraints and budget cycles.

Lengthy sales cycles for acceleration and emulation hardware products subject us to a number of significant risks over which we have limited control, including insufficient, excess or obsolete inventory, variations in inventory valuation and fluctuations in quarterly operating results.

Also, because of the timing of large orders and our customers’ buying patterns, we may not learn of bookings shortfalls, 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 our common stock.

The profitability of our services business depends on factors that are difficult to control, such as the high cost of our services employees, our cost of performing our fixed-price services contracts and the success of our design services business, which has historically suffered losses.

To be successful in our services business, we must overcome several factors that are difficult to control, including the following:

• Our cost of services employees is high and reduces our gross margin. Gross margin represents the difference between the amount of revenue from the sale of services and our cost of providing those services. We must pay high salaries to attract and retain professional services employees. This results in a lower gross margin than the gross margin in our software business. In addition, the high cost of training new services employees or not fully utilizing these employees can significantly lower gross margin. It is difficult to adjust staffing levels quickly to reflect customer demand for services; therefore, the services business has in the past and could continue to experience losses.

• A portion of services contracts consists of fixed-price contracts. Some of our customers pay a fixed price for services provided, regardless of the cost we must incur to perform the contract. If our cost in performing the services were to exceed the amount the customer has agreed to pay, we would experience a loss on the contract, which could harm our business, operating results and financial condition.

• We have historically suffered losses in our design services business. The market for electronics design services is sensitive to customer budgetary constraints and engineering capacity. Our design services business has historically suffered losses. If our design services business fails to increase its revenue to offset its expenses, the design services business will continue to experience losses. Our failure to succeed in the design services business may harm our business, operating results and financial condition.

Our international operations may seriously harm our financial condition because of the effect of foreign exchange rate fluctuations and other risks to our international business.

We have significant operations outside the United States. Our revenue from international operations as a percentage of total revenue was approximately 46% for the second quarter of 2004 and 47% for the second quarter of 2003. We expect that revenue from our international operations will continue to account for a significant portion of our total revenue. We also transact business in various foreign currencies. Recent economic and political uncertainty and the volatility of foreign currencies in certain regions, most notably the Japanese yen and the European Union euro, have had, and may in the future have, a seriously harmful effect on our revenue and operating results.

Fluctuations in the rate of exchange between the U.S. dollar and the currencies of other countries in which we conduct business could seriously harm our 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 the same amount of U.S. dollars than before the rate increase. If we price our products and services in the foreign currency, we will receive fewer U.S. dollars than we did before the rate increase went into effect. If we price our products and services in U.S. dollars, an increase in the exchange rate will result in an increase in the price for our products and services compared to those products of our competitors that are priced in local currency. This could result in our prices being uncompetitive in markets where business is transacted in the local currency.

Exposure to foreign currency transaction risk can arise when transactions are conducted in a currency different from the functional currency of one of our subsidiaries. A subsidiary’s functional currency is the currency in which it primarily conducts its operations, including product pricing, expenses and borrowings. Although we attempt to reduce the impact of foreign currency fluctuations, significant exchange rate movements may hurt our results of operations as expressed in U.S. dollars.

Our international operations may also be subject to other risks, including:

• The adoption and expansion of government trade restrictions;

• Limitations on repatriation of earnings;

• Limitations on the conversion of foreign currencies;

• Reduced protection of intellectual property rights in some countries;

• Recessions in foreign economies;

• Longer collection periods for receivables 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 exports which may lengthen the sales cycle or restrict or prohibit the sale or licensing of certain products.

We have offices throughout the world, including key research facilities outside of the United States. Our operations are dependent upon the connectivity of our operations throughout the world. Activities that interfere with our international connectivity, such as computer “hacking” or the introduction of a virus into our computer systems, could significantly interfere with our business operations.

Our operating results could be adversely affected as a result of changes in our effective tax rates.

Our future effective tax rates could be adversely affected by the following:

• Earnings being lower than anticipated in countries where we are taxed at lower statutory rates as compared to the U.S. statutory tax rate;

• An increase in expenses not deductible for tax purposes, including write-offs of acquired in-process technology and impairment of goodwill;

• Changes in the valuation of our deferred tax assets and liabilities;

• Changes in tax laws or the interpretation of such tax laws; or

• New accounting standards or interpretations of such standards.

Any significant change in our future effective tax rates could adversely impact our results of operations for future periods.

We have received an examination report from the Internal Revenue Service proposing a tax deficiency in certain of our tax returns, and the outcome of the examination or any future examinations involving similar claims may have a material adverse effect on our results of operations and cash flows.

The IRS and other tax authorities regularly examine our income tax returns. In November 2003, the IRS completed its field examination of our federal income tax returns for the tax years 1997 through 1999 and has issued the RAR in which the IRS proposes to assess an aggregate tax deficiency for the three-year period of approximately $143 million, plus interest, which interest will accrue until the matter is resolved. This interest is compounded daily at rates published by the IRS, which rates have been between four and nine percent since 1997, and adjusts quarterly. The IRS may also make similar claims for years subsequent to 1999 in future examinations. The RAR is not a final Statutory Notice of Deficiency, and we have filed a protest to certain of the proposed adjustments with the IRS.

The most significant of the disputed adjustments relates to transfer pricing arrangements that we have with a foreign subsidiary. We believe that the proposed IRS adjustments are inconsistent with the applicable tax laws, and that we have meritorious defenses to the proposed adjustments. We are challenging these proposed adjustments vigorously.

The IRS is currently examining our federal income tax returns for tax years ended 2000 through 2002.

Significant judgment is required in determining our provision for income taxes. In determining the adequacy of our provision for income taxes, we regularly assess the likelihood of adverse outcomes resulting from these examinations, including the current IRS examination and the IRS RAR for 1997 through 1999. However, the ultimate outcome of tax examinations cannot be predicted with certainty, including the total amount payable or the timing of any such payments upon resolution of these issues. In addition, we cannot assure you that such amount will not be materially different than that which is reflected in our historical income tax provisions and accruals. Should the IRS or other tax authorities assess additional taxes as a result of a current or a future examination, we may be required to record charges to operations in future periods that could have a material impact on the results of operations, financial position or cash flows in the applicable period or periods recorded.

Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and material differences between forecasted and actual tax rates could have a material impact on our results of operations.

Forecasts of our income tax position and resultant effective tax rate are complex and subject to uncertainty because our income tax position for each year combines the effects of a mix of profits (losses) earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates as well as benefits from available deferred tax assets and costs resulting from tax audits. To forecast our global tax rate, pre-tax profits and losses by jurisdiction are estimated and tax expense by jurisdiction is calculated. If the mix of profits and losses or effective tax rates by jurisdiction is different than those estimates, our actual tax rate could be materially different than forecasted, which could have a material impact on our results of operations.

Failure to obtain export licenses could harm our business by rendering us unable to ship products and transfer our technology outside of the United States.

We must comply with U.S. Department of Commerce regulations in shipping our software products and transferring our technology outside the United States and to foreign nationals. Although we have not had any significant difficulty complying with these regulations so far, any significant future difficulty in complying could harm our business, operating results and financial condition.

Proposed regulations related to equity compensation could cause us to recognize an additional expense, which would result in a reduction in our net income.

On March 31, 2004, the Financial Accounting Standards Board, or FASB, issued a proposed Statement “Share Based Payment, an Amendment of FASB Statements No. 123 and 95” relating to the accounting for equity-based compensation. This statement proposes changes to U.S. Generally Accepted Accounting Principles, or GAAP, that, if implemented, would require us to record a charge to compensation expense for stock option grants. On July 20, 2004, the U.S. House of Representatives passed a bill that would block implementation of the FASB’s proposed regulations and would instead require companies to record a charge to compensation expense for stock option grants to their named executive officers (i.e., the chief executive officer and the four most highly compensated executive officers, other than the chief executive officer, as of the end of the most recent fiscal year). We currently account for stock options under SFAS No. 123, “Accounting for Stock-Based Compensation”. As permitted by SFAS No. 123, we have elected to use the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, or APB Opinion No. 25, “Accounting for Stock Issued to Employees,” to measure compensation expense for stock-based awards granted to employees, under which the granting of stock options is not considered compensation, if the option exercise price is not less than the fair market value of the common stock at the grant date. Starting in 2005, the FASB’s proposal would require that stock-based awards be accounted for using a fair-value based method, which would require us to measure the compensation expense for all such awards, including stock options, at fair-value at the grant date. The House bill would also require that stock-based awards to our named executive officers be accounted for using a fair-value based method, with some modifications. We cannot predict whether the proposed FASB regulations or House bill will be adopted, and if adopted, whether either will be adopted in its current form, but if either is adopted in its current form, there would be an adverse affect on our results of operations.

Errors or defects in our products and services could expose us to liability and harm our reputation.

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

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

• Failure to attract new customers or achieve market acceptance;

• Diversion of development resources to resolve the problem;

• Increased service costs; and

• Liability for damages.

If we become subject to unfair hiring claims, we could be prevented from hiring needed employees, incur liability for damages and incur substantial costs in defending ourselves.

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

Our business is subject to the risk of earthquakes, floods and other natural catastrophic events.

Our corporate headquarters, including certain of our research and development operations, and certain of our distribution facilities, are located in the Silicon Valley area of Northern California, which is a region known to experience seismic activity. In addition, several of our facilities, including our corporate headquarters, certain of our research and development operations, and certain of our distribution operations, are in areas

of San Jose, California that have been identified by the Director of the Federal Emergency Management Agency, or FEMA, as being located in a special flood area. The areas at risk are identified as being in a one hundred year flood plain, using FEMA’s Flood Hazard Boundary Map or the Flood Insurance Rate Map. If significant seismic or flooding activity were to occur, our operations may be interrupted, which would adversely impact our business and results of operations.

We maintain research and other facilities in parts of the world that are not as politically stable as the United States, and as a result we may face a higher risk of business interruption from acts of war or terrorism than other businesses located only or primarily in the United States.

We maintain international research and other facilities, some of which are in parts of the world that are not as politically stable as the United States. Consequently, we may face a greater risk of business interruption as a result of terrorist acts or military conflicts than businesses located domestically. Furthermore, this potential harm is exacerbated given that damage to or disruptions at our international research and development facilities could have an adverse effect on our ability to develop new or improve existing products as compared to other businesses which may only have sales offices or other less critical operations abroad. We are not insured for losses or interruptions caused by acts of war or terrorism.

Risks Related to Our Securities

Our debt obligations expose us to risks that could adversely affect our business, operating results and financial condition, and could prevent us from fulfilling our obligations under such indebtedness.

We have a substantial level of debt. As of July 3, 2004, we had $420.1 million of outstanding indebtedness, including $420.0 million from the Notes that we issued in August 2003. The level of our indebtedness, among other things, could:

• make it difficult for us to satisfy our payment obligations on our debt as described below;

• make it difficult for us to incur additional debt or obtain any necessary financing in the future for working capital, capital expenditures, debt service, acquisitions or general corporate purposes;

• limit our flexibility in planning for or reacting to changes in our business;

• reduce funds available for use in our operations;

• make us more vulnerable in the event of a downturn in our business;

• make us more vulnerable in the event of an increase in interest rates if we must incur new debt to satisfy our obligations under the Notes; or

• place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have greater access to capital resources.

If we experience a decline in revenue due to any of the factors described in this section entitled “Factors That May Affect Future Results” or otherwise, we could have difficulty paying amounts due on our indebtedness. In the case of the Notes, although the Notes mature in 2023, the holders of the Notes may require us to repurchase their notes at an additional premium in 2008, which makes it probable that we will be required to repurchase the Notes in 2008 if the Notes are not otherwise converted into our common stock. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our indebtedness, including the Notes, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause defaults under our other indebtedness. Any default under our indebtedness could have a material adverse effect on our business, operating results and financial condition.

We are not restricted under our outstanding indebtedness from incurring additional debt, including other senior indebtedness or secured indebtedness. In addition, our outstanding indebtedness does not restrict our ability to pay dividends, issue or repurchase stock or other securities or require us to achieve or maintain any minimum financial results relating to our financial position or results of operations. Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of our outstanding indebtedness could have the effect of diminishing our ability to make payments on such indebtedness when due. Although our outstanding indebtedness does not contain such financial and other restrictive covenants,

future indebtedness could include such covenants. If we incur additional indebtedness or other liabilities, our ability to pay our obligations on our outstanding indebtedness could be adversely affected.

We may be unable to adequately service our indebtedness, which may result in defaults and other costs to us.

We may not have sufficient funds or may be unable to arrange for additional financing to pay the outstanding obligations due on our indebtedness. Any future borrowing arrangements or debt agreements to which we become a party may contain restrictions on or prohibitions against our repayment on our outstanding indebtedness. With respect to the Notes, at maturity, the entire outstanding principal amount of the Notes will become due and payable. Holders may require us to repurchase for cash all or any portion of the Notes on August 15, 2008 for 100.25% of the principal amount, August 15, 2013 for 100.00% of the principal amount and August 15, 2018 for 100.00% of the principal amount. As a result, although the Notes mature in 2023, the holders may require us to repurchase the Notes at an additional premium in 2008, which makes it probable that we will be required to repurchase the Notes in 2008 if the Notes are not otherwise converted into our common stock. If we are prohibited from paying our outstanding indebtedness, we could try to obtain the consent of lenders under those arrangements, or we could attempt to refinance the borrowings that contain the restrictions. If we do not obtain the necessary consents or refinance the borrowings, we may be unable to satisfy our outstanding indebtedness. Any such failure would constitute an event of default under our indebtedness, which could, in turn, constitute a default under the terms of any other indebtedness then outstanding.

In addition, a material default on our indebtedness could suspend our eligibility to register securities using certain registration statement forms under SEC guidelines which permit incorporation by reference of substantial information regarding us, which could potentially hinder our ability to raise capital through the issuance of our securities and will increase the costs of such registration to us.

The price of our common stock may fluctuate significantly, which may make it difficult for stockholders to sell our common stock when desired or at attractive prices.

The market price of our common stock is subject to significant fluctuations in response to the factors set forth in this section entitled “Factors That May Affect Future Results” and other factors, many of which are beyond our control. Such fluctuations, as well as economic conditions generally, may adversely affect the market price of our common stock.

In addition, the stock markets in recent years have experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our common stock, regardless of our operating performance.

Conversion of the Notes will dilute the ownership interests of existing stockholders.

The terms of the Notes permit the holders to convert the Notes into shares of our common stock. The Notes are convertible into our common stock initially at a conversion price of $15.65 per share, which would result in an aggregate of approximately 26.8 million shares of our common stock issued upon conversion, subject to adjustment upon the occurrence of specified events. The conversion of some or all of the Notes will dilute the ownership interest of our existing stockholders. Any sales in the public market of the common stock issuable upon conversion could adversely affect prevailing market prices of our common stock. Prior to the conversion of the Notes, if the trading price of our common stock exceeds the conversion price of the Notes by 145.00% or more over specified periods, earnings per share will be diluted if and to the extent the convertible notes hedge instruments are not exercised. We may redeem for cash all or any part of the Notes on or after August 15, 2008 for 100.00% of the principal amount. The holders may require us to repurchase for cash all or any portion of their notes on August 15, 2008 for 100.25% of the principal amount, on August 15, 2013 for 100.00% of the principal amount, or on August 15, 2018 for 100.00% of the principal amount.

Each $1,000 of principal of the Notes is initially convertible into 63.879 shares of our common stock, subject to adjustment upon the occurrence of specified events. Holders of the Notes may convert their Notes

prior to maturity only if: (1) the price of our common stock reaches $22.69 during periods of time specified by the Notes, (2) specified corporate transactions occur, (3) the Notes have been called for redemption or (4) the trading price of the Notes falls below a certain threshold. As a result, although the Notes mature in 2023, the holders may require us to repurchase their notes at an additional premium in 2008, which makes it probable that we will be required to repurchase the Notes in 2008 if the Notes are not otherwise converted into our common stock.

Although the conversion price is currently $15.65 per share, the convertible notes hedge and warrant transactions that we entered into in connection with the issuance of the Notes effectively increased the conversion price of the Notes until 2008 to approximately $23.08 per share, which would result in an aggregate issuance upon conversion prior to August 15, 2008 of approximately 18.2 million shares of our common stock. We have entered into convertible notes hedge and warrant transactions to reduce the potential dilution from the conversion of the Notes, however we cannot guarantee that such convertible notes hedge and warrant instruments will fully mitigate the dilution. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could depress the price of our common stock.

Proposed regulations related to certain features of contingently convertible debt could cause us to include the number of contingently issuable shares in our diluted earnings per share calculation, which would result in significantly lower diluted earnings per share.

On July 2, 2004, the EITF reached a tentative conclusion on EITF 04-08. If the EITF were to reach a consensus in agreement with the tentative conclusion on EITF 04-08, it would require us to include in diluted earnings per share, on the “if-converted” method, the aggregate of approximately 26.8 million shares of our common stock into which the Notes may be converted, regardless of whether the conversion threshold has been met. If a consensus is reached on EITF 04-08, adoption may require us to restate previously reported diluted earnings per share for all periods in which the Notes were outstanding. We cannot predict whether the proposed regulations will be adopted, but if adopted as proposed this statement would have a material adverse effect on our diluted earnings per share.

We may, at the option of the noteholders and only in certain circumstances, be required to repurchase the Notes in shares of our common stock upon a significant change in our corporate ownership or structure, and issuance of shares to repurchase the notes would result in dilution to our existing stockholders.

Under the terms of the Notes, we may be required to repurchase the Notes following a significant change in our corporate ownership or structure, such as a change of control, prior to maturity of the Notes. Following a significant change in our corporate ownership or structure, in certain circumstances, we may choose to pay the repurchase price of the Notes in cash, shares of our common stock or a combination of cash and shares of our common stock. In the event we choose to pay all or any part of the repurchase price of notes in shares of our common stock, this would result in dilution to the holders of our common stock.

Convertible notes hedge and warrant transactions entered into in connection with the issuance of the Notes may affect the value of our common stock.

We entered into convertible notes hedge transactions with JP Morgan Chase Bank, an affiliate of one of the initial purchasers of the Notes, at the time of issuance of the Notes, with the objective of reducing the potential dilutive effect of issuing our common stock upon conversion of the Notes. We also entered into warrant transactions. In connection with our convertible notes hedge and warrant transactions, JP Morgan Chase Bank, or its affiliates purchased our common stock in secondary market transactions and entered into various over-the-counter derivative transactions with respect to our common stock. This entity or its affiliates is likely to modify its hedge positions from time to time prior to conversion or maturity of the Notes by purchasing and selling shares of our common stock, other of our securities or other instruments it may wish to use in connection with such hedging. The effect, if any, of any of these transactions and activities on the market price of our common stock or the Notes could adversely affect the value of our common stock and, as a result, the number of shares and the value of the common stock holders will receive upon conversion of the

Notes. In addition, subject to movement in the trading price of our common stock, if the convertible notes hedge transactions settle in our favor, we could be exposed to credit risk related to the other party.

Rating agencies may provide unsolicited ratings on the Notes that could reduce the market value or liquidity of our common stock.

We have not requested a rating of the Notes from any rating agency and we do not anticipate that the Notes will be rated. However, if one or more rating agencies independently elects to rate the Notes and assigns the Notes a rating lower than the rating expected by investors, or reduces their rating in the future, the market price or liquidity of the Notes and our common stock could be harmed. A resulting decline in the market price of the Notes as compared to the price of our common stock may require us to repurchase the Notes.

Anti-takeover defenses in our governing documents and certain provisions under Delaware law could prevent an acquisition of our company or limit the price that investors might be willing to pay for our common stock.

Our governing documents and certain provisions of the Delaware General Corporation Law that apply to us could make it difficult for another company to acquire control of our company. For example:

• Our certificate of incorporation allows our 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 of our preferred stock that may be issued in the future may be superior to the rights of holders of our common stock.

• We have a rights plan, commonly known as a “poison pill,” which would make it difficult for someone to acquire our company without the approval of our board of directors.

• 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.

All or any one of these factors could limit the price that certain investors would be willing to pay for shares of our common stock and could delay, prevent or allow our board of directors to resist an acquisition of our company, even if the proposed transaction were favored by a majority of our independent stockholders.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Disclosures about Market Risk


	*Interest Rate Risk*

Our exposure to market risk for changes in interest rates relates primarily to our short-term investment portfolio. While we are exposed to interest rate fluctuations in many of the world’s leading industrialized countries, our 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 our cash and cash equivalents, short-term and long-term investments and costs associated with foreign currency hedges.

We invest in high quality credit issuers and, by policy, limit the amount of our credit exposure to any one issuer. As part of our policy, our first priority is to reduce the risk of principal loss. Consequently, we seek to preserve our invested funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in only high quality credit securities that we believe to have low credit risk and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The short-term interest-bearing portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.

The table below presents the carrying value and related weighted average interest rates for our interest-bearing instruments. All highly liquid investments with a maturity of three months or less at the date of

purchase are considered to be cash equivalents; investments with maturities between three and 12 months are considered to be short-term investments. Investments with maturities greater than 12 months are considered long-term investments. The carrying value of our interest-bearing instruments approximated fair value at July 3, 2004.


				Carrying		Average
				Value		Interest Rate

				(In millions)
Interest-Bearing Instruments:
	Cash equivalents – variable rate			$	147.7		1.62%
	Commercial Paper – fixed rate				144.9		1.30%
	Cash – variable rate				75.8		0.83%

		Total interest-bearing instruments			368.4		1.33%
		Total non-interest bearing cash			21.3

			Total cash and cash equivalents	$	389.7


	*Foreign Currency Risk*

Our operations include transactions in foreign currencies and, therefore, we benefit from a weaker dollar, and we are adversely affected by a stronger dollar relative to major currencies worldwide. The primary effect of foreign currency transactions on our results of operations from a weakening U.S. dollar is an increase in revenue offset by a smaller increase in expenses. Conversely, the primary effect of foreign currency transactions on our results of operations from a strengthening U.S. dollar is a reduction in revenue offset by a smaller reduction in expenses.

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

We do not use forward contracts for trading purposes. Our forward contracts generally have maturities of 180 days or less. Recognized gains and losses with respect to our current hedging activities will ultimately depend on how accurately we are able to match the amount of currency forward exchange contracts with underlying asset and liability exposures.

The table below provides information, as of July 3, 2004, about our forward foreign currency contracts. 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 expressed as units of the foreign currency per U.S. dollar. All of these forward contracts mature prior to September 17, 2004.


					Weighted
					Average
		Notional			Contract
		Principal			Rate

		(In millions)
Forward Contracts:
	Japanese yen	$	102.6			111.05
	Euro		31.8			0.83
	Hong Kong dollars		9.7			7.79
	Canadian dollars		7.6			1.37
	British pound sterling		6.3			0.55
	Estimated fair value	$	(2.0	)

While we actively and continually manage our foreign currency risks, there can be no assurance that our foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on our results of operations, cash flows and financial position.


	*Equity Price Risk*

In August 2003, we issued $420.0 million principal amount of the Notes to two initial purchasers in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A, for which we received net proceeds of approximately $406.4 million after transaction fees of approximately $13.6 million. The Notes are convertible into our common stock initially at a conversion price of $15.65 per share, which would result in an aggregate of 26.8 million shares issued upon conversion, subject to adjustment upon the occurrence of specified events. We may redeem for cash all or any part of the Notes on or after August 15, 2008 for 100.00% of the principal amount. The holders may require us to repurchase for cash all or any portion of their Notes on August 15, 2008 for 100.25% of the principal amount, on August 15, 2013 for 100.00% of the principal amount or on August 15, 2018 for 100.00% of the principal amount. The Notes do not contain restrictive financial covenants.

Each $1,000 of principal of the Notes will initially be convertible into 63.8790 shares of our common stock, subject to adjustment upon the occurrence of specified events. Holders of the Notes may convert their Notes prior to maturity only if: (1) the price of our common stock reaches $22.69 during periods of time specified by the Notes, (2) specified corporate transactions occur, (3) the Notes have been called for redemption or (4) the trading price of the Notes falls below a certain threshold.

In addition, in the event of a significant change in our corporate ownership or structure, the holders may require us to repurchase all or any portion of their Notes for 100% of the principal amount.

Concurrently with the issuance of the Notes, we entered into convertible notes hedge transactions with JP Morgan Chase Bank, whereby we have the option to purchase up to 26.8 million shares of our common stock at a price of $15.65 per share. These options expire on August 15, 2008 and must be settled in net shares. The cost of the convertible notes hedge transactions to us was approximately $134.6 million. As of July 3, 2004, the estimated fair value of the convertible notes hedge transactions was $117.2 million.

In addition, we sold to JP Morgan Chase Bank warrants to purchase up to 26.8 million shares of our common stock at a price of $23.08 per share. The warrants expire on various dates from February 2008 through May 2008 and must be settled in net shares. We received approximately $56.4 million in cash

proceeds for the sales of these warrants. As of July 3, 2004, the estimated fair value of the warrants sold was $43.5 million.

Item 4. Controls and Procedures

Cadence carried out an evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934 under the supervision and with the participation of Cadence’s management, including the Chief Executive Officer, or CEO, and the Chief Financial Officer, or CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of July 3, 2004.

Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in Cadence’s reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures designed with the objective of providing reasonable assurance regarding the reliability of financial reporting and permitting the preparation of Cadence’s financial statements in conformity with generally accepted accounting principles, including that its (A) transactions are properly authorized, recorded and reported and (B) assets are safeguarded against unauthorized or improper use.

The evaluation of Cadence’s disclosure controls and procedures and internal controls included a review of its processes and implementation and the effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, Cadence sought to identify any significant deficiencies or material weaknesses in its controls, to determine whether it had identified any acts of fraud involving personnel who have a significant role in its internal controls, and to confirm that any necessary corrective action, including process improvements, were being undertaken. This type of evaluation is done every fiscal quarter so that Cadence’s conclusions concerning the effectiveness of these controls can be reported in its periodic reports filed with the SEC. Cadence’s internal controls are also evaluated on an ongoing basis by its internal auditors and by other personnel in its Finance organization. The overall goals of these evaluation activities are to monitor Cadence’s disclosure and internal controls and to make modifications as necessary. Cadence intends to maintain these controls, modifying them as circumstances warrant.

The evaluation allowed Cadence to make conclusions, as set forth below, regarding the state of its disclosure controls and procedures as of July 3, 2004. In connection with this evaluation, to improve the quality and timeliness of information available to management, Cadence made certain changes in its internal controls over financial reporting in 2004, as described below.

As reported in its 2003 Annual Report, Cadence restated its Consolidated Balance Sheet as of December 28, 2002 and the Consolidated Statements of Operations for 2002, and the Condensed Consolidated Statements of Operations for the first three quarters of 2003, to properly reflect the equity method of accounting for certain equity investments and for certain other adjustments.

During the first quarter of 2004, Cadence’s independent auditors issued a letter to our Audit Committee related to the audit of Cadence’s Consolidated Financial Statements for the year ended January 3, 2004 in which they noted certain matters involving Cadence’s internal controls and operation that they considered to be “reportable conditions”, as defined under standards established by the American Institute of Certified Public Accountants. Reportable conditions are matters coming to the attention of our independent auditors that, in their judgment, relate to significant deficiencies in the design or operation of our internal controls that could adversely affect Cadence’s ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. The reportable conditions, which are less serious findings than findings of material weaknesses, were: the absence of appropriate controls relating to investments in non-marketable securities and the absence of appropriate documentation, review and approval of significant non-revenue related transactions, and the corresponding accounting entries originating from departments other than corporate accounting. As a result of these findings, Cadence’s Audit Committee authorized and directed management to implement actions to address these deficiencies and to enhance the reliability and effectiveness of Cadence’s control procedures.

To address the insufficiency of appropriate controls relating to investments in non-marketable securities, Cadence implemented changes to its internal controls regarding reporting by Telos and its Mergers, Acquisitions and Alliances, or MA&A, group to Cadence’s corporate accounting group regarding Cadence and Telos investments. These changes included the implementation of written reporting and review policies to ensure that Cadence’s corporate accounting group receives and validates as complete and accurate, on a quarterly basis, all pertinent information relating to investments held directly by Cadence, as well as by Telos, so that Cadence can properly account for its investments in non-marketable securities.

To address the absence of appropriate documentation, reviews and approvals of transactions, and accounting entries originating from departments other than corporate accounting, as of July 3, 2004, Cadence had taken actions designed to enhance its internal controls, including adopting and implementing formal written policies and procedures to ensure appropriate communication between Cadence’s corporate accounting group and other departments, including MA&A, Tax, Stock Administration and foreign locations, to facilitate the timely identification, documentation, review and approval of, and to ensure proper accounting for, significant non-revenue related and non-routine transactions. These policies and procedures were fully implemented prior to the completion of Cadence’s second quarter 2004 accounting close process.

Cadence believes that these efforts have addressed the significant deficiencies that affected or could have affected its internal controls. Based upon the foregoing, Cadence’s CEO and CFO have concluded that Cadence’s controls and procedures, after implementation of the aforementioned actions, are effective in meeting the above-stated objectives. Cadence continues to improve and refine its internal controls. This process is ongoing, and Cadence seeks to foster an exemplary internal control environment. Cadence’s management, including its CEO and CFO, has concluded that, as of July 3, 2004, its disclosure controls and procedures are designed, and are effective, to give reasonable assurance that information it must disclose in reports filed with the SEC is properly recorded, processed and summarized, and then reported within the time periods specified in the rules and forms of the SEC.

Other than as summarized above, there have been no changes in Cadence’s internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, its internal controls.

Despite management’s conclusions regarding the effectiveness of Cadence’s controls and procedures, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Cadence’s management, including its CEO and CFO, necessarily applied its judgment in assessing the benefits of controls relative to their costs. In particular, Cadence has investments in certain unconsolidated entities, which investments are accounted for using either the cost basis or equity method of accounting. Because Cadence does not control or manage these entities, its disclosure controls and procedures with respect to information it receives from such entities are often more limited than those it maintains with respect to its consolidated subsidiaries. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contract law, distribution arrangements and employee relations matters. Periodically, we review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss at the low end of the range. Legal proceedings are subject to uncertainties, and

the outcomes are difficult to predict. Because of such uncertainties, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates.

While the outcome of these disputes and litigation matters cannot be predicted with any certainty, management does not believe that the outcome of any current matters will have a material adverse effect on our consolidated financial position or results of operations.

Item 2. Changes in Securities and Use of Proceeds and Issuer Purchases of Equity Securities


	A. Recent Sales of Unregistered Securities:

In connection with our acquisition of Plato Design Systems, Inc., or Plato, completed in April 2002, on May 26, 2004, we issued to former Plato shareholders an additional 526,221 shares of our common stock, based on the achievement of performance goals. Such shares were issued pursuant to an exemption from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended because the terms and condition of the issuance were approved by the California Department of Corporations after a hearing on the fairness of such terms.

In connection with our acquisition of Silicon Perspective Corporation, or SPC, completed in December 2001, on April 8, 2004, we issued to former SPC shareholders an additional 3,393,101 shares of our common stock, based on the achievement of performance goals. Such shares were issued pursuant to an exemption from registration pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended because the terms and condition of the issuance were approved by the California Department of Corporations after a hearing on the fairness of such terms.


	B. Stock Repurchases:

In August 2001, we authorized a stock repurchase program under which repurchased shares with a value of up to $500.0 million are used for general corporate purposes, including the share issuance requirements of our employee stock option and purchase plans and acquisitions. The following table sets forth illustrates the repurchases we made during the three months ended July 3, 2004:


						Total Number of
						Shares Purchased		Maximum Number of
		Total Number		Average		as Part of		Shares that May Yet
		of Shares		Price		Publicly Announced		Be Purchased Under
		Purchased		Per Share		Repurchase Program		Repurchase Program

								(In millions)
Period:
April 4, 2004 – May 3, 2004			- - - -	$	- - - -		- - - -	$	217.0
May 4, 2004 – June 3, 2004			2,535,700		13.62		2,535,700	$	182.5
June 4, 2004 – July 3, 2004			2,493,200		14.16		2,493,200	$	147.2

	Total		5,028,900	$	13.89		5,028,900

Item 3. Defaults Upon Senior Securities

None.

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

At the Annual Meeting of Stockholders held on June 15, 2004, the stockholders of Cadence approved the following matters:

1. A proposal to elect eight (8) directors of Cadence to serve for the following year and until their successors are elected or until such director’s earlier resignation or removal.


Nominee	In Favor		Withheld

H. Raymond Bingham		224,221,794		24,424,840
Susan L. Bostrom		221,779,625		26,867,009
Donald L. Lucas		209,754,359		38,892,275
Dr. Alberto Sangiovanni-Vincentelli		213,622,381		35,024,253
George M. Scalise		219,308,300		29,338,334
Dr. John B. Shoven		206,606,384		42,040,250
Roger S. Siboni		212,869,198		35,777,436
Lip-Bu Tan		225,806,710		22,839,924

      2. A proposal to approve an amendment and restatement of the 1987 Stock Option Plan to enable Cadence to issue up to three million shares of incentive stock thereunder was approved by a vote of 166,450,882 for, 48,387,307 opposed, 2,140,958 withheld and 31,667,487 broker non-votes.

      3. A proposal to approve an amendment to the Amended and Restated Employee Stock Purchase Plan to increase the number of shares available for purchase thereunder by nine million was approved by a vote of 166,256,066 for, 48,648,522 opposed, 2,074,559 withheld and 31,667,487 broker non-votes.

      4. A proposal for the ratification of the selection of KPMG LLP as independent auditors for the fiscal year ending January 1, 2005 was approved by a vote of 245,777,350 for, 874,078 opposed, and 1,995,206 withheld and no broker non-votes.

Item 5. Other Information

On July 16, 2004, the listing of our common stock on the NASDAQ Stock Market became effective. Our common stock is now listed on both the NYSE and the NASDAQ under the symbol CDN.

Item 6. Exhibits and Reports on Form 8-K

(a) The following exhibits are filed herewith:


Exhibit
Number			Exhibit Title

	10	.01	The Registrant’s 1987 Stock Incentive Plan (formerly 1987 Stock Option Plan), as amended.
	10	.02	Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under the Registrant’s 1987 Stock Incentive Plan (formerly 1987 Stock Option Plan), as amended.
	10	.16	First Amendment to Residential Lease dated May 1, 2004 to Residential Lease and Option to Purchase, dated as of March 1, 2003, between 849 College Avenue, Inc. a subsidiary of the Registrant, and Kevin Bushby.
	10	.32	The Registrant’s 2002 Deferred Compensation Venture Investment Plan, as amended.
	10	.78	Employment Agreement, dated as of May 12, 2004, between the Registrant and Michael J. Fister.
	10	.79	Employment Agreement, dated as of May 24, 2004, between the Registrant and Lavi A. Lev.
	10	.80	Employment Agreement, dated as of May 26, 2004, between the Registrant and Kevin Bushby.
	10	.81	Employment Agreement, dated as of May 18, 2004, between the Registrant and R.L. Smith McKeithen.
	31	.01	Certification of the Registrant’s Chief Executive Officer, Michael J. Fister, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
	31	.02	Certification of the Registrant’s Chief Financial Officer, William Porter, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
	32	.01	Certification of the Registrant’s Chief Executive Officer, Michael J. Fister, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.02	Certification of the Registrant’s Chief Financial Officer, William Porter, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

On May 28, 2004, a current report on Form 8-K was furnished to the SEC to report that Sean M. Maloney has decided not to stand for reelection to Cadence’s Board of Directors.

On May 12, 2004, a current report on Form 8-K was filed with the SEC to report that Michael J. Fister was named President and Chief Executive Officer, succeeding Ray Bingham, who was elected chairman of the Cadence Board of Directors, that former chairman Donald L. Lucas would continue on the Board as a director, and that Roger S. Siboni was appointed as lead director.

On May 12, 2004, a current report on Form 8-K was furnished to the SEC to report that Michael J. Fister was named President and Chief Executive Officer, succeeding Ray Bingham, who was elected chairman of the Cadence Board of Directors, that former chairman Donald L. Lucas would continue on the Board as a director, and that Roger S. Siboni was appointed as lead director.

On April 22, 2004, a current report on Form 8-K was filed with the SEC to report first quarter 2004 financial results.

On April 21, 2004, a current report on Form 8-K was furnished to the SEC to report that Cadence issued a press release and conducted a conference call announcing its financial results for the first quarter of 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CADENCE DESIGN SYSTEMS, INC.

(Registrant)


DATE: August 10, 2004		By: /s/ Michael J. Fister

		Michael J. Fister President, Chief Executive Officer and Director

DATE: August 10, 2004		By: /s/ William Porter

		William Porter Senior Vice President and Chief Financial Officer

EXHIBIT INDEX


Exhibit
Number			Exhibit Title

	10	.01	The Registrant’s 1987 Stock Incentive Plan (formerly 1987 Stock Option Plan), as amended.
	10	.02	Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under the Registrant’s 1987 Stock Incentive Plan (formerly 1987 Stock Option Plan), as amended.
	10	.16	First Amendment to Residential Lease dated May 1, 2004 to Residential Lease and Option to Purchase, dated as of March 1, 2003, between 849 College Avenue, Inc. a subsidiary of the Registrant, and Kevin Bushby.
	10	.32	The Registrant’s 2002 Deferred Compensation Venture Investment Plan, as amended.
	10	.78	Employment Agreement, dated as of May 12, 2004, between the Registrant and Michael J. Fister.
	10	.79	Employment Agreement, dated as of May 24, 2004, between the Registrant and Lavi A. Lev.
	10	.80	Employment Agreement, dated as of May 26, 2004, between the Registrant and Kevin Bushby.
	10	.81	Employment Agreement, dated as of May 18, 2004, between the Registrant and R.L. Smith McKeithen.
	31	.01	Certification of the Registrant’s Chief Executive Officer, Michael J. Fister, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
	31	.02	Certification of the Registrant’s Chief Financial Officer, William Porter, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
	32	.01	Certification of the Registrant’s Chief Executive Officer, Michael J. Fister, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.02	Certification of the Registrant’s Chief Financial Officer, William Porter, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EXHIBIT 10.01

CADENCE DESIGN SYSTEMS, INC.

1987 STOCK INCENTIVE PLAN

1. PURPOSES OF THE PLAN. The purposes of this Stock Incentive Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the employees of the Company and any parent or subsidiary corporations, and to promote the success of the Company's business. The Plan was initially established as the 1987 Stock Option Plan, and was most recently amended on September 16, 1999. The Plan is hereby amended and restated in its entirety, effective upon adoption by the Company's stockholders.

2. DEFINITIONS. As used herein, the following definitions shall apply:

(a) "BOARD" shall mean the Committee, if one has been appointed, or the Board of Directors of the Company, if no Committee is appointed.

(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.

(d) "COMPANY" shall mean CADENCE DESIGN SYSTEMS, INC., a Delaware corporation.

(e) "COMMITTEE" shall mean the Committee appointed by the Board of Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is appointed.

(f) "CONSULTANT" shall mean any consultants, independent contractors or advisers (provided that such persons render bona fide services not in connection with the offering and sale of securities in capital raising transactions) rendering services to the Company or a Parent or Subsidiary.

(g) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" shall mean the absence of any interruption of termination of service, whether as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence.

(h) "EMPLOYEE" shall mean any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee or other compensation paid solely on account of service as a director by the Company shall not be sufficient to constitute "employment" by the Company.

(i) "INCENTIVE STOCK" means shares of Common Stock granted to a Participant pursuant to Section 10 hereof.

(j) "INCENTIVE STOCK AGREEMENT" means a written agreement between the Company and a holder of an award of Incentive Stock evidencing the terms and conditions of an individual Incentive Stock grant. Each Incentive Stock Agreement shall be subject to the terms and conditions of the Plan.

(k) "INCENTIVE STOCK OPTION" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.

(l) "OPTION" shall mean a stock option granted pursuant to the Plan, which may be either an Incentive Stock Option or a "non-statutory stock option," at the discretion of the Board and as reflected in the terms of the Stock Option Agreement.

(m) "OPTIONED STOCK" shall mean the Common Stock subject to an Option.

(n) "PARENT" shall mean a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Internal Revenue Code of 1986, as amended.

(o) "PARTICIPANT" shall mean an Employee or Consultant who receives a Stock Award.

(p) "PLAN" shall mean this 1987 Stock Incentive Plan.

(q) "QUALIFYING PERFORMANCE CRITERIA" shall mean any one or more of the following performance criteria as determined pursuant to an objective formula, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit, segment or Subsidiary, either individually, alternatively or in any combination, and measured over a performance period determined by the Board, on an absolute basis or relative to a pre-established target, to previous results or to a designated comparison group, in each case as specified by the Board in the Stock Award: (a) cash flow (including measures of operating or free cash flow), (b) earnings per share (including measures of GAAP earnings per share or non-GAAP measures such as non-GAAP earnings per-share or per-share earnings before interest, taxes, depreciation and amortization), (c) return on equity, (d) total stockholder return, (e) return on capital, (f) return on assets or net assets, (g) revenue,
(h) income or net income (on a GAAP basis or a non-GAAP basis), (i) operating income or net operating income, (j) operating profit or net operating profit,
(k) operating margin, (l) return on operating revenue, (m) market share, (n) bookings and segments of bookings such as net product bookings, (o) market penetration, (p) technology development or proliferation, or (q) customer loyalty or satisfaction as measured by a customer loyalty or satisfaction index determined by an independent consultant expert in measuring such matters.

(r) "RULE 16b-3" shall mean Rule 16b-3 of the Securities Exchange Act of 1934, as amended, or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(s) "SHARE" shall mean a share of Common Stock, as adjusted in accordance with Section 12 of the Plan.

(t) "STOCK AWARD" shall mean any right granted under the Plan, including an Option or Incentive Stock.

(u) "STOCK OPTION AGREEMENT" means a written agreement between the Company and a holder of an Option award evidencing the terms and conditions of an individual Option grant. Each Stock Option Agreement shall be subject to the terms and conditions of the Plan.

(v) "SUBSIDIARY" shall mean a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended.

3. STOCK SUBJECT TO THE PLAN.

(a) RESERVED SHARES. Subject to the provisions of Sections 3(b) and 12 of the Plan, the number of shares reserved for issuance under the Plan is seventy-one million three hundred seventy thousand one hundred (71,370,100) shares of Common Stock; provided, however, that no more than three million (3,000,000) shares of Common Stock authorized under the Plan may be issued pursuant to Awards of Incentive Stock. Shares issued under the Plan may be authorized, but unissued, or reacquired Common Stock.

(b) UNEXERCISABLE, FORFEITED OR TERMINATED AWARDS. If a Stock Award should expire, become unexercisable, be forfeited or otherwise terminate for any reason without having been exercised in full, the unpurchased or forfeited Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan, provided, however, that if a Stock Award is canceled, forfeited or treated as having been canceled for purposes of Section 162(m) the canceled Stock Award shall count against the maximum number of shares for which a Stock Award may be granted to any person under the terms of the Plan.

4. ADMINISTRATION OF THE PLAN.

(a) PROCEDURE. The Board of Directors of the Company shall administer the Plan. The Board of Directors may appoint a Committee consisting of not less than two members of the Board of Directors to administer the Plan on behalf of the Board of Directors, subject to such terms and conditions as the Board of Directors may prescribe. The Committee shall consist of two or more "Non-Employee Directors" (a director who is receiving no compensation from the Company other than for service on the Board of Directors or who does not receive such additional compensation which exceeds the limits specified in the definition of such term under Rule 16b-3 and otherwise meets the requirement under Rule 16b-3 for "non-employee directors") or "Outside Directors" (a director who is not either a current or former officer of the Company nor a current employee of the Company, and who is receiving no compensation from the Company other than for service on the Board of Directors or who does not receive such

additional compensation which exceeds the limits specified in the definition of such term under Section 162(m) of the Code). Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. From time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause), and appoint new members in substitution therefor, fill vacancies however caused and remove all members of the Committee, and thereafter directly administer the Plan. Notwithstanding anything in this Section 4 to the contrary, at any time the Board or the Committee may delegate to a committee of one or more members of the Board of Directors the authority to grant Options to all Employees and Consultants or any portion or class thereof. Members of the Board who are either eligible for Options or have been granted Options may vote on any matters affecting the administration of the Plan or grant of any Options pursuant to the Plan, except that no such member shall act upon the granting of an Option to himself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting of Options to him.

(b) POWERS OF THE BOARD. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion: (i) to grant Stock Awards under the Plan; (ii) to determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (iii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iv) to determine the Employees or Consultants to whom, and the time or times at which, Stock Awards shall be granted, the number of shares to be represented by each Stock Award, and the terms of such Stock Awards; (v) to interpret the Plan; (vi) to prescribe, amend and rescind rules and regulations relating to the Plan; (vii) to determine the terms and provisions of each Stock Award granted (which need not be identical) in accordance with the Plan, and, with the consent of the holder thereof with respect to any adverse change, modify or amend each Stock Award; (viii) to accelerate or defer (the latter with the consent of the Participant) the exercise date and vesting of any Option;
(ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of a Stock Award previously granted by the Board; and (x) to make all other determinations deemed necessary or advisable for the administration of the Plan.

(c) EFFECT OF BOARD'S DECISION. All decisions, determinations and interpretations of the Board shall be final and binding on all Participants and any other holders of any Stock Awards granted under the Plan.

5. ELIGIBILITY. Stock Awards may be granted only to Employees or Consultants as defined in Section 2 hereof. An Employee or Consultant who has been granted a Stock Award may, if he is otherwise eligible, be granted an additional Stock Award.

Incentive Stock Options may only be granted to Employees. The aggregate fair market value (determined at the time the Option is granted) of the stock with respect to which Incentive Stock Options are exercisable for the first time by such individual during any calendar

year (under this Plan or under any other incentive stock option plan of the Company or any Parent or Subsidiary of the Company) shall not exceed $100,000. To the extent that the grant of an Option exceeds this limit, the portion of the Option that exceeds such limit shall be treated as a non-statutory stock option.

The Plan shall not confer upon any Participant any right with respect to continuation of employment or consultancy by the Company, nor shall it interfere in any way with his right or the Company's right to terminate his employment at any time or his consultancy pursuant to the terms of the Consultant's agreement with the Company.

No person shall be eligible to be granted Stock Awards covering more than 2,216,702 shares of Common Stock in any calendar year. The foregoing limit shall be adjusted pursuant to the provisions of Section 12.

6. TERM OF THE PLAN. The Plan became effective upon its adoption by the Board of Directors. Subsequently amended, the Plan shall continue in effect until May 21, 2007 unless sooner terminated under Section 15 of the Plan.

7. TERM OF OPTION; VESTING PROVISIONS.

(a) OPTION TERM. The term of each Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the Stock Option Agreement. However, in the case of an Incentive Stock Option granted to an Employee who immediately before the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter time as may be provided in the Stock Option Agreement.

(b) VESTING PROVISIONS. The terms on which each Option shall vest shall be determined by the Board in its Discretion, and shall be set forth in Stock Option Agreement relating to each such Option. Without limiting the discretion of the Board, vesting provisions may include time-based vesting or vesting based on achievement of performance or other criteria. Performance criteria may, but need not, be based on Qualifying Performance Criteria.

8. OPTION EXERCISE PRICE AND CONSIDERATION.

(a) EXERCISE PRICE. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but shall be subject to the following:

(i) In the case of an Incentive Stock Option:

(1) Granted to an Employee who, immediately before the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the fair market value per Share on the date of grant.

(2) Granted to any Employee, the per Share exercise price shall be no less than 100% of the fair market value per Share on the date of grant.

(ii) In the case of an Option granted on or after the effective date of registration of any class of equity security of the Company pursuant to Section 12 of the Exchange Act and prior to six months after the termination of such registration, the per Share exercise price shall be not less than 100% of the fair market value per Share on the date of grant.

(iii) Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or non-statutory stock option) may be granted with an exercise price lower than set forth in the preceding paragraphs if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.

(b) FAIR MARKET VALUE. The fair market value shall be determined by the Board in its discretion: provided however, that where there is a public market for the Common Stock, the fair market value per Share shall be the average of the high and low prices of the Common Stock on the date of grant, as reported on the New York Stock Exchange.

(c) CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory note, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said option shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company.

9. EXERCISE OF OPTION.

(a) PROCEDURE FOR EXERCISE RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Participant, and as shall be permissible under the terms of the Plan.

An Option may not be exercised for a fraction of a Share.

An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect

to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan.

Exercise of an Option in any manner shall result in a decrease in the number of Shares that thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

(b) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. If a Participant ceases to serve as an Employee or Consultant, the Participant may, but only within thirty (30) days (or such longer period of time as determined by the Board) after the date Participant ceases to be an Employee or Consultant of the Company, exercise the Option to the extent that Participant was entitled to exercise it at the date of such termination. To the extent that Participant was not entitled to exercise the Option at the date of such termination, or if Participant does not exercise such Option (which Participant was entitled to exercise) within the time specified herein, the Option shall terminate.

(i) during the term of the Option who is at the time of Participant's death an Employee or Consultant of the Company and who shall have been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised at any time within three (3) months (or such longer period of time as determined by the Board) following the date of death, by the Participant's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Participant continued living three (3) months (or such longer period of time as determined by the Board) after the date of death; or

(ii) within one (1) month (or such longer period of time as determined by the Board) after the termination of Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within three
(3) months (or such longer period of time as determined by the Board) following the date of death, by the Participant's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination.

10. INCENTIVE STOCK.

(a) GENERAL. Incentive Stock is an award or issuance of shares of Common Stock under the Plan, the grant, issuance, retention, vesting and/or transferability of which is subject during specified periods of time to such conditions (including continued employment or performance conditions) and terms as the Board deems appropriate. The Board may specify that the grant, vesting or retention of any or all Incentive Stock is intended to satisfy the requirements for "performance-based compensation" under Section 162(m) of the Code. To the extent that any Incentive Stock is designated by the Board as "performance-based compensation" under Section 162(m) of the Code, (i) the performance criteria for the grant, vesting or retention of any such Incentive Stock shall be a measure based on one or more Qualifying Performance Criteria

selected by the Board, specified at the time the Incentive Stock is granted, and shall be a preestablished goal under Treasury Regulation Section 1.162-27(e)(2)(i), (ii) the Board shall certify the extent to which any Qualifying Performance Criteria has been satisfied, and the amount payable as a result thereof, prior to payment of any Incentive Stock that is intended to satisfy the requirements for "performance-based compensation" under Section 162(m) of the Code, and (iii) the award shall comply with all other applicable requirements relating to "performance based compensation" under Section 162(m) of the Code and the Treasury Regulations issued thereunder. To the extent a performance-based award is not intended to satisfy the requirements for "performance-based compensation" under Section 162(m) of the Code, the performance criteria for the grant, vesting or retention of any such Incentive Stock may be a measure based on one or more Qualifying Performance Criteria selected by the Board, or any other criteria deemed appropriate by the Board.

(b) INCENTIVE STOCK AGREEMENT. Each Incentive Stock Agreement shall contain provisions regarding (i) the number of shares of Common Stock subject to such award or a formula for determining such, (ii) the purchase price of the shares, if any, and the means of payment for the shares, (iii) the performance criteria, if any, and level of achievement versus these criteria that shall determine the number of shares granted, issued, retainable and/or vested, (iv) such terms and conditions on the grant, issuance, vesting and/or forfeiture of the shares as may be determined from time to time by the Board,
(v) restrictions on the transferability of the shares and (vi) such further terms and conditions in each case not inconsistent with this Plan as may be determined from time to time by the Board. Shares of Incentive Stock may be issued in the name of the Participant and held by the Participant or held by the Company, in each case as the Board may provide.

(c) SALES PRICE. Subject to the requirements of applicable law, the Board shall determine the price, if any, at which shares of Incentive Stock shall be sold or awarded to a Participant, which may vary from time to time and among Participants and which may be below the fair market value of such shares (as determined in Section 8(b)) at the date of grant or issuance.

(d) SHARE VESTING. Except as set forth herein, the grant, issuance, retention and/or vesting of shares of Incentive Stock shall be at such time and in such installments as determined by the Board. The Board shall have the right to make the timing of the grant and/or the issuance, ability to retain and/or vesting of shares of Incentive Stock subject to continued employment, passage of time and/or such performance criteria as deemed appropriate by the Board, provided that, in no event shall an award of Incentive Stock vest sooner than (i) three (3) years after the date of grant, if the vesting of the Incentive Stock is based solely on Continuous Status as an Employee or Consultant and the grant of Incentive Stock is not a form of payment of earned incentive compensation or other performance-based compensation, provided, however, that notwithstanding the foregoing vesting limitations, shares of Incentive Stock vesting under this paragraph (i) may vest in installments so long as the vesting schedule, at any point in time, is not more favorable than what would be vested under a monthly pro rata installment schedule (i.e., 1/36 per month for 3 years), or (ii) one (1) year after the date of grant, if the vesting of Incentive Stock is also subject to the attainment of performance goals. Notwithstanding the foregoing, the Board may accelerate vesting (in a Stock Award agreement or otherwise) of any

Stock Award in the event of a Participant's termination of service as an Employee or Consultant, a change in control of the Company or similar event, provided that, in the case of award of Incentive Stock that is intended to qualify as "performance based compensation" under Section 162(m), such acceleration shall comply with the requirements set forth in Treasury Regulation
Section 1.162-27(e)(2)(iii).

(e) TRANSFERABILITY. Shares of Incentive Stock shall be transferable by the Participant only upon such terms and conditions as are set forth in the Incentive Stock Agreement, as the Board shall determine in its discretion, so long as Incentive Stock awarded under the Incentive Stock Agreement remains subject to the terms of the Incentive Stock Agreement.

(f) DISCRETIONARY ADJUSTMENTS. Notwithstanding satisfaction of any performance goals, the number of shares granted, issued, retainable and/or vested under an award of Incentive Stock on account of either financial performance or personal performance evaluations may be reduced by the Board on the basis of such further considerations as the Board shall determine, but may not be increased. In addition, the Board may appropriately adjust any evaluation of performance under a Qualifying Performance Criteria to exclude any of the following events that occurs during a performance period: (i) asset write-downs,
(ii) litigation or claim judgments or settlements, (iii) the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results, (iv) accruals for reorganization and restructuring programs and (v) any extraordinary non-recurring items as described in Accounting Principles Board Opinion No. 30 and/or in management's discussion and analysis of financial condition and results of operations appearing in the Company's annual report to stockholders for the applicable year.

11. NON-TRANSFERABILITY OF OPTIONS. Except as otherwise expressly provided in the terms of an individual Option which is a non-statutory stock option, the Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. Notwithstanding the foregoing, the person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Participant, shall thereafter be entitled to exercise the Option.

12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Stock Award, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Stock Awards have yet been granted or which have been returned to the Plan upon cancellation, expiration, forfeiture or other termination of a Stock Award, as well as the price per share of Common Stock covered by each such outstanding Stock Award, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or the payment of a stock dividend with respect to the Common Stock or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall

not be deemed to have been "effected without receipt of consideration." Such adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to a Stock Award.

In the event of the proposed dissolution or liquidation of the Company, or in the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Stock Award will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that any Stock Award shall terminate as of a date fixed by the Board and give each Participant the right to exercise his Option as to all or any part of the Optioned Stock or otherwise accelerate the vesting of such Stock Award. If the Board, at its sole discretion, permits acceleration as to all or any part of a Stock Award, the aggregate fair market value (determined at the time Stock Award is granted) of stock with respect to which Incentive Stock Options first become exercisable in the year of such dissolution, liquidation, sale of assets or merger cannot exceed $100,000. Any remaining accelerated Incentive Stock Options shall be treated as non-statutory stock options.

13. MISCELLANEOUS.

(a) ADDITIONAL RESTRICTIONS ON STOCK AWARDS. Either at the time a Stock Award is granted or by subsequent action, the Board may, but need not, impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by an Participant or other subsequent transfers by an Participant of any shares issued under an Option, including without limitation (a) restrictions under an insider trading policy, (b) restrictions designed to delay and/or coordinate the timing and manner of sales by Participants, and (c) restrictions as to the use of a specified brokerage firm for such resales or other transfers.

(b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Option unless and until such Participant has satisfied all requirements for exercise of the Option pursuant to its terms.

(c) INVESTMENT ASSURANCES. The Company may require an Participant, as a condition of exercising or acquiring Common Stock under any Stock Award,
(i) to give written assurances satisfactory to the Company as to the Participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares of

Common Stock upon the exercise the Option or acquisition of Common Stock under the Plan has been registered under a then currently effective registration statement under the Securities Act or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.

(d) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a Stock Option Agreement or Incentive Stock Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to a Stock Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant as a result of the Stock Award, provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering to the Company owned and unencumbered shares of Common Stock.

14. TIME OF GRANTING THE STOCK AWARD. The date of grant of a Stock Award shall, for all purposes, be the date on which the Board makes the determination granting such Stock Award. Notice of the determination shall be given to each Employee or Consultant to whom a Stock Award is so granted within a reasonable time after the date of such grant.

15. AMENDMENT AND TERMINATION OF THE PLAN.

(a) AMENDMENT AND TERMINATION. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary for the Plan to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any listing requirements of any securities exchange or national market system on which the Common Stock is traded.

(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not adversely affect Stock Awards already granted and such Stock Awards shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Participant and the Board, which agreement must be in writing and signed by the Participant and the Company.

16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to a Stock Award unless the exercise of the Option, if applicable, and the issuance and delivery of such Shares pursuant the Stock Award shall comply with all relevant provisions of the law, including without limitation, the Securities Act of 1933, as amended; the Securities Exchange Act of 1934, as amended; the rules and regulations promulgated thereunder, and the requirements

of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

17. LIABILITY OF COMPANY. The Company shall not be liable to an Participant or other persons as to any tax consequence expected, but not realized, by any Participant or other person due to the receipt, exercise or settlement of any Stock Award granted hereunder.

18. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

19. STOCK AWARD AGREEMENT. Stock Awards shall be evidenced by written award agreements in such form as the Board shall approve.

EXHIBIT 10.02

OPTION NO. __________
CADENCE DESIGN SYSTEMS, INC.

NONQUALIFIED STOCK OPTION GRANT AGREEMENT
(SUBSEQUENT GRANT)

CADENCE DESIGN SYSTEMS, INC., a Delaware corporation (the "Company"), hereby grants as of ______________ to ___________ ("Optionee") a nonqualified stock option to purchase a total of ______________ (________) shares of Common Stock of the Company (the "Shares"), at an exercise price of $________ per share (the "Exercise Price") subject to the terms, definitions and provisions of this Option and the Company's 1987 Stock Incentive Plan (the "Plan") which is incorporated herein by reference. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan. Vesting of this Option shall commence on ___________ (the "Vesting Commencement Date").

1. NATURE OF THE OPTION. This Option is a nonqualified stock option and is not intended to qualify as an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended.

2. EXERCISE OF OPTION. This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows:

(i) RIGHT TO EXERCISE.

(a) This Option shall become vested and exercisable with respect to 1/48th of the Shares for each full month of service following the Vesting Commencement Date. A full month of service shall be completed upon continuous service up to (but not including) the same date of the month as the date of the Vesting Commencement Date.

(b) This Option may not be exercised for a fraction of a share.

(c) In the event of Optionee's death, disability or other termination of employment, the exercisability of this Option is governed by
Section 9 of the Plan and Sections 5, 6 and 7 below.

(ii) METHOD OF EXERCISE. This Option shall be exercisable by delivery to the Company of an executed written notice in the form attached hereto, or in such other form as may be approved by the Company, which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Stock Administration Group of the Company and shall be accompanied by payment of the Exercise Price.

3. METHOD OF PAYMENT. Payment of the Exercise Price shall be made as follows: (i) by cash or check; or (ii) by delivery of an irrevocable written commitment from a broker-dealer

approved by the Company that is a member in good standing of the New York Stock Exchange to deliver the exercise price directly to the Company upon receipt of the Shares or, in the case of a margin loan, upon receipt of a copy of the notice of exercise of this Option.

4. RESTRICTIONS ON EXERCISE. This Option may not be exercised unless such exercise, the issuance of the Shares upon such exercise and the method of payment of consideration for the Shares are in compliance with (i) the Securities Act of 1933, as amended, (ii) all applicable state securities laws,
(iii) all other applicable federal and state laws and regulations, and (iv) the rules of any stock exchange or national market system upon which the Shares may then be listed, as such laws, regulations and rules are in effect on the date of exercise. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation.

5. TERMINATION OF STATUS AS AN EMPLOYEE. If Optionee ceases to serve as an Employee or Consultant, Optionee may, but only three (3) months after the date Optionee ceases to be an Employee or Consultant of the Company (or a Parent or Subsidiary), exercise this Option to the extent that Optionee was entitled to exercise it on the date of such termination. To the extent that Optionee was not entitled to exercise this Option on the date of such termination, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

6. DEATH OF OPTIONEE. In the event of the death of Optionee:

(i) During the term of this Option and while an Employee or Consultant of the Company (or a Parent or Subsidiary) and having been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised, at any time within twelve (12) months following the date of death, by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had Optionee continued living three (3) months after the date of death; or

(ii) Within one (1) month after the termination of Optionee's Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within twelve (12) months following the date of death, by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the right to exercise had accrued at the date of termination.

7. DISABILITY OF OPTIONEE. In the event of the disability of Optionee during the term of this Option and while an Employee or Consultant of the Company (or a Parent or Subsidiary) and having been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised, at any time within twelve (12) months following the date Optionee ceases to be an Employee or Consultant, by Optionee to the extent that Optionee was entitled to exercise it at the date that Optionee ceased to be an Employee or Consultant. To the extent that Optionee was not entitled to exercise this Option on such date, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

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8. TRANSFERABILITY OF OPTION. Optionee may transfer all or any portion of this Option, in accordance with the rules which may be established by the Board of Directors or Committee, to (i) his or her spouse, former spouse, parents, stepparents, children, stepchildren, grandchildren, grandparents, siblings, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, including adoptive relationships, or any person sharing Optionee's household (other than a tenant or employee) ("Family Members"), (ii) a trust in which the Family Members have more than 50% of the beneficial interest, (iii) a foundation in which the Family Members (or Optionee) control the management of assets, and (iv) any entity in which Family Members (or Optionee) own more than 50% of the voting interests. Following such a transfer, (x) this Option shall not again be transferable other than by will or by the laws of descent and distribution; (y) this Option shall continue to be subject to the same terms and conditions that were applicable immediately prior to transfer, and (z) the term "Optionee" shall be deemed to refer to the transferee for all purposes of this Agreement except as otherwise provided in this Section 8. The events of termination of employment of Sections 5, 6 and 7 above shall continue to be applied with respect to the original Optionee, following which this Option shall be exercisable by the transferee only to the extent, and for the periods, specified by Sections 5, 6 and 7 above.

9. TERM OF OPTION. Notwithstanding any other provision of this Option, this Option may not be exercised more than ten years from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and the terms of this Option.

CADENCE DESIGN SYSTEMS, INC.
a Delaware corporation

By: ______________________________
William Porter,
Its: Senior Vice President,
Chief Financial Officer

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ACCEPTANCE

Optionee acknowledges receipt of a copy of the Plan, a copy of which is annexed hereto, and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. Optionee acknowledges that there may be adverse tax consequences upon exercise of this Option or disposition of the Shares and that Optionee should consult a tax advisor prior to such exercise or disposition.

_______________________                              ___________________________
Dated

CADENCE DESIGN SYSTEMS, INC.                  NOTICE OF EXERCISE OF STOCK OPTION

YOUR BROKER WILL NOT EXERCISE OR SELL ANY SHARES REPRESENTED BY THIS FORM UNTIL YOU INSTRUCT YOUR BROKER TO ACT ON YOUR BEHALF.

Section I: Personal Data

Name:_______________________________________ SSN: _ _ - _ _ - _ _ _ _ Address:____________________________________ Phone: ___________________________

City, State, Zip:___________________________

================================================================================
Section II: Statement of Intent to Exercise
================================================================================

Type of Option (check one) ___Incentive Stock Option (ISO)  _____Non-qualified
                                                            Stock Option (NQSO)

Option #  # Shares Exercise    Option Price per Share   Taxes (NQSO only)  Total Exercise Price
______    ______________    x  $_________________    +  TBD      =         $________________
______    ______________    x  $_________________    +  TBD      =         $________________
______    ______________    x  $_________________    +  TBD      =         $________________
                                   Total amount due to Cadence:            $________________

I understand that for NQSO exercises I am required to pay Federal (27%), State and FICA withholding taxes on the gain, as measured by the difference between the option exercise price and the fair market value of the shares as of the Date of Exercise. Tax calculations will be provided by the Stock Administrator.

Section III: Method of Exercise

_______ Exercise and hold

_______ Same day sale of all shares as listed above

_______ Same day sale of partial shares, number of shares to be sold: __________

================================================================================
Section IV: Method of Payment
================================================================================

____ Proceeds from sale of stock   ____ Cash in employee's account (with broker)

____ Personal check made out to    ____ Use of margin (with broker)
     Cadence Design Systems, Inc.

Section V: Registration

____ Issue stock in my name individually and mail to the above address.

____ Issue stock in my name and ____________________________ as joint tenants or as tenants in common. (Please circle correct choice!)

____ Issue in street name and send directly to Broker:

Name of Broker:_______________________ Address:_________________________________

Account No.:__________________________ Phone No.:_______________________________

Employee signature:_________________________ Date: ___________________________

PLEASE FAX BACK TO STOCK ADMINISTRATION DEPT. 408-944-7835

EXHIBIT 10.16

FIRST AMENDMENT TO RESIDENTIAL LEASE

This First Amendment to Residential Lease (this "First Amendment") is made and entered into as of May 1, 2004, by and between 849 College Avenue, Inc. ("Landlord") and Kevin Bushby and Elizabeth Bushby (collectively, "Tenant").

RECITALS:

WHEREAS, Landlord and Tenant have entered into that certain Residential Lease dated as of March 1, 2003 (the " Lease"); and

WHEREAS, Landlord and Tenant desire to amend the Lease to modify the provisions thereof as more particularly set forth herein.

NOW, THEREFORE, for and in consideration of the premises, the mutual covenants and agreements herein set forth, and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby expressly acknowledged by the parties hereto, the parties hereto hereby covenant and agree as follows:

1. Option(s) to Extend. The words and figures "three (3)" set forth in the second line of Section 35(a) of the Lease are hereby deleted in their entirety, and inserted in lieu thereof shall be the words and figures "five (5)".

2. Ratification. The Lease, as modified by this First Amendment, is hereby ratified and confirmed by Landlord and Tenant.

IN WITNESS WHEREOF, the undersigned have caused this First Amendment to be executed and delivered as of the date first above written.

849 COLLEGE AVENUE, INC.

By: /s/ R.L. Smith McKeithen                       /s/ Kevin Bushby
    ------------------------------------           ------------------------
Name: R. L. Smith McKeithen                        Kevin Bushby
Title: Sr. V. P. and General Counsel
                                                   /s/ Elizabeth Bushby
                                                   ------------------------
                                                   Elizabeth Bushby

EXHIBIT 10.32

CADENCE DESIGN SYSTEMS, INC.

AMENDED AND RESTATED

2002 DEFERRED COMPENSATION VENTURE INVESTMENT PLAN

TABLE OF CONTENTS

                                                                PAGE
SECTION 1 Definitions......................................       1

SECTION 2 Eligibility......................................       6

SECTION 3 Deferral of Compensation.........................       6

SECTION 4 Designation of Beneficiary.......................      15

SECTION 5 Change of Control................................      16

SECTION 6 Trust Provisions.................................      17

SECTION 7 Amendment and Termination........................      17

SECTION 8 Administration...................................      17

SECTION 9 General and Miscellaneous........................      18

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CADENCE DESIGN SYSTEMS, INC.

2002 DEFERRED COMPENSATION VENTURE INVESTMENT PLAN

CADENCE DESIGN SYSTEMS, INC., a Delaware corporation, hereby establishes the Cadence Design Systems, Inc. Amended and Restated 2002 Deferred Compensation Venture Investment Plan, effective as of July 1, 2002, amended and restated as of July 1, 2004, for the purpose of providing certain deferred compensation benefits to a select group of management and highly compensated executives of the Employer. The Plan is an unfunded deferred compensation plan that is intended to qualify for the exemptions provided in Sections 201, 301, and 401 of ERISA.

SECTION 1

DEFINITIONS

1. DEFINITIONS. As used in the Plan:

1.1 "ACCOUNT" shall mean, for each Participant, a separate bookkeeping account established under the Plan and maintained by Employer in the name of such Participant, that is:

(a) Increased by: (i) an amount equal to the Deferred Compensation of such Participant; and (ii) allocations of Profit made in accordance with Section 3.8;

(b) Decreased by: (i) an amount equal to the cash distributed to such Participant pursuant to a distribution election made pursuant to the Plan; (ii) the fair market value of any other property distributed to such Participant pursuant to a distribution election made in accordance with the Plan; and (iii) allocations of Loss made in accordance with Section 3.8; and

1.2 "AVAILABLE CAPITAL" with respect to one of the Partnerships shall mean, for each Participant, as of the time of determination, such Participant's Deferred Compensation that has been designated for investment in such Partnership measured from the Effective Date to the time of determination:

(a) increased by such Participant's deemed share of Distributable Assets that the Committee has determined are available for re-investment in such Partnership in accordance with Section 3.7(c), and assets transferred to the Trust in accordance with Section 3.9 that have been designated for investment in such Partnership (each determined by the Committee in its sole discretion and measured from the Effective Date to the time of determination); and

(b) reduced by the aggregate Losses allocated to such Participant's Account (other than Losses attributable to Portfolio Investments, as determined by the Committee in its sole discretion) from the Effective Date to the time of determination (but only to the extent that such Losses reduce amounts available in the Participant's account that had previously been designated for investment in the Partnership, as determined by the Committee in its sole discretion) and further reduced by any assets that had previously been designated for investment in such Partnership that are transferred from the Trust in accordance with Section 3.9;

(c) and further reduced by the sum of, for each Portfolio Investment acquired by such Partnership prior to the time of determination, the product of (x) the cost basis of such Portfolio Investment as reported by the Partnership, and (y) such Participant's Investment Percentage in respect of such Portfolio Investment (or zero if such Participant has no Investment Percentage in respect of such Portfolio Investment).

1.3 "BASE SALARY" for a given Plan Year means an Employee's regular cash compensation payable during the Plan Year, excluding any bonuses, commissions, overtime, incentive payments, non-monetary awards, compensation deferred pursuant to all Section 125 (cafeteria) or Section 401(k) (savings) plans of the Employer and other special compensation, and reduced by the tax withholding obligations imposed on the Employer and any other withholding requirements imposed by law with respect to such amounts.

1.4 "BENEFICIARY" shall mean the person entitled to receive a Participant's deferred Compensation benefits in accordance with Section 4.1 in the event of the Participant's death.

1.5 "BOARD" shall mean the Board of Directors of the Employer, as constituted from time to time.

1.6 "CASH BONUS" shall mean amounts (if any) awarded under the bonus plans or policies maintained by the Employer and any commissions earned on sales.

1.7 "CHANGE OF CONTROL" shall have the meaning set forth in Section 5.1.

1.8 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder.

1.9 "COMMITTEE" shall mean the Compensation Committee of the Board or any other committee designated by the Board to administer the Plan in accordance with Section 8.1.

1.10 "COMPENSATION" shall mean the Base Salary, Cash Bonuses, and Directors Fees described in Section 3.1.

1.11 "DEFERRAL ELECTION PERIOD" shall mean, during a Plan Year, a semi-annual period (a) beginning on January 1 and ending at the close of business on June 30, or (b) beginning on July 1 and ending at the close of business on December 31.

1.12 "DEFERRED COMPENSATION" shall mean, for each Participant, the aggregate amount of Compensation which is subject to a deferral election made in accordance with Section 3.1 that actually would have been paid to such Participant in the absence of such deferral election, calculated from the Effective Date to the time of determination. "Deferred Compensation" in respect of a Plan Year, shall mean, for each Participant, the aggregate amount of Compensation which is subject to a deferral election made in accordance with
Section 3.1 that actually would have been paid to such Participant in the absence of such deferral election, calculated from January 1 of such Plan Year to the close of business on December 31 of such Plan Year.

1.13 "DIRECTORS FEES" for a given Plan Year means the annual retainer, meeting fees, any committee meeting fees, and consulting fees payable to members of the Board for services during such year.

1.14 "DISTRIBUTABLE ASSETS" shall mean cash or Marketable Securities distributed by either of the Partnerships to the Trust.

1.15 "EFFECTIVE DATE" shall mean July 1, 2002.

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1.16 "ELIGIBLE COMPENSATION" shall mean an Employee's projected annual compensation from the Employer, determined by the Employer at or before the beginning of the Plan Year, which may consist of salary, bonus, and/or incentive payments, determined before any deductions under any qualified plan of the Employer (including a Code Section 401(k) or 125 plan) and excluding any special or non-recurring compensatory payments such as moving or relocation bonuses or automobile allowances.

1.17 "EMPLOYEE" shall mean an employee of the Employer who (a) is a U.S. citizen or is a lawful permanent resident of the U.S., within the meaning of Code Section 7701(b)(1)(A)(i), (b) earns solely U.S. source income from the Employer, and (c) is exclusively on the Employer's U.S. payroll system. References to the term "Employee" herein shall include references to a Non-Employee Director or Beneficiary where the context so requires.

1.18 "EMPLOYER" shall mean Cadence Design Systems, Inc., a Delaware corporation, and any successor organization thereto (but not Subsidiaries or affiliates of the Employer).

1.19 "EMPLOYER CONTRIBUTIONS" shall mean the Employer's discretionary contribution, if any, pursuant to Section 3.1(d).

1.20 "EMPLOYER PLAN" shall mean a non-qualified deferred compensation plan (other than the Plan) sponsored by the Employer that is intended to qualify for the exemptions provided in Sections 201, 301, and 401 of ERISA.

1.21 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder.

1.22 "GAAP" shall mean United States generally accept accounting principles, consistently applied.

1.23 "GENERAL PARTNERS" shall mean, collectively, the Telos II General Partner and the Telos III General Partner.

1.24 "IDLE FUNDS INCOME" shall mean any income attributable to the following short-term investments of cash: (i) debt securities issued or backed by the United States or a State; (ii) investment grade rated commercial paper;
(iii) certificates or other evidences of deposit in any commercial bank holding over $500 million in deposits; (iv) money market or similar mutual fund interests; and (v) other highly liquid investments.

1.25 "INCUMBENT DIRECTORS" shall mean directors who are either: (i) directors of the Employer as of the Effective Date; or (ii) 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 (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Employer).

1.26 "INSOLVENT" or "INSOLVENCY" shall have the meaning set forth in
Section 7 of the Trust Agreement.

1.27 "INVESTMENT PERCENTAGE" shall mean, for each Participant, a fraction, expressed as a percentage, which is assigned by the Committee in respect of each Portfolio Investment made by one of the Partnerships during a Plan Year:

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(x) the numerator of which equals the sum of (i) the Available Capital of such Participant with respect to the Investing Partnership immediately following the close of business on the last day of the preceding Plan Year, plus (ii) the Deferred Compensation of such Participant in respect of such Plan Year that has been designated for investment in the Investing Partnership, plus (iii) any increase in the Available Capital of such Participant with respect to the Investing Partnership during such Plan Year by operation of Section 1.2(a), minus (iv) any decrease in the Available Capital of such Participant with respect to the Investing Partnership during such Plan Year by operation of Section 1.2(b); and

(y) the denominator of which equals the sum of (i) the Available Capital of all Participants with respect to the Investing Partnership immediately following the close of business on the last day of the preceding Plan Year, plus (ii) the Deferred Compensation of all Participants in respect of such Plan Year that has been designated for investment in the Investing Partnership, plus (iii) any increase in the Available Capital of all Participants with respect to the Investing Partnership during such Plan Year by operation of Section 1.2(a), minus (iv) any decrease in the Available Capital of all Participants with respect to the Investing Partnership during such Plan Year by operation of Section 1.2(b).

At all times following a Partnership's acquisition of a Portfolio Investment, the aggregate Investment Percentages for all of the Participants in respect of such Portfolio Investment shall equal 100 percent.

1.28 "INVESTING PARTNERSHIP" shall mean, with respect to each Portfolio Investment, the Partnership that acquired such Portfolio Investment.

1.29 "MARKETABLE SECURITIES" shall mean a Security that is freely tradable by the holder thereof. For purposes of the preceding sentence, a Security shall be deemed to be freely tradable if: (i) Securities equivalent to such Security are generally traded on one or more established public markets;
(ii) such Security is not subject to "lockup" or other contractual restrictions, and (iii) the Trust and/or each Participant receiving such Security is not subject to restrictions and limitations on the transferability thereof under Rule 144(e) (except for restrictions and limitations specifically applicable to a particular Participant, such as restrictions applicable to a Participant that is an affiliate of the issuer of such Security).

1.30 "NON-EMPLOYEE DIRECTOR" shall mean a director of the Employer who is not otherwise an employee of the Employer.

1.31 "PARTICIPANT" shall mean an Employee or Non-Employee Director who
(i) has become a Participant in the Plan pursuant to Sections 3.3(a) through
(e), as applicable, and (ii) has not ceased to be a Participant pursuant to
Section 3.3(h).

1.32 "PARTNERSHIPS" shall mean, collectively, the Telos II Partnership and the Telos III Partnership.

1.33 "PERMANENT DISABILITY" shall mean that a Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or otherwise meets the definition of "Permanent Disability" as set forth in the Employer's Long Term Disability Plan. A Participant shall not be deemed to have a Permanent Disability unless he or she furnishes proof of such condition sufficient to satisfy the Committee, acting in its sole and absolute discretion.

1.34 "PLAN" shall mean the Cadence Design Systems, Inc. Amended and Restated 2002 Deferred Compensation Venture Investment Plan, as set forth herein and as hereafter amended from time to time.

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1.35 "PLAN YEAR" shall mean the calendar year beginning on January 1 and ending at the close of business on December 31; provided, however, that the 2002 Plan Year shall be the period beginning on the Effective Date through the close of business on December 31, 2002.

1.36 "PORTFOLIO INVESTMENT" shall mean any promissory note, Security, or other interest in a corporation or other business entity which is issued to either of the Partnerships. Except as otherwise determined by the Committee acting in its sole discretion, for purposes of determining a Participant's Investment Percentage, each promissory note, Security or other interest in a corporation or other entity which is issued to one of the Partnerships at a specific time shall be deemed to be a separate Portfolio Investment from any Security, promissory note, or other interest in such corporation or business entity that is issued at a subsequent time; provided, however, that in the event a Security held by one of the Partnerships is exchanged for another Security pursuant to a merger, acquisition, reorganization, recapitalization or similar transaction, a Participant's Investment Percentage applicable to such newly received Security (immediately following receipt) shall equal the Participant's Investment Percentage in respect of the Security exchanged therefor (as determined immediately prior to such exchange).

1.37 "PROFITS AND LOSSES" shall mean, for any period, items of deemed income and gain as well as items of deemed loss, expense and deduction, determined in accordance with GAAP (as if Participants' Accounts were invested to acquire interests in one or both of the Partnerships or in any other manner specified by the Committee, acting in its sole and absolute discretion); provided, however, that Profits and Loss computed for each allocation period under Section 3.8 shall not be determined by taking into account any unrealized gains and losses; and provided, further, that Losses shall include all items of cost and expense associated with the formation, operation, dissolution, winding-up, or termination of the Plan and Trust.

1.38 "SECURITY" or "SECURITIES" shall mean equity, debt, synthetic securities of any type, or any other evidence of ownership of an asset or entity.

1.39 "SUBSIDIARY" shall mean any corporation (other than the Employer) in an unbroken chain of corporations or other entities beginning with the Employer, if each of the entities other than the last entity in the unbroken chain holds equity or other indicia of ownership representing fifty percent (50%) or more of the total combined voting power of all classes of equity or other indicia of ownership in one of the other entities in such chain.

1.40 "TELOS II GENERAL PARTNER" shall mean Telos Venture Management II, LLC, a Delaware limited liability company.

1.41 "TELOS II PARTNERSHIP" shall mean Telos Venture Partners II, L.P., a Delaware limited partnership.

1.42 "TELOS III GENERAL PARTNER" shall mean Telos Venture Management III, LLC, a Delaware limited liability company.

1.43 "TELOS III PARTNERSHIP" shall mean Telos Venture Partners III, L.P., a Delaware limited partnership.

1.44 "TERMINATION DATE" shall have the meaning set forth in Section 3.3(h)(ii).

1.45 "TRUST" shall mean the cash and other assets and/or properties held and administered by Trustee pursuant to the Trust Agreement to carry out the provisions of the Plan.

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1.46 "TRUST AGREEMENT" shall mean the Cadence Design Systems, Inc. 2002 Deferred Compensation Venture Investment Trust Agreement, including any amendments thereto, entered into between the Employer and the Trustee to carry out the provisions of the Plan.

1.47 "TRUSTEE" shall mean the designated Trustee acting at any time under the Trust Agreement.

1.48 "1994 PLAN" shall mean the Cadence Design Systems, Inc. 1994 Deferred Compensation Plan, as amended from time to time.

1.49 "1996 PLAN" shall mean the Cadence Design Systems, Inc. 1996 Deferred Compensation Plan, as amended from time to time.

SECTION 2

ELIGIBILITY

2.1 ELIGIBILITY. Eligibility to participate in the Plan shall be limited to (a) Employees who (i) have Eligible Compensation of at least $150,000 for the Plan Year, (ii) are classified as officers, vice-presidents, directors, or an equivalent title, and (iii) have been selected to participate in the Plan by the Committee acting in its sole and absolute discretion, and (b) Non-Employee Directors who have been selected to participate in the Plan by the Committee acting in its sole and absolute discretion. Participation in the Plan shall commence as of the effective date of the eligible Employee's or Non-Employee Director's enrollment form, which shall be completed and submitted to the Employer in accordance with the provisions of Section 3.3. Nothing in the Plan or in any administrative form used to administer the Plan or Trust shall be construed to require any contributions to be made to the Plan on behalf of the Participant by the Employer. The Committee has the discretion to end the eligibility of one or more Participants at any time in the sole and absolute discretion of the Committee.

SECTION 3

DEFERRAL OF COMPENSATION

3.1 DEFERRAL OF COMPENSATION.

(a) Each eligible Employee or Non-Employee Director may elect, in accordance with Section 3.3, to defer the receipt of a portion of the Base Salary or Directors Fees for active service otherwise payable to him or her by the Employer during each Plan Year or portion of a Plan Year that the Participant is in the employ or service of the Employer. Each eligible Employee may elect, in accordance with Section 3.3, to defer the receipt of a portion of the Cash Bonus for active service otherwise payable to him or her by the Employer during each Deferral Election Period or portion of a Deferral Election Period that the Participant is in the employ or service of the Employer. The Employer shall furnish each Participant with a statement of his or her Account balance within 90 days of the end of each Plan Year or such longer period as the Committee deems appropriate.

(i) The amount or percentage of Compensation that a Participant elects to defer under Section 3.3 will remain constant for the Plan Year (or for Cash Bonus amounts, the Deferral Election Period) with respect to which the election was made and shall not be subject to change during such period, except to the extent that a Participant ceases to be eligible to defer Compensation for the period due to the termination of such Participant's employment or service to the Employer.

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(ii) Each such deferral election as to Base Salary or Directors Fees, or discontinuance of a deferral election as to Base Salary or Directors Fees, will continue in force for each successive Plan Year, until or unless suspended or modified by the filing of a subsequent election with the Employer by the Participant in accordance with Section 3.3.

(iii) Each deferral election as to an eligible Employee's Cash Bonus shall continue in force only for the Deferral Election Period with respect to which it was made and shall not apply to any successive Deferral Election Periods or Plan Years. Any deferral election with respect to a Cash Bonus must be made prior to the time the amount of the bonus is determined, prior to the end of the period of time as to which the bonus is awarded, and at a time that the amount of any such Cash Bonus remains substantially uncertain, as determined by the Committee in its sole and absolute discretion.

(iv) Subject to Section 3.1(c), Compensation deferral elections shall be subject to minimum dollar and maximum percentage amounts as follows: (i) the minimum annual deferral amount is $10,000, which shall be withheld from the Participant's Compensation; and (ii) the maximum deferral percentage amount is 80 percent of the Participant's Base Salary, 100 percent of the Participant's Cash Bonus (if any), and 100 percent of the Participant's Directors Fees, as applicable.

(v) The Employer shall withhold the amount or percentage of Base Salary specified to be deferred by an eligible Employee in equal amounts for each payroll period and shall withhold the amount or percentage of Cash Bonus (if any) specified to be deferred at the time or times such Cash Bonus is or otherwise would be paid to the Employee. The Employer shall withhold the amount or percentage of Directors Fees specified to be deferred by a Non-Employee Director at the time or times such Directors Fees are or otherwise would be paid to such Non-Employee Director.

(vi) Subject to Sections 3.6, 7.1 and 7.2, all deferrals of Compensation made pursuant to this Section 3.1(a) shall be fully vested at all times.

(b) Notwithstanding any provision of this Section 3.1 to the contrary, amounts deferred under the Plan shall be calculated and withheld from the Employee's Base Salary and/or Cash Bonus (if any) after such Compensation has been reduced to reflect any tax withholding obligations imposed on the Employer, any other withholding requirements imposed by law, salary reduction contributions to the Employer's Code Section 125 (cafeteria) and Code Section
401(k) (savings) plans, but before any reductions for contributions to the Employer's Code Section 423 (employee stock purchase) plan, the 1994 Plan, or the 1996 Plan.

(c) Notwithstanding any provision of this Section 3.1 to the contrary, the Committee may, in its sole and absolute discretion, decline to accept all or any portion of any Participant's Compensation deferral election.

(d) The Employer shall not be obligated to make any other contribution to the Plan on behalf of any Participant or for any other purpose at any time.

(i) The Employer shall be entitled, in its sole and absolute discretion, to make Employer Contributions to the Plan on behalf of one or more Participants. Employer Contributions, if any, may be made without regard to whether the Participant to whose account such contribution is credited has made, or is making, Compensation deferrals pursuant to Section 3.1(a). The Employer shall not be bound or obligated to apply any specific formula or basis for calculating the amount of any Employer Contributions and the Employer shall have sole and absolute discretion as to the allocation of any Employer Contributions among Participants' Accounts. The use of any particular formula or basis for making an Employer Contribution in one or more Deferral Election Periods or Plan Years shall not bind or obligate the Employer

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to use such formula or basis in any other Deferral Election Period or Plan Year. Employer Contributions may be subject to a substantial risk of forfeiture in accordance with the terms of a vesting schedule, which may be selected by the Employer in its sole and absolute discretion.

(ii) To the extent that the Trust lacks sufficient assets at any time to fulfill its capital contribution obligations to one or both of the Partnerships, the Employer shall be entitled, in its sole and absolute discretion, to make capital contributions to the Trust to enable the Trust to satisfy such capital contribution obligations. If Employer makes capital contributions to the Trust in accordance with the preceding sentence, then, solely for purposes of maintaining the Participants' Accounts under the Plan, the Committee may establish an Account for Employer, and the provisions of
Section 3.8 may be amended in accordance with Section 7.1 to account for the extent and timing of Employer's contributions to the Trust pursuant to this
Section 3.1(d)(ii).

3.2 DISTRIBUTIONS OF ACCOUNT BALANCES. Subject to Section 3.2(f):

(a) A Participant shall elect whether he or she will receive distribution of his or her entire Account, subject to applicable tax withholding requirements, (i) upon reaching a specified age, (ii) upon passage of a specified number of years, (iii) upon termination of his or her employment or service with the Employer, (iv) upon the earlier to occur of (A) his or her termination of employment or service with the Employer or (B) passage of a specified number of years or attainment of a specified age, or (v) upon the later to occur of (A) his or her termination of employment or service with the Employer or (B) passage of a specified number of years or attainment of a specified age, as elected by the Participant in accordance with the form established by the Committee. Such form may permit a Participant to make an election among some or all of the alternatives listed in this Section 3.2(a), as determined in the Committee's sole and absolute discretion, and shall also permit the Participant to make an election, pursuant to the provisions of
Section 3.2(e), to receive all amounts payable to him or her under the Plan in a single lump sum or in equal monthly installments over a designated period of five (5) or ten (10) years. A designation of the time of distribution shall be required as a condition of participation in the Plan. These elections shall be made in accordance with Section 3.4. All payments shall be made in the form of cash.

(b) Distributions shall be made to the maximum extent allowable under the Plan and the election made by the Participant, except that no distribution shall be made to the extent that the receipt of such distribution, when combined with the receipt of all other "applicable employee remuneration" (as defined in Code Section 162(m)(4)), would cause any remuneration received by the Participant to be nondeductible by the Employer under Code Section 162(m)(l). The portion of any distributable amount that is not distributed by operation of this Section 3.2(b) shall be distributed in subsequent taxable years in which such distribution would not be subject to the deductibility limitation of Code Section 162(m) in accordance with the manner elected by the Participant. For Participants who have elected to receive payment in a single lump sum or in equal monthly installments over a designated period of five (5) or ten (10) years in accordance with Section 3.2(e), the commencement date of the lump sum payment or the five (5) or ten (10) year period (whichever is applicable) shall be automatically extended, when necessary to satisfy the requirements of this Section 3.2(b), for one-year periods until all Account balances have been distributed in the manner elected by the Participants.

(c) Upon termination of a Participant's employment or service with the Employer by reason of death or Permanent Disability prior to the time when payment of his or her Account balance otherwise would have been made or commenced under the provisions of Section 3.2(a), the Participant or his or her Beneficiary will be entitled to receive all amounts credited to the Account as of the date of the Participant's death or Permanent Disability (notwithstanding any contrary election to receive distributions under the first sentence of
Section 3.2(a)). Upon termination of the Participant's employment or service with the Employer

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by reason other than death or Permanent Disability prior to the date when payment of his or her Account balance otherwise would have been made or commenced under the provisions of Section 3.2(a), the Employer may, in the sole and absolute discretion of the Committee, distribute to the Participant all amounts credited to the Participant's Account as of the date of such termination (notwithstanding any contrary election to receive distributions under the first sentence of Section 3.2(a)). Said amounts shall be payable in the form determined pursuant to the provisions of Section 3.2(e).

(d) Upon the death of a Participant prior to the complete distribution to him or her of the entire balance of his or her Account (and after the date of termination of employment or service with the Employer), the balance of his or her Account on the date of death shall be payable to the Participant's Beneficiary pursuant to Section 3.2(e). Notwithstanding any other provision of the Plan to the contrary, except for Section 3.2(f), the Participant's Beneficiary may receive the distribution of the remaining portion of such deceased Participant's Account in the form of a single lump sum if the Beneficiary requests such a distribution and the Committee, in its sole and absolute discretion, consents to such a distribution.

(e) The Employer shall distribute or direct distribution of the balance of amounts previously credited to a Participant's Account, in a single lump sum, or in monthly installments over a period of five (5) years or ten (10) years, as the Participant shall designate pursuant to his or her distribution election made pursuant to Section 3.4. The Participant's distribution election shall be in the form established by the Committee in accordance with the terms of the Plan. A designation of the form of distribution shall be required as a condition of participation in the Plan. Subject to the other provisions of this Section 3.2, distribution of the lump sum or the first installment generally shall be made or commenced within ninety (90) days following the date specified in the first sentence of Section 3.2(a). Subsequent installments, if any, shall be made on the first day of each month following the first installment as determined by Employer. The amount of each installment shall be calculated by dividing the Account balance as of the date of the distribution by the number of installments remaining pursuant to the Participant's distribution election. Each such installment, if any, shall take into account deemed allocations of items of Profit and Loss to the Participant's Account. If at the time for a distribution of an installment payment, the balance in a Participant's Account that may be distributed is less than the amount of the distribution calculated in accordance with the prior two sentences, then at such time only that lesser amount that may be distributed shall be distributed to the Participant. The remaining amount (subject to any necessary adjustments as determined by the Committee acting in its sole and absolute discretion) that should have been distributed with such installment shall be distributed at a reasonably administratively convenient time following the time that any additional amounts that may be distributed have been allocated to the Participant's Account. If the balance in a Participant's Account cannot be distributed in its entirety on the date for final distribution of the Participant's Account under such Participant's last effective distribution election, then as that balance becomes distributable, it shall be distributed to such Participant as soon as reasonably administratively convenient.

(f) Distributions shall be made in accordance with a Participant's distribution election only to the extent that the Committee determines, in its sole and absolute discretion, that the Trust has sufficient Distributable Assets available to reasonably satisfy the distribution elections made, or to be made, by all Participants; provided, however, that the Committee shall be entitled, in its sole and absolute discretion, to permit distributions to Participants in accordance with their positive Account balances or in any other manner that the Committee deems appropriate. Notwithstanding any provision of the Plan or the Trust Agreement to the contrary, no distribution shall be made to any Participant except to the extent that such distribution is approved by the Committee, acting in its sole and absolute discretion, and such distribution does not:

(i) require either the transfer of an interest in one or both of the Partnerships or any other investment partnership or trust holding some or all of the Distributable Assets;

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(ii) require a distribution of assets from one or both of the Partnerships;

(iii) cause the Trust to be insolvent or cause the Trust's assets to be insufficient to satisfy any unpaid debt or capital calls made by one or both of the General Partners;

(iv) cause one or both of the Partnerships or the Trust to sell or distribute Securities other than Marketable Securities; or

(v) create a negative balance in the Account of such Participant or increase the amount by which such Account balance is negative.

3.3 ELECTION TO DEFER COMPENSATION. Each eligible Employee or Non-Employee Director's decision to become a Participant shall be entirely voluntary.

(a) INITIAL ELECTIONS BY CURRENT EMPLOYEES AND NON-EMPLOYEE DIRECTORS. An Employee or Non-Employee Director who is eligible to participate in the Plan pursuant to Section 2.1 may elect to become a Participant in the Plan by electing in writing, no later than the Effective Date, to defer his or her Compensation under the Plan. An election under this Section 3.3(a) to defer Compensation shall be effective only for the 2002 Plan Year.

(b) INITIAL ELECTIONS BY OTHER EMPLOYEES. Each Employee who first becomes eligible to participate in the Plan pursuant to Section 2.1 during the 2002 Plan Year or a subsequent Plan Year (whether by hire or promotion) may elect to become a Participant in the Plan by electing in writing, within thirty
(30) days of the date of his or her hire or promotion (as the case may be), to defer his or her Compensation under the Plan. An election under this Section 3.3(b) to defer Base Salary shall be effective only for the remainder of the Plan Year with respect to which the election is made.

(c) INITIAL ELECTIONS BY OTHER NON-EMPLOYEE DIRECTORS. Each individual who is elected a Non-Employee Director during a Plan Year and is eligible to participate in the Plan pursuant to Section 2.1 may elect to become a Participant in the Plan by electing in writing, within thirty (30) calendar days of the effective date of his or her election to the Board, to defer his or her Compensation under the Plan. An election under this Section 3.3(c) to defer Compensation shall be effective only for the remainder of the Plan Year with respect to which the election is made.

(d) ELECTIONS FOR SUBSEQUENT PLAN YEARS. An Employee or Non-Employee Director who is eligible to participate in the Plan pursuant to
Section 2.1 may elect to become a Participant (or to continue or reinstate his or her active participation) in the Plan for any subsequent Plan Year by electing in writing, at least twenty (20) days (or such other period of time determined by the Committee and communicated to eligible individuals prior to the beginning of the Plan Year with respect to which the Compensation to be deferred is otherwise payable to them) prior to the beginning of the Plan Year with respect to which the Compensation to be deferred is otherwise payable to the Employee or Non-Employee Director.

(e) SEPARATE ELECTION TO DEFER BONUSES. Each Employee who is eligible to participate in the Plan pursuant to Section 2.1 shall make a separate written Compensation deferral election with respect to the Cash Bonus portion(s) (if any) of his or her Compensation. An election under this Section 3.3(e) to defer Cash Bonus shall be effective only for the Deferral Election Period with respect to which the election is made. An Employee's Compensation deferral election with respect to his or her Cash Bonus(es) shall be made prior to the time the amount of the bonus is determined, prior to the end of the period of time as to which the bonus is awarded, and at a time that the amount of any such bonus remains substantially uncertain, as determined by the Committee acting in its sole and absolute discretion.

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(f) NO ELECTION CHANGES DURING PLAN YEAR OR DEFERRAL ELECTION PERIOD. A Participant shall not be permitted to change or revoke his or her election to defer (i) Base Salary or Directors Fees for a Plan Year after the beginning of such Plan Year, (ii) Cash Bonus for a Deferral Election Period after the beginning of such Deferral Election Period.

(g) SPECIFIC TIMING AND METHOD OF ELECTION. Notwithstanding any provision of this Section 3.3 to the contrary, the Committee, in its sole and absolute discretion, shall determine the manner and deadlines for Participants to make Compensation deferral elections under the Plan. The deadlines prescribed by the Committee may be earlier than the deadlines otherwise specified in this Section 3.3, but shall not be later than such specified deadlines.

(h) TERMINATION OF PARTICIPATION.

(i) An eligible Employee or Non-Employee Director who has become a Participant shall remain a Participant until his or her entire vested positive Account balance is distributed. An eligible Employee or Non-Employee Director who has become a Participant may or may not be an active Participant making Compensation deferrals for a particular period, depending on whether such Participant is entitled, and has elected, to make Compensation deferrals for such Plan Year or Deferral Election Period.

(ii) Notwithstanding any provision in the Plan or Trust Agreement to the contrary, from and after the close of business on the date that a Participant's employment or service to the Employer is terminated (the "Termination Date"), such Participant shall no longer be entitled to make Compensation deferrals under the Plan (except to the extent that such Participant is subsequently re-hired or begins to provide services to the Employer, and is deemed eligible to become an active Participant in the Plan in accordance with Section 2.1). Except as otherwise determined by the Committee acting in its sole and absolute discretion, from and after a Participant's Termination Date: (A) the Available Capital of such Participant with respect to either of the Partnerships shall not be deemed to be invested in either of the Partnerships during any Plan Year which begins after the Termination Date; and (B) the Participant's Investment Percentage in respect of each Portfolio Investment made by one of the Partnerships during any Plan Year beginning after the Termination Date shall equal zero percent.

3.4 DISTRIBUTION ELECTION. Each Participant shall indicate on his or her Compensation deferral election made pursuant to Section 3.3, the form and time of payment of his or her positive Account balance as provided in Section 3.2. Subject to Section 3.2(f), a Participant's election as to the form and time of payment shall apply to all amounts credited to the Participant's Account, and except to the limited extent provided below, shall be irrevocable. If permitted by the Committee in its sole and absolute discretion, a Participant may change the terms of such distribution election by making a new distribution election, and any such new election will be effective as of the later of the date that is
(a) six (6) months following the date the new election is made, or (b) the first day of the Plan Year following the Plan Year in which the new election is made and will apply to the Participant's entire Account. A Participant may not make a new election once distributions from the Plan have commenced or which would first become effective at a time when distributions from the Plan have commenced. The Participant's distribution election shall be in the form and manner established by the Committee acting in its sole and absolute discretion.

3.5 PAYMENT UPON CHANGE OF CONTROL. Notwithstanding any provision of the Plan to the contrary, the aggregate balance credited to each Participant's Account shall be distributed to such Participant, subject to Section 3.2(f), in a single lump sum within ninety (90) days following a Change of Control, except to the extent that one or more of the Committee, the Board, or the Employer's
401(k)/NQDC Administrative Committee (as each is composed immediately prior to such Change in Control) determines in its sole and absolute discretion that no such distribution shall be made following a Change of Control.

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3.6 EMPLOYEE'S RIGHTS UNSECURED. The right of a Participant or his or her Beneficiary to receive a distribution hereunder shall be an unsecured claim against the general assets of the Employer, and neither the Participant nor his or her Beneficiary shall have any rights in or against any amount credited to his or her Account or any specific assets of the Employer, except as otherwise provided in the Trust Agreement. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between the Plan and the Employer or any other person.

3.7 INVESTMENT OF CONTRIBUTIONS.

(a) Although no assets will be segregated or otherwise set aside with respect to a Participant's Account, the amount that is ultimately payable to the Participant with respect to his or her Account shall be determined as if such Account had been invested in such manner as the Committee, in its sole and absolute discretion, may specify from time to time. The Committee, in its sole and absolute discretion, shall adopt (and may modify from time to time) such rules and procedures as it deems necessary or appropriate to implement the deemed investment of Participants' Accounts.

(b) The investment options available to each Participant for the deemed investment of his or her Account shall be determined by the Committee in its sole and absolute discretion and described in a separate written document, a copy of which shall be attached hereto and by this reference is incorporated herein. Prior to July 1, 2004, all of the Trust's assets were invested to acquire limited partnership interests in the Telos II Partnership, and such investment was the sole option available to Participants under the Plan for the deemed investment of their Accounts. From and after July 1, 2004, it is the Committee's intention to allow for the investment of the Trust's assets, at the direction of the Committee, in either the Telos II Partnership or the Telos III Partnership. From and after July 1, 2004, the Committee may allow Participants, as part of their deferral election made pursuant to Section 3.3, to direct the Trustee to make deemed investments of their Accounts in either of the Partnerships; provided, however, that the Committee retains the authority to limit the deemed investment of Participants' Accounts to one of the Partnerships. Notwithstanding the forgoing, unless otherwise determined by the Committee, all amounts in a Participant's Account prior to July 1, 2004, shall be deemed to have been designated for investment in the Telos II Partnership. In the event that the Committee makes additional investment options available to Participants for the deemed investment of their Accounts, each Participant shall have the right to direct the Trustee as to the deemed investment of the portion of his or her Account among those options in accordance with policies and procedures implemented by the Committee, the Trustee and the terms and conditions of those options, and the Plan shall be amended to account for such options.

(i) The Committee shall be entitled, in its sole and absolute discretion, to direct the Trust to retain Distributable Assets (or cash proceeds from the liquidation thereof) to satisfy any capital calls issued by the either of the General Partners or any items of deemed debt or expense which are allocable to a Participant's Account in accordance with the Plan.

(ii) A Participant may request that the Committee, acting in its sole and absolute discretion, direct the Trustee to retain Distributable Assets (or cash proceeds from the liquidation thereof) and invest such assets in one of the Partnerships or other available investment options in accordance with policies and procedures implemented by the Trustee, provided, however, that no Participant whose employment or service with the Employer has terminated may request that the Committee direct the Trustee to re-invest any Distributable Assets in either of the Partnerships.

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(iii) If the Committee directs the Trustee to retain all or a portion of a Participant's deemed share of Distributable Assets in accordance with this Section 3.7(c), such assets shall be deemed to increase the Available Capital of such Participant with respect to the Partnership in which the Committee determines such Distributable Assets will be invested (to the extent of the value thereof) until such time as such assets are re-invested by the Trustee or used to satisfy any items of deemed debt or expense which are allocable to such Participant's Account.

(d) Notwithstanding any provision of the Plan to the contrary, the Committee may determine not to take account of a Participant's deemed investment elections, if any, and determine to have the Participant's Account deemed invested in any other manner as the Committee shall determine. The Committee shall also be entitled to designate the manner in which the Trust's assets shall be invested for interim short-term periods of time pending investment in one of the Partnerships or following distribution from one of the Partnerships but prior to distribution from the Trust or re-investment of the Trust's assets in another investment option.

3.8 ALLOCATIONS.

(a) Except as otherwise provided in the Plan, items of Profit and Loss shall be allocated among the Participants' Accounts at the close of business on last day of each Plan Year, as follows:

(i) First, items of Profit and Loss attributable to each Portfolio Investment, as determined by the Committee in its sole discretion, shall be allocated among the Participants' Accounts in proportion to each Participant's respective Investment Percentage for such Portfolio Investment;

(ii) Next, items of Profit attributable to Idle Funds Income shall be allocated among the Participants' Accounts in proportion to each Participant's deemed interest in the cash assets of the Trust (as determined by the Committee in its sole and absolute discretion); and

(iii) Next, all remaining items of Profit and Loss shall be allocated among the Participants' Accounts in proportion to the aggregate Deferred Compensation of each Participant.

(b) Prior to the final allocation of items of Profit and Loss in respect of a Plan Year, the Committee may make interim allocations of items of Profit and Loss among the Participants' Accounts in proportion to the Deferred Compensation of each Participant in respect of such Plan Year (determined as of the time of such interim allocation) or in any other manner that the Committee deems appropriate, acting in its sole and absolute discretion. Immediately following the final allocation of items of Profit and Loss in respect of a Plan Year, the Committee shall be entitled to cause items of Profit and Loss among the Participants' Accounts to be re-allocated, as necessary, to cause the Participants' Accounts to reflect the same amounts that they would have reflected if all items of Profit and Loss for such Plan Year had been allocated in accordance with Section 3.8(a).

(c) If an item of Loss otherwise allocable in respect of a Plan Year under Sections 3.8(a) or 3.8(b) would create a negative balance in a Participant's Account (or increase the amount by which such Account balance is negative), the item shall not be allocated to such Participant's Account but shall instead be specially allocated as follows:

(i) First, to the Participants' Accounts as a group, to the extent possible in proportion to respective positive Account balances, until the Account balance of each Participant has been reduced to (but not less than ) zero; and

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(ii) Next, to the Participants as a group in proportion to the aggregate amount of Deferred Compensation for each Participant.

To the extent that there have been special allocations of Loss under this
Section 3.8(c) away from a Participant that have not been subsequently been reversed pursuant to this sentence, the next available items of Profit otherwise allocable to such Participant pursuant to Sections 3.8(a) and 3.8(b) shall be specially allocated to the Participants to whom such items of Loss had been specially allocated under this Section 3.8(c) so as to first offset in reverse order such special allocations of Loss.

(d) To the extent that (i) Losses that otherwise would have been allocated to a Participant under this Section 3.8 were allocated to one or more other Participant's Accounts under Section 3.8(c) in consequence of such Participant's Account balance having been equal to, reduced to, or less than zero, (ii) such allocation has not been reversed pursuant to the subsequent operation of Section 3.8(c) or this Section 3.8(d), and (iii) by operation of a deferral election, Section 3.7(c) or Section 3.9, a Participant's Available Capital subsequently increases, the Accounts of the Participants shall be adjusted in connection with such increase in such Participant's Available Capital (to the extent of the value thereof) to effect a reallocation of such Losses to the Participant.

(e) From time to time, the Trustee shall be entitled, with Committee approval, to borrow funds to satisfy the obligations of the Trust, whether to cover expenses, meet capital calls issued by either of the General Partners, or otherwise. The principal amount of any such loan, and costs associated with interest expenses on such loan, shall be allocated to Participants' Accounts as determined by the Committee in its sole and absolute discretion.

(f) The selection of a given method of allocating deemed expenses or other items of Profit and Loss among Participants' Accounts shall not be deemed to restrict the Committee in any manner whatsoever from selecting a different method for future allocations or to imply that a different method would not be fair and equitable to Participants.

3.9 TRANSFER OF ASSETS.

(a) The Committee shall be entitled, in its sole and absolute discretion, to direct the Trustee to:

(i) transfer assets to the Trust from the trust established under the 1996 Plan for the benefit of the Participant (if such individual is a participant under the 1996 Plan and such transfer is approved by the plan administrator of the 1996 Plan in its sole and absolute discretion);

(ii) transfer assets to the Trust from the trust established under the 1994 Plan for the benefit of the Participant (if such individual is a participant under the 1994 Plan and such transfer is approved by the plan administrator of the 1994 Plan in its sole and absolute discretion);

(iii) transfer Distributable Assets to the trust established under the 1994 Plan for the benefit of the Participant (if such individual is a participant under the 1994 Plan and such transfer is approved by the plan administrator of the 1994 Plan in its sole and absolute discretion);

(iv) transfer to the Trust some or all of the assets of any other trust established under the terms of an Employer Plan, and designate which Partnership or other investment option such assets will be available for deemed investment in; or

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(v) transfer of some or all of the Trust's assets to any other trust established under the terms of an Employer Plan.

(b) In the event that assets are transferred in accordance with Section 3.9(a) to the Trust, such assets shall be subject to the terms and conditions of the Trust, provided, however, that such assets shall continue to be subject to the distribution election made by a Participant under the applicable Employer Plan unless such distribution election is revised as permitted by the Plan. In the event that assets are transferred in accordance with Section 3.9(a) to a trust established under an applicable Employer Plan, such assets shall be subject to the terms and conditions of such trust, provided, however, that such assets shall continue to be subject to the Participant's distribution election under the Plan unless such distribution election is revised as permitted by the applicable Employer Plan.

(c) Any transfer of assets made in accordance with this
Section 3.9 from the Trust to any other trust established under an Employer Plan, or from any other trust established under an Employer Plan to the Trust, shall not cause any individual's rights to a distribution under the Plan or any Employer Plan to be a secured right to a distribution under the Plan or any Employer Plan.

SECTION 4

DESIGNATION OF BENEFICIARY

4.1 DESIGNATION OF BENEFICIARY.

(a) Each Participant may designate a Beneficiary or Beneficiaries to receive any amount due hereunder by the Participant by written notice thereof to the Employer at any time prior to his or her death and may revoke or change the Beneficiary designated therein without the Beneficiary's consent by written notice delivered to the Employer at any time and from time to time prior to the Participant's death.

(b) If a Participant designates a person other than or in addition to his or her spouse as a primary Beneficiary, the designation shall be ineffective unless the Participant's spouse consents to the designation. Any spousal consent required under this Section 4.1 shall be ineffective unless it
(i) is set forth in writing in a form specified by the Committee in its sole and absolute discretion, (ii) acknowledges the effect of the Participant's designation of another person as his or her Beneficiary, and (iii) is signed by the spouse and witnessed by a notary public. Any spousal consent required under this Section 4.1 shall be valid only with respect to the spouse who signs the consent.

(c) Any Beneficiary designation or revocation shall be effective only if it is received by the Employer. However, when so received, the designation or revocation shall be effective as of the date the notice is executed (whether or not the Participant still is living), but without prejudice to the Committee on account of any payment made before the change is recorded. The last effective designation received by the Employer shall supersede all prior designations.

(d) If the Participant dies without having effectively designated a Beneficiary, or if no Beneficiary survives him or her, then such amount shall be paid to his or her estate. Designations of Beneficiaries shall be in the form and manner determined by the Committee in its sole and absolute discretion.

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SECTION 5

CHANGE OF CONTROL

5.1 CHANGE OF CONTROL. For purposes of the Plan, a Change of Control shall mean the following:

(a) The first public announcement or public acknowledgment (including without limitation, a report filed pursuant to Section 13(d) of the Securities Exchange Act of 1934 as amended (the "Exchange Act")) by the Employer that a "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Employer, a Subsidiary or an employee benefit plan of the Employer or a Subsidiary, or other controlled affiliate of the Employer, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act or comparable successor rule), directly or indirectly, of securities of the Employer representing fifty percent (50%) or more of the combined voting power of the Employer's then outstanding Common Stock entitled to vote in the election of directors, where such person's beneficial ownership of the Employer's Common Stock was not initiated by the Employer or approved by the Employer's Board of Directors; or

(b) The sale, lease or other disposition of all or substantially all of the assets of the Employer;

(c) The merger or consolidation of the Employer with or into another corporation not initiated by the Employer, in which the Employer is not the surviving corporation and the stockholders of the Employer immediately prior to the merger or consolidation fail to possess direct or indirect beneficial ownership of more than eighty percent (80%) of the voting power of the securities of the surviving corporation (or if the surviving corporation is a controlled affiliate of another entity, then the required beneficial ownership shall be determined with respect to the securities of that entity which controls the surviving corporation and is not itself a controlled affiliate of any other entity) immediately following such transaction, or a reverse merger not initiated by the Employer, in which the Employer is the surviving corporation and the stockholders of the Employer immediately prior to the reverse merger fail to possess direct or indirect beneficial ownership of more than eighty percent (80%) of the securities of the Employer (or if the Employer is a controlled affiliate of another entity, then the required beneficial ownership shall be determined with respect to the securities of that entity which controls the Employer and is not itself a controlled affiliate of any other entity) immediately following the reverse merger. For purposes of this Section 5.1(c), any person who acquired securities of the Employer prior to the occurrence of a merger, reverse merger, or consolidation in contemplation of such transaction and who after such transaction possesses direct or indirect beneficial ownership of at least ten percent (10%) of the Common Stock of the Employer or the surviving corporation (or if the Employer or the surviving corporation is a controlled affiliate, then of the appropriate entity as determined above) immediately following such transaction shall not be included in the group of stockholders of the Employer immediately prior to such transaction; or

(d) A change in the composition of the Board, as a result of which fewer than a majority of the directors are Incumbent Directors; or

(e) Any liquidation or dissolution of the Employer.

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SECTION 6

TRUST PROVISIONS

6.1 TRUST AGREEMENT. The Employer shall establish the Trust within an administratively reasonable period of time following the adoption of the Plan for the purpose of retaining assets set aside by the Employer pursuant to the Trust Agreement for payment of amounts payable pursuant to the Plan. The Trust shall be intended to constitute a grantor trust (within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Code). Any Plan benefits not paid from the Trust shall be paid solely from the Employer's general funds, and any benefits paid from the Trust shall be credited against and reduced by a corresponding amount of the Employer's liability to Participants under the Plan. No special or separate fund, other than the Trust, shall be required to be established and no other segregation of assets shall be required to be made to assist the Employer in meeting its obligations to pay benefits under the Plan. All Trust assets shall be subject to the claims of the general creditors of the Employer in the event the Employer is Insolvent. The obligations of the Employer to pay benefits under the Plan constitutes an unfunded, unsecured promise to pay benefits under the Plan and Participants and Beneficiaries shall have no greater rights than the general creditors of the Employer.

SECTION 7

AMENDMENT AND TERMINATION

7.1 AMENDMENT. The Committee shall be entitled, in its sole and absolute discretion, to amend the Plan in such manner as it may determine, at any time and for any reason. Any such amendment shall become effective upon the date stated therein, and shall be binding on all Participants, except as otherwise provided in such amendment.

7.2 TERMINATION. Notwithstanding any other provision of the Plan to the contrary, the Committee shall have the right to terminate the Plan at any time and for any reason and, subject to Section 3.2(f), direct the lump sum payments of all assets held by the Trust if the Employer is not then Insolvent. Except as otherwise provided in the Plan, no such termination shall reduce the balance then credited to a Participant's Account.

SECTION 8

ADMINISTRATION

8.1 ADMINISTRATION. The Employer is hereby designated as the administrator of the Plan (within the meaning of section 3(16)(A) of ERISA). The Committee shall administer and interpret the Plan in accordance with the provisions of the Plan and the Trust Agreement. The Committee shall have all powers and discretion necessary or appropriate to supervise the administration of the Plan and to control its operation, including (but not limited to) the following powers:

(a) To interpret and determine the meaning and validity of the provisions of the Plan and to determine any question arising under, or in connection with, the administration, operation or validity of the Plan or any amendment thereto;

(b) To determine any and all considerations affecting the eligibility of any employee or director to become a Participant or remain a Participant in the Plan;

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(d) To establish and revise the accounting method for the Plan;

(e) To employ legal counsel, consultants, actuaries and agents as it may deem desirable in the administration of the Plan and to rely on the opinion of such counsel or the computations of such consultants or other agents in carrying out the provisions of the Plan;

(f) To arrange for the preparation and delivery of an annual statement of benefits for each Participant;

(g) To publish a claims and appeal procedure satisfying the minimum requirements of section 503 of ERISA pursuant to which individuals or estates may claim Plan benefits and appeal denials of such claims;

(h) To delegate some or all of the powers and responsibilities under the Plan and the Trust Agreement to such person or persons as it shall deem necessary, desirable or appropriate for administration of the Plan; and

(i) To cause deferrals of Compensation to be credited, and items of Profit and Loss allocated, to Participants' Accounts and determine all issues and questions regarding Account balances, and the time, form, manner and amount of any distributions to Participants or Beneficiaries.

Any determination or decision by the Committee (or its delegates) shall be conclusive and binding on all persons, and shall be given the maximum possible deference allowed by law.

8.2 LIABILITY OF COMMITTEE; INDEMNIFICATION. To the maximum extent not prohibited by law, no member of the Committee shall be liable to any person and in any event shall be indemnified by the Employer, from and against any and all losses, claims, damages or liabilities (including attorneys' fees and amounts paid, with the approval of the Committee and the Board in settlement of any claim) for any duty, decision, action taken or omitted in connection with the interpretation and administration of the Plan, so long as unless such duty, decision, action taken or omitted was not attributable to the bad faith or willful misconduct of such individual.

8.3 EXPENSES. All costs and expenses of establishing, adopting and administering the Plan and the Trust, including legal fees and expenses, shall be borne by the Trust unless the Employer elects in its sole and absolute discretion to pay all or a portion of those expenses; provided, however, that the Employer shall bear, and shall not be reimbursed by, the Trust for any tax liability of the Employer associated with the investment of the assets of the Trust.

SECTION 9

GENERAL AND MISCELLANEOUS

9.1 RIGHTS AGAINST EMPLOYER. Except as expressly provided in the Plan, neither the establishment nor the maintenance of the Plan shall be held or construed as giving to any Employee or to any other person, any legal, equitable or other rights against the Employer, or against its officers, directors, agents or stockholders, or as giving to any Employee or Beneficiary any equitable or other interest in the assets, business or shares of Employer stock or giving any Employee the right to be retained in the employ of the

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Employer. Neither the Plan nor any action taken hereunder shall be held or construed as giving to any Employee the right to be retained in the employ of the Employer or as affecting the right of the Employer to dismiss any Employee. Any benefit paid or payable under the Plan shall not be deemed salary or other compensation for the purpose of computing benefits under any other employee benefit plan or arrangement of the Employer for the benefit of its Employees, but Compensation deferrals under the Plan shall be deemed salary or other compensation for the purpose of computing benefits under other employee benefit plans or arrangements of the Employer for the benefit of its Employees, but only to the extent provided under the terms of such other plans or arrangements. Nothing in the Plan or in any instrument executed pursuant thereto shall confer upon any Non-Employee Director any right to continue in the service of the Employer in any capacity or shall affect any right of the Employer, the Board or stockholders of the Employer to remove any Non-Employee Director pursuant to the Employer's By-Laws and the provisions of the Delaware General Corporation Law.

9.2 NO ASSIGNMENT OR TRANSFER. No right, title or interest of any kind in the Plan shall be transferable or assignable by any Participant, former Participant or his or her Beneficiary, spouse or estate or be subject to alienation, anticipation, encumbrance, garnishment, attachment, execution or levy of any kind, whether voluntary or involuntary, or be subject to the debts, contracts, liabilities, engagements, or torts of the Participant, former Participant or his or her Beneficiary or spouse. Any attempt to alienate, anticipate, encumber, sell, transfer, assign, pledge, garnish, attach or otherwise subject to legal or equitable process or encumber or dispose of any interest in the Plan shall be void. Notwithstanding the foregoing, and only if the Committee in its sole and absolute discretion so permits pursuant to such procedures it may specify from time to time, a Participant's interest in the Plan may be transferable to an alternate payee in accordance with a domestic relations order.

9.3 SEVERABILITY. If any provision of the Plan shall be declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of the Plan but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein.

9.4 CONSTRUCTION. The article and section headings and numbers are included only for convenience of reference and are not be taken as limiting or extending the meaning of any of the terms and provisions of the Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. When used herein, the masculine gender includes the feminine gender.

9.5 GOVERNING LAW. The provisions of the Plan shall be construed, administered and enforced in accordance with ERISA, and to the extent not preempted by ERISA, with the laws of the State of Delaware (other than its conflict of laws provisions).

9.6 PAYMENT DUE TO INCOMPETENCE. If the Committee receives evidence that a Participant or Beneficiary entitled to receive any payment under the Plan is physically or mentally incompetent to receive such payment, the Committee may, in its sole and absolute discretion, direct the payment to any other person or trust which has been legally appointed by the courts or to any other person determined by the Employer to be a proper recipient on behalf of such person otherwise entitled to payment, or any of them, in such manner and proportion as the Employer may deem proper. Any such payment shall be in complete discharge of the Employer's obligations under the Plan to the extent of such payment.

9.7 TAXES. The Employer may withhold from any benefits payable under the Plan, all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling.

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9.8 ATTORNEY'S FEES. The Employer shall pay the reasonable attorney's fees incurred by any Participant in an action brought against the Employer to enforce the Participant's rights under the Plan, provided that such fees shall only be payable in the event that the Participant prevails in such action.

9.9 PLAN BINDING ON SUCCESSORS/ASSIGNEES. The Plan shall be binding upon and inure to the benefit of the Employer and its successor and assigns and the Participant and the Participant's designee and estate.

[Remainder of this page intentionally left blank; signature page follows.]

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EXECUTION

IN WITNESS WHEREOF, the Employer has caused its authorized officer to execute this amendment and restatement of the Plan on this _____ day of __________, 2004.

CADENCE DESIGN SYSTEMS, INC.

Signature: ________________________________

By: _______________________________________

Title: ____________________________________

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EXHIBIT 10.78

CADENCE DESIGN SYSTEMS, INC.
EMPLOYMENT AGREEMENT
WITH MICHAEL J. FISTER

THIS AGREEMENT (this "Agreement") is made effective as of May 12, 2004 (the "Effective Date"), between CADENCE DESIGN SYSTEMS, INC., a Delaware corporation (the "Company"), and Michael J. Fister ("Executive").

WHEREAS, the Company is engaged in the electronic design automation software business; and

WHEREAS, the Company desires to secure the services of Executive as President and Chief Executive Officer, and Executive desires to perform such services for the Company, on the terms and conditions as set forth herein.

NOW, THEREFORE, in consideration of the premises and of the covenants and agreements set forth below, it is mutually agreed as follows:

1. TERM AND DUTIES.

1.1 EFFECTIVE DATE. The Company hereby employs Executive and Executive hereby accepts employment pursuant to the terms and provisions of this Agreement commencing on the Effective Date. Executive thereafter shall be employed on an at will basis, meaning that either Executive or the Company may terminate Executive's employment at any time, with or without Cause (as defined in Section 4.2 hereof), in the manner specified herein.

1.2 SERVICES.

(a) Executive shall have the title President and Chief Executive Officer ("CEO"). Executive's duties will be assigned to Executive from time to time by the Board of Directors of the Company (the "Board"). Executive shall report directly to the Board.

(b) During his employment with the Company as CEO, the Company shall recommend Executive's membership on the Board to the Board's Corporate Governance and Nominating Committee.

(c) Executive shall be required to comply with all applicable company policies and procedures, as such shall be adopted, modified or otherwise established by the Company from time to time.

1.3 SERVICES TO BE EXCLUSIVE. During his employment with the Company, Executive agrees to devote his full productive time and best efforts to the performance of Executive's duties hereunder. Executive further agrees, as a condition to the performance by the Company of each and all of its obligations hereunder, that so long as Executive is employed by the Company as CEO pursuant to the terms of this Agreement, he will not directly or indirectly render services of any nature to, otherwise become employed by, serve on the board of directors of, or otherwise participate or engage in any other business without the Company's prior written consent. Nothing herein contained shall be deemed to preclude Executive from (i) continuing to serve as a non-employee member of the Board of Directors of Autodesk, Inc. during the term of his employment with the Company, and (ii) having outside personal investments and involvement with appropriate community activities, or from devoting a reasonable amount of time to such matters, provided that they shall in no manner interfere with or derogate from Executive's work for the Company.

1.4 OFFICE. The Company shall maintain an office for Executive at the Company's corporate headquarters, which currently are located in San Jose, California.

2. COMPENSATION.

The Company shall pay to Executive, and Executive shall accept as full consideration for his services hereunder, compensation consisting of the following:

2.1 BASE SALARY. The Company shall initially pay Executive a base salary of Eight Hundred Thousand Dollars ($800,000) per year ("Base Salary"), payable in

installments in accordance with the Company's customary payroll practices, less such deductions and withholdings required by law or authorized by Executive. The Board or the Compensation Committee of the Board (the "Compensation Committee") shall review the amount of the Base Salary from time to time, but no less frequently than annually. Any increase approved during the first four (4) months of the Company's fiscal year shall become retroactively effective as of the beginning of such fiscal year, and any increase approved thereafter shall become effective on the date determined by the Board or the Compensation Committee, as appropriate.

2.2 BONUS. Executive shall participate in the Company's Senior Executive Bonus Plan or its successor (the "Bonus Plan") at an annual target bonus of one hundred percent (100%) of Executive's Base Salary (the "Target Bonus") for the Company's fiscal year with respect to which such bonus shall be determined pursuant to the terms of such Bonus Plan (the criteria for earning a bonus thereunder are set annually by the Compensation Committee). For fiscal 2004, Executive shall be guaranteed a bonus equal to the amount of annual Base Salary paid to Executive for the portion of the year that Executive was employed by the Company. The Board or the Compensation Committee shall review the amount of the Target Bonus from time to time, but no less frequently than annually. The Board or the Compensation Committee may choose, in its sole discretion, to approve a bonus payment in excess of 100% of Executive's Base Salary for any fiscal year.

2.3 SIGN-ON BONUS.

The Company shall pay Executive a sign-on bonus of $1,000,000, 50% of which shall be paid within thirty (30) days after the Effective Date and 50% of which shall be paid on the earliest to occur of:

(i) the date which is 180 days after the Effective Date,

(ii) the termination of Executive's employment as the result of a Permanent Disability (as defined in Section 4.4 hereof) or death, and

(iii) the termination of Executive's employment without Cause (as defined in Section 4.2 hereof) or as a result of an event constituting a Constructive Termination (as defined in Section 4.3 hereof);

provided, however, that Executive shall not receive any such payment if Executive voluntarily terminates his employment for any reason other than a Constructive Termination (as defined in Section 4.3 hereof) or is terminated for Cause (as defined in Section 4.2 hereof) before the applicable payment date.

2.4 EQUITY GRANTS.

(a) Inducement Grants. As an inducement to entering into this Agreement, Executive shall receive a grant of restricted stock and stock options on the Effective Date, as follows: (i) Executive shall be entitled to receive 600,000 shares of restricted stock pursuant to the Company's 1993 Nonstatutory Stock Incentive Plan and/or the Company's 2000 Nonstatutory Equity Incentive Plan, such grant of restricted shares to vest over three (3) years, with 33 1/3% of the shares vesting at the end of each full year of Executive's employment over the three-year period measured from the Effective Date, and be subject to such other terms and conditions as shall be documented in a restricted stock agreement, substantially in the form attached hereto as Exhibit A, which Executive shall execute and deliver to the Company concurrently with the grant of such shares; and (ii) Executive shall receive a grant of 3,000,000 options for Company common stock pursuant to the Company's 2000 Nonstatutory Equity Incentive Plan, such option grant to have an exercise price equal to the average of the high and low prices (as published by the NYSE) of Company stock on the date of grant, and to vest over four years, with 25% of the options vesting at the end of Executive's first full year of employment measured from the Effective Date and the remainder vesting over the next 36 months in equal amounts each month, and be subject to such other terms and conditions as shall be documented in the option grant

agreement, which shall be in the Company's customary form to be executed and delivered by Executive concurrently with such grant.

(b) Subsequent Grants. After the inducement grants described above, Executive shall be eligible to receive grants of either restricted stock or stock options, or both, as the Compensation Committee may determine from time to time. All stock options shall be granted at one hundred percent (100%) of the fair market value of the Company's common stock on the date of grant, except as otherwise mandated by applicable law or regulations. Any awards shall vest in accordance with the Company's vesting policy for additional grants to executive officers of the Company in effect on the date of the grant by the Compensation Committee, and shall contain such other terms and conditions as shall be set forth in the agreement documenting the grant.

2.5 INDEMNIFICATION. In the event Executive is made, or threatened to be made, a party to any legal action or proceeding, whether civil or criminal, by reason of the fact that Executive is or was a director or officer of the Company or serves or served any other corporation or other person which is at least fifty percent (50%) or more owned by the Company or controlled by the Company in any capacity at the Company's request, Executive shall be indemnified by the Company, and the Company shall pay Executive's related expenses when and as incurred, all to the fullest extent not prohibited by law, as more fully described in the form of Indemnification Agreement attached hereto as Exhibit B.

3. EXPENSES AND BENEFITS.

The amount, nature and extent of reimbursement for such expenses shall always be subject to the control, supervision and direction of the Company's Chief Financial Officer, and/or its General Counsel, and the Board.

3.2 BENEFITS. During Executive's full-time employment with the Company, pursuant to this Agreement:

(a) Executive shall be eligible to participate in the Company's standard U.S. health insurance, life insurance and disability insurance plans, as such plans may be modified from time to time;

(b) Executive shall be eligible to participate in the Company's qualified and non-qualified retirement and other deferred compensation programs pursuant to their terms, as such programs may be modified from time to time; and

(c) Executive shall be eligible to participate in any other benefit plan or arrangement implemented for other executive officers of the Company for which he satisfies the same eligibility requirements applicable to those executive officers.

3.3 RELOCATION BENEFITS.

(a) During the first two weeks of Executive's employment with the Company, the Company shall reimburse Executive for reasonable and actual expenses incurred by him and his wife for travel, lodging and meals in connection with their temporary relocation to the San Jose, California area.

(b) During the next three months of Executive's employment with the Company as CEO, the Company shall reimburse Executive for all (i) reasonable and actual costs associated with leasing a furnished apartment, and (ii) such other reasonable and actual relocation expenses agreed to by the Company.

(c) During the next 24 months of Executive's employment with the Company as CEO, the Company shall provide Executive with (i) a $5,000 per month housing allowance, and (ii) reimbursement of such other reasonable and actual relocation expenses agreed to by the Company.

(d) During the first two years of Executive's employment with the Company as CEO, Executive shall be entitled to reimbursement for the reasonable and actual cost of moving his household goods and certain other personal items to the San Jose, California area pursuant to the terms of the Company's Domestic Relocation Policy then in effect.

(e) If during the first five years of Executive's employment with the Company as CEO he sells his home in Portland, Oregon and/or buys a new home in the San Francisco/San Jose, California area (or any other location in proximity to the Company's then corporate headquarters), the Company (i) will reimburse Executive for his reasonable and documented closing costs (including title search, title insurance, transfer taxes, escrow fees, appraisals, points and other loan origination fees) associated with such sale and/or purchase and
(ii) will absorb and/or reimburse Executive for the broker's commission paid in connection with the sale of Executive's home in Portland, Oregon, provided that Executive complies and cooperates with the Company's Domestic Relocation Policy then in effect, including, but not limited to, using a third party reasonably satisfactory to the Company to handle such sale.

(f) To the extent any of the relocation benefits provided by this
Section 3.3 are included in Executive's gross income for tax purposes, Executive shall receive an additional amount equal to (x) the amount of the relocation benefits included in Executive's income (net of any related income tax deduction allowable to Executive for the underlying expenses) divided by the remainder of 1 minus TR (as defined below), minus (y) the amount included in Executive's income (as so netted). For purposes of this Section 3.3(f), "TR" shall equal the highest effective marginal tax rate taking into account all applicable federal, state and local income taxes (and reflecting the value of lost or phased out itemized deductions) and applicable employment taxes all assumed at the highest rate otherwise applicable to Executive.

3.4 SARBANES-OXLEY ACT LOAN PROHIBITION. To the extent that any company benefit, program, practice, arrangement, or any term of this Agreement would or might otherwise result in the Company's extension of a credit arrangement to Executive not permissible under the Sarbanes-Oxley Act of 2002 (a "Loan"), the Company will use reasonable efforts to provide Executive with a substitute for such Loan, which is lawful and of at least equal value.

4. TERMINATION OF EMPLOYMENT AS CEO.

4.1 GENERAL. Executive's employment by the Company as CEO under this Agreement shall terminate immediately upon delivery to Executive of written notice of termination by the Company, upon the Company's receipt of written notice of termination by Executive at least thirty (30) days before the specified effective date of such termination, or upon Executive's death or Permanent Disability (as defined in Section 4.4 hereof); provided, however, that only five (5) business days' written notice shall be required under this Section 4.1 in connection with Executive's voluntary termination of his employment in connection with a Constructive Termination (as defined in Section 4.3 hereof). In the event of such termination, except where Executive is terminated for Cause (as defined in Section 4.2 hereof) or as the result of a Permanent Disability or death, or where Executive voluntarily terminates his employment for any reason other than in connection with a Constructive Termination, and upon execution by Executive at or about the effective date of such termination of the Executive Transition and Release Agreement, in the form attached hereto as Exhibit C (the "Transition Agreement"), the Company shall provide Executive with the benefits set forth in the Transition Agreement.

4.2 DEFINITION OF CAUSE. For purposes of this Agreement, "Cause" shall be limited to (1) Executive's gross misconduct or fraud in the performance of his services hereunder; (2) Executive's conviction or guilty plea or plea of nolo contendere with respect to any felony; (3) Executive's engaging in any material act of theft or other

material misappropriation of company property in connection with his employment;
(4) Executive's material breach of this Agreement after written notice delivered to Executive identifying such breach and his failure to cure such breach, if curable, within thirty (30) days following delivery of such notice; (5) Executive's material breach of the Proprietary Information Agreement (as defined in Section 8 hereof) after written notice delivered to Executive identifying such breach and his failure to cure such breach, if curable, within thirty (30) days following delivery of such notice; or (6) Executive's material breach of the Company's Code of Business Conduct as such code may be revised from time to time after written notice delivered to Executive identifying such breach and his failure to cure such breach, if curable, within thirty (30) days following delivery of such notice. In no event may the Company terminate Executive's employment for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of at least a majority of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was culpable for the conduct constituting "Cause" and specifying the particulars thereof.

4.3 CONSTRUCTIVE TERMINATION. Notwithstanding anything in this Section 4 to the contrary, Executive may, upon written notice to the Company, voluntarily end his employment upon or within ninety (90) days following the occurrence of an event constituting a Constructive Termination (but with at least five (5) business days' written notice to the Company) and be eligible for the benefits set forth in the Transition Agreement in exchange for executing and delivering that agreement in accordance with Section 9.3 hereof. For purposes of this Agreement, "Constructive Termination" shall mean:

(a) a material adverse change, without Executive's written consent, in Executive's authority, duties, title or reporting relationship to the Board causing

Executive's position to be of materially less stature or responsibility, after written notice delivered to the Company of such change and the Company's failure to cure such change, if curable, within thirty (30) days following delivery of such notice; provided, however, that such a material adverse change shall in all events be deemed to occur if Executive no longer serves as the Chief Executive Officer of a publicly traded company, unless Executive consents in writing to such change;

(b) a reduction, without Executive's written consent, in Executive's Base Salary in effect on the Effective Date (or such higher level as may be in effect in the future) by more than ten percent (10%) or a reduction by more than ten percent (10%) in Executive's stated Target Bonus in effect on the Effective Date (or such greater Target Bonus amount as may be in effect in the future) under the Bonus Plan;

(c) a relocation of Executive's principal place of employment by more than thirty (30) miles, unless Executive consents in writing to such relocation;

(d) any material breach by the Company of any provision of this Agreement, after written notice delivered to the Company of such breach and the Company's failure to cure such breach, if curable, within thirty (30) days following delivery of such notice; or

(e) any failure by the Company to obtain the assumption of this Agreement by any successor to the Company.

4.4 PERMANENT DISABILITY. For purposes of this Agreement, "Permanent Disability" shall mean any medically determinable physical or mental impairment that can reasonably be expected to result in death or that has lasted or can reasonably be expected to last for a continuous period of not less than twelve
(12) months and renders Executive unable to perform effectively his services pursuant to this Agreement.

4.5 CHANGE IN CONTROL.

(a) Should there occur a Change in Control (as defined below) and if within three (3) months before the Change in Control or thirteen (13) months following

the Change in Control either (i) Executive's employment under this Agreement is terminated without Cause or (ii) Executive terminates his employment pursuant to this Agreement as a result of an event constituting a Constructive Termination, then, in exchange for executing and delivering the Transition Agreement, Executive shall be entitled to all of the benefits set forth therein, except that (i) the payments of salary and bonus described in Section 5 of that Agreement shall equal two (2) years of Executive's Base Salary and Target Bonus at the level in effect on the Transition Commencement Date (as defined in such agreement) or, if greater, at the highest level in effect at any time during the term of this Agreement; and (ii) all of the unvested options and other stock awards outstanding and held by Executive on the Transition Commencement Date shall immediately vest and become exercisable in full on the Transition Commencement Date.

(b) For purposes of this Section 4.5, a Change in Control shall be deemed to occur upon the consummation of any one 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) becomes the "beneficial owner" (as defined in Rule 13d-3 of that Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) 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
("Incumbent Directors" means directors who either (A) are directors of the Company as of the Effective Date, or (B) 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, but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Board);

(iii) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation in which the holders of the Company's outstanding voting securities immediately prior to such merger or consolidation receive, in exchange for their voting securities of the Company in consummation of such merger or consolidation, securities possessing at least fifty percent (50%) of the total voting power represented by the outstanding voting securities of the surviving entity (or parent thereof) 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.

(a) Executive will be paid only (a) any earned but unpaid Base Salary and any outstanding expense reimbursements submitted and approved pursuant to Section 3.1 hereof, (b) any amount owed to Executive pursuant to Sections 2.3 and 3.3 hereof, and (c) other unpaid vested amounts or benefits under the compensation,

incentive and benefit plans of the Company in which Executive participates, in each case under this clause (c) as of the effective date of such termination; and

(b) Executive shall not become a party to the Transition Agreement and shall not be bound by any of the terms and provisions thereof.

5. EXCISE TAX.

In the event that any benefits payable to Executive pursuant to the Transition Agreement ("Termination Benefits") (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any comparable successor provisions, and (ii) but for this Section 5 would be subject to the excise tax imposed by Section 4999 of the Code, or any comparable successor provisions (the "Excise Tax"), then Executive's Termination Benefits shall be either (a) provided to Executive in full, or (b) provided to Executive as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, when taking into account applicable federal, state, local and foreign income and employment taxes, the Excise Tax, and any other applicable taxes, results in the receipt by Executive, on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under the Excise Tax. Unless the Company and Executive otherwise agree in writing, any determination required under this
Section 5 shall be made in writing in good faith by a nationally recognized accounting firm selected by the Company (the "Accountants"). In the event of a reduction of benefits hereunder, Executive shall be given the choice of which benefits to reduce. If Executive does not provide written identification to the Company of which benefits he chooses to reduce within ten (10) days after notice of the Accountants' determination, and Executive has not disputed the Accountants' determination, then the Company shall select the benefits to be reduced. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning

applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code, and other applicable legal authority. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 5. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5.

If, notwithstanding any reduction described in this Section 5, the Internal Revenue Service (the "IRS") determines that Executive is liable for the Excise Tax as a result of the receipt of the payment of benefits as described above, then Executive shall be obligated to pay back to the Company, within thirty (30) days after a final IRS determination or in the event that Executive challenges the final IRS determination, a final judicial determination, a portion of the payment equal to the "Repayment Amount." The Repayment Amount with respect to the payment of benefits shall be the smallest such amount, if any, as shall be required to be paid to the Company so that Executive's net after-tax proceeds with respect to any payment of benefits (after taking into account the payment of the Excise Tax and all other applicable taxes imposed on such payment) shall be maximized. The Repayment Amount with respect to the payment of benefits shall be zero if a Repayment Amount of more than zero would not result in Executive's net after-tax proceeds with respect to the payment of such benefits being maximized. If the Excise Tax is not eliminated pursuant to this paragraph, Executive shall pay the Excise Tax.

Notwithstanding any other provision of this Section 5, if (1) there is a reduction in the payment of benefits as described in this Section 5, (2) the IRS later determines that Executive is liable for the Excise Tax, the payment of which would result in the maximization of Executive's net after-tax proceeds
(calculated as if Executive's benefits had not previously been reduced), and (3)
Executive pays the Excise Tax, then the Company shall pay to Executive those benefits which were reduced pursuant to this

subsection as soon as administratively possible after Executive pays the Excise Tax so that Executive's net after-tax proceeds with respect to the payment of benefits are maximized.

6. DISPUTE RESOLUTION.

(a) Each of the parties expressly agrees that, to the extent permitted by applicable law and to the extent that the enforceability of this Agreement is not thereby impaired, any and all disputes, controversies or claims between Executive and the Company arising under this Agreement (as opposed to the Transition Agreement), except those arising under Sections 6(d) and 9.10 hereof or under the Proprietary Information Agreement (as defined in Section 8 hereof), shall be determined exclusively by final and binding arbitration before a single arbitrator in accordance with the JAMS Arbitration Rules and Procedures, or successor rules then in effect, and that judgment upon the award of the arbitrator may be rendered in any court of competent jurisdiction. This includes, without limitation, any and all disputes, controversies, and/or claims arising out of or concerning Executive's employment by the Company as CEO or the termination of Executive's employment as CEO or this Agreement, and includes, without limitation, claims by Executive against directors, officers or employees of the Company, whether arising under theories of liability or damages based on contract, tort or statute, to the full extent permitted by law. As a material part of this agreement to arbitrate claims, the parties expressly waive all rights to a jury trial in court on all statutory or other claims. This Section 6 does not purport to limit either party's ability to recover any remedies provided for by statute, including attorneys' fees.

shall govern the interpretation and enforcement of such arbitration proceeding. The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the State of California, or federal law, if California law is preempted, and the arbitrator is without jurisdiction to apply any different substantive law. The parties agree that they will be allowed to engage in adequate discovery, the scope of which will be determined by the arbitrator, consistent with the nature of the claims in dispute. The arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. The arbitrator shall render an award that shall include a written statement of opinion setting forth the arbitrator's findings of fact and conclusions of law. Judgment upon the award may be entered in any court having jurisdiction thereof. The parties intend this arbitration provision to be valid, enforceable, irrevocable and construed as broadly as possible.

(d) The parties agree, however, that damages would be an inadequate remedy for the Company in the event of a breach or threatened breach of Section 1.3 of this Agreement or any provision of the Proprietary Information Agreement (as defined in Section 8 hereof). In the event of any such breach or threatened breach, the Company may, either with or without pursuing any potential damage remedies, obtain from a court of competent jurisdiction, and enforce, an injunction prohibiting Executive from violating Section 1.3 of this Agreement or any provision of the Proprietary Information Agreement (as defined in Section 8 hereof) and requiring Executive to comply with the terms of those agreements.

7. COOPERATION WITH THE COMPANY AFTER TERMINATION OF THE EMPLOYMENT PERIOD.

Following the termination of his full-time employment for any reason (other than death), Executive shall cooperate with the Company in all matters relating to the winding up of his pending work on behalf of the Company and the orderly transfer of any such pending work to other employees of the Company as may be designated by the Company. Executive also agrees to participate as a witness in any litigation or regulatory proceeding to which the Company or any of its affiliates is a party at the request of the Company upon delivery to Executive of reasonable advance notice and the Company's written obligation to reimburse Executive for all reasonable and documented expenses incurred in connection therewith. Furthermore, Executive agrees to return to the Company all property of the Company, including all hard and soft copies of records, documents, materials and files relating to confidential, proprietary or sensitive company information in his possession or control, as well as all other company-owned property in his possession or control, at the time of the termination of his full-time employment, except to the extent that the Company determines that retention of any of such property is necessary, desirable or convenient in order to permit Executive to satisfy his obligations under this
Section 7 or under the Transition Agreement, after which time Executive shall promptly return all such retained company property.

8. PROPRIETARY INFORMATION AGREEMENT.

Executive shall, on the Effective Date, execute and deliver to the Company an Employee Proprietary Information and Inventions Agreement, in the form attached hereto as Exhibit D (the "Proprietary Information Agreement").

9. GENERAL.

9.1 WAIVER. Neither party shall, by mere lapse of time, without giving notice or taking other action hereunder, be deemed to have waived any breach by the other

party of any of the provisions of this Agreement. Further, the waiver by either party of a particular breach of this Agreement by the other shall neither be construed as, nor constitute, a continuing waiver of such breach or of other breaches of the same or any other provision of this Agreement.

9.2 SEVERABILITY. If for any reason a court of competent jurisdiction or arbitrator finds any provision of this Agreement to be unenforceable, the provision shall be deemed amended as necessary to conform to applicable laws or regulations, or if it cannot be so amended without materially altering the intention of the parties, the remainder of this Agreement shall continue in full force and effect as if the offending provision were not contained herein.

9.3 NOTICES. All notices and other communications required or permitted to be given under this Agreement must be in writing and shall be considered effective either (a) upon personal service or (b) upon delivery by facsimile and depositing such notice in the U.S. Mail, postage prepaid, return receipt requested and, if addressed to the Company, in care of the General Counsel at the Company's principal corporate address, and, if addressed to Executive, at his most recent address shown on the Company's corporate records or at any other address that Executive may specify by notice to the Company, or (c) three (3) days after depositing such notice in the U.S. Mail as described in clause (b) of this paragraph.

9.4 COUNTERPARTS. This Agreement may be executed by facsimile and in any number of counterparts, each of which shall be deemed an original and all of which taken together constitutes one and the same instrument, and in making proof hereof it shall not be necessary to produce or account for more than one such counterpart.

9.5 ENTIRE AGREEMENT. The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement, the exhibits to this Agreement, and the documents, plans and policies referred to in this Agreement (which are hereby incorporated herein

by reference) constitute the complete and exclusive statement of the agreement between the parties and supersede all proposals (oral or written), understandings, representations, conditions, covenants, and all other communications between the parties relating to the subject matter hereof.

9.6 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, without regard to its conflict of laws principles.

9.7 ASSIGNMENT AND SUCCESSORS. The Company shall have the right to assign its rights and obligations under this Agreement to an entity that, directly or indirectly, acquires all or substantially all of the assets of the Company. The rights and obligations of the Company under this Agreement shall inure to the benefit and shall be binding upon the successors and assigns of the Company. Executive shall not have any right to assign his obligations under this Agreement and shall only be entitled to assign his rights under this Agreement upon his death, solely to the extent permitted by this Agreement, or as otherwise agreed to by the Company.

9.8 AMENDMENTS. This Agreement, and the terms and conditions of the matters addressed in this Agreement, may only be amended in writing executed both by the Executive and the Chairman of the Board and/or the General Counsel of the Company.

9.9 TERMINATION AND SURVIVAL OF CERTAIN PROVISIONS. This Agreement shall terminate upon the termination of Executive's full-time employment for any reason; provided, however, that the following provisions of this Agreement shall survive its termination: the Company's and Executive's obligations under Section 7 hereof, the Company's obligations to provide compensation earned through the termination of the employment relationship, plus all reimbursements to which Executive is entitled, under Sections 2 and 3 hereof, the Company's and Executive's obligations under Section 5 hereof, the Company's and Executive's obligations enumerated in the Transition Agreement, if applicable, the Company's obligation to indemnify Executive

pursuant to Section 2.5 hereof and the referenced Indemnification Agreement, the dispute resolution provisions of Section 6 hereof and, to the extent applicable, this Section 9.

9.10 FORMER EMPLOYERS. Executive represents and warrants to the Company that he is not subject to any employment, confidentiality or other agreement or restriction that would prevent him from fully satisfying his duties under this Agreement or that would be violated if he did so. Without the Company's prior written approval, Executive will not:

(a) disclose any proprietary information belonging to a former employer or other entity without its written permission;

(b) contact any former employer's customers or employees to solicit their business or employment on behalf of the Company in violation of Executive's existing obligations to his former employer; or

Executive shall indemnify and hold the Company harmless from any liabilities, including reasonable defense costs, it may incur because he is alleged to have broken any of these promises or improperly revealed or used such proprietary information or to have threatened to do so, or if a former employer challenges Executive's entering into this Agreement or rendering services pursuant to it.

9.11 DEPARTMENT OF HOMELAND SECURITY VERIFICATION REQUIREMENT. If Executive has not already done so, he will timely file all documents, if any, required by the Department of Homeland Security to verify his identity and his lawful employment in the United States. Notwithstanding any other provision of this Agreement, if Executive fails to meet any such requirements promptly after receiving a written request from the Company to do so, his employment will terminate immediately upon notice from the Company and he will not be entitled to any compensation from the

Company of any type, and, if already paid by the Company, Executive will be required to repay the sign-on bonus described in Section 2.3 hereof.

9.12 HEADINGS. The headings of the several sections and paragraphs of this Agreement are inserted solely for the convenience of reference and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof.

9.13 REIMBURSEMENT OF EXECUTIVE'S ATTORNEYS' FEES. The Company shall reimburse, as promptly as practicable after its receipt of documentation therefor, all of Executive's reasonable and documented attorneys' fees and expenses in connection with the negotiation, and execution and delivery of, this Agreement and the exhibits attached hereto.

9.14 ATTORNEYS' FEES. In the event of any dispute, controversy, claim, litigation or arbitration arising out of or concerning Executive's employment by the Company as CEO or the termination of Executive's employment as CEO or this Agreement, the prevailing party in any such dispute, controversy, claim, litigation or arbitration shall be entitled to reasonable attorneys' fees (excluding expert fees and costs).

9.15 TAXES AND OTHER WITHHOLDINGS. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable hereunder all federal, state, local and foreign taxes and other amounts that are required to be withheld by applicable laws or regulations, and the withholding of any amount shall be treated as payment thereof for purposes of determining whether Executive has been paid amounts to which he is entitled.

IN WITNESS WHEREOF, the parties have executed this Agreement on this 12th day of May, 2004.

CADENCE DESIGN SYSTEMS, INC.                    EXECUTIVE

By:________________________________             ________________________________
         R.L. Smith McKeithen                   Michael J. Fister

Title: Sr. VP & General Counsel

EXHIBIT A

FORM OF RESTRICTED STOCK AGREEMENT

CADENCE DESIGN SYSTEMS, INC.
NONSTATUTORY INCENTIVE STOCK AWARD AGREEMENT
________ NONSTATUTORY EQUITY INCENTIVE PLAN ("PLAN")

Cadence Design Systems, Inc. (the "Company"), pursuant to the Plan, hereby grants you an Incentive Stock Award as set forth below. This award is subject to all of the terms and conditions set forth in this Nonstatutory Incentive Stock Award Agreement ("Agreement") and in the Incentive Stock Award Terms and the Plan located on the Cadence Stock Information Website (located at http://ess.cadence.com); provided, however, that in the event of a conflict between the terms of this Agreement and the terms of the Plan, the terms of this Agreement shall prevail.

Grantee:                                             _____________
ID Number:                                           _____________
Nonstatutory Incentive Stock Award Number:           _____________
Date of Award:                                       _____________
Vesting Commencement Date:                           _____________
Number of Shares Subject to Incentive Stock Award:   _____________

VESTING SCHEDULE: 33 1/3% of the shares vest on _________ 33 1/3% of the shares vest on _________ 33 1/3% of the shares vest on _________

Acceptance: Your right to the Incentive Stock will be forfeited unless you deliver to the Company a counterpart of this Agreement together with an Acknowledgment and Statement of Decision Regarding Section 83(b) Election in the form attached hereto as Exhibit A, duly executed by you and your spouse, if applicable, no later than __________, 2004, unless you have received an extension from the Company in writing.

CADENCE DESIGN SYSTEMS, INC.

By: _____________________________________

Title: ______________________________________

Date: ________ ___, 2004

ACKNOWLEDGED AND AGREED

Employee

Spouse

CADENCE DESIGN SYSTEMS, INC.
NONSTATUTORY INCENTIVE STOCK AWARD TERMS
______ NONSTATUTORY EQUITY INCENTIVE PLAN

Pursuant to your Nonstatutory Incentive Stock Award Agreement ("Agreement") and these Nonstatutory Incentive Stock Award Terms (collectively, your "Incentive Stock Award"), CADENCE DESIGN SYSTEMS, INC., a Delaware corporation (the "Company"), has granted you an Incentive Stock Award under its _____ Nonstatutory Equity Incentive Plan (the "Plan") for the number of shares of Incentive Stock indicated in your Agreement and subject to the restrictions indicated in your Agreement. The Plan is incorporated herein by reference. Defined terms not explicitly defined in your Incentive Stock Award but defined in the Plan shall have the same definitions as in the Plan.

The details of your Incentive Stock Award are as follows:

1. INCENTIVE STOCK AWARD. Subject to the provisions of Section 2 hereof and
Section 3 hereof, upon the issuance to you of Incentive Stock hereunder, you shall have all the rights of a stockholder with respect to such Incentive Stock, including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto.

2. RESTRICTIONS ON SALE OR OTHER TRANSFER. Each share of Incentive Stock awarded to you pursuant to this Agreement may not be sold or otherwise transferred except pursuant to the following provisions:

a. The shares shall be held in book entry form with the Company's transfer agent until the restrictions set forth herein lapse in accordance with the provisions of Section 3 hereof or until the shares are forfeited pursuant to paragraph (c) of this Section 2. Notwithstanding the foregoing, you may request that stock certificates evidencing such shares be issued in your name and delivered to you, with each such certificate bearing the following legend:

The shares of Cadence Design Systems, Inc. common stock evidenced by this certificate may not be sold or otherwise transferred except pursuant to the provisions of the Incentive Stock Agreement by and between Cadence Design Systems, Inc. and the registered owner of such shares. Additional information on the restrictions imposed under such Incentive Stock Agreement may be obtained from the Corporate Secretary of Cadence Design Systems, Inc.

b. No such shares may be sold, transferred or otherwise alienated or hypothecated so long as such shares are subject to the restriction provided for in this Section 2.

c. Upon your termination of employment with the Company or its subsidiaries for any reason other than those which result in a lapse of restrictions pursuant to Section 3 hereof, then any such shares as to which the foregoing restrictions have yet to lapse pursuant to Section 3 shall be forfeited by you and acquired by the Company at no cost to the Company on the date of such termination of employment, and you shall forthwith surrender and deliver to the Company any certificates evidencing such shares.

3. LAPSE OF RESTRICTIONS

a. The restrictions set forth in Section 2 hereof shall lapse (provided that such shares have not previously been forfeited pursuant to the provisions of paragraph (c) of Section 2 hereof) as to 33 1/3% of the total number of shares subject to this Incentive Stock Award upon Grantee's completion of each year of employment with the Company over the three-year period measured from the Vesting Commencement Date.

b. Notwithstanding the forgoing, the restrictions set forth in Section 2 hereof shall lapse (provided that such shares have not previously been forfeited pursuant to the provisions of paragraph (c) of Section 2 hereof) upon all shares that remain subject to the foregoing restrictions if, prior to the vesting of all of the shares subject to this Incentive Stock Award pursuant to the schedule described in paragraph (a) of this Section 3, the employment of the Grantee by the Company or its subsidiaries is terminated on account of death or permanent and total disability, as determined in accordance with applicable Company personnel policies.

c. Notwithstanding the foregoing, all or a portion of the shares subject to this Incentive Stock Award shall vest on an accelerated basis, and the restrictions set forth in Section 2 hereof shall concurrently lapse with respect to those shares, upon the termination of Grantee's employment as Chief Executive Officer of the Company under certain prescribed circumstances set forth in Section 4.5 of the Grantee's Employment Agreement with the Company, dated as of May 12, 2004, and Sections 4, 5 and 6 of the Executive Transition and Release Agreement attached as Exhibit C to such Employment Agreement.

d. The foregoing notwithstanding, no such lapse of restriction shall become effective unless and until Grantee or Grantee's legal representative shall surrender to the Company the certificates representing such shares, if any, and upon surrender thereof the Company shall cause new certificates evidencing such shares to be issued and delivered to Grantee or Grantee's legal

representative, free from the restriction provided for in Section 2 hereof or any other restrictions on the sale or other transfer of such shares. The foregoing notwithstanding, no stock certificate shall be delivered to Grantee or Grantee's legal representative as hereinabove provided unless and until Grantee or Grantee's legal representative shall have paid to the Company in cash the full amount of all federal and state withholding or other employment taxes applicable to the taxable income of Grantee resulting from the lapse of such restrictions.

4. NO RIGHTS TO CONTINUED EMPLOYMENT OR SERVICE. Nothing in the Plan or this Incentive Stock Award shall confer upon you any right to continue in the employ of the Company or its Affiliates (or to continue acting as a Consultant) or shall affect the right of the Company or its Affiliates to terminate your employment with or without cause or the right to terminate your relationship as a Consultant pursuant to the terms of your consultant agreement with the Company or its Affiliates.

5. TAX CONSEQUENCES. Set forth below is a brief summary as of the Date of Award of the some of the federal tax consequences of our grant of an Incentive Stock Award to you. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. YOU SHOULD CONSULT A TAX ADVISOR BEFORE MAKING ANY TAX ELECTION RELATING TO YOUR AWARD. The income tax consequences of our grant of Incentive Stock to you depend upon whether or not you make an election under section 83(b) of the Internal Revenue Code to be taxed upon grant. To make the election, you must file the statement required under section 83(b) with the Internal Revenue Service no later than 30 days after the grant of the shares to you. Once made, the election is irrevocable. A suggested form is available from the Company. Copies of the election must also be attached to your federal income tax return for the year of the grant and a copy must be provided to the Company.

a. NO SECTION 83(b) ELECTION MADE. If you do not make the section 83(b) election, our grant of Incentive Stock to you is not a taxable event for you. Rather, recognition of taxable income is postponed until the restrictions on the shares lapse -- in other words, each time you vest in any of the shares. At each such time, you will recognize ordinary income equal to the value (the average of the high and low price of Company common stock on the New York Stock Exchange on the day the shares vest, or on the next trading day if the vesting date falls on a day that is not a trading day) of the Incentive Stock and that amount will be your basis in those shares. Any dividends with a record date prior to that time will be taxed to you as ordinary income, not as dividends, when paid. If those shares are otherwise a capital asset in your hands, any gain or loss on a subsequent sale or other taxable disposition will be capital gain or loss.

b. SECTION 83(b) ELECTION MADE. If you make the section 83(b) election, you will recognize ordinary income at the time of our grant of Incentive Stock to you equal to the value of such shares on the date of the grant determined without regard to any of the restrictions thereon and that amount will be your basis in those shares. If those shares are subsequently forfeited before the restrictions lapse, you will be entitled to no deduction on account thereof. If those shares are otherwise a capital asset in your hands, any gain or loss on a sale or other taxable disposition after the restrictions lapse will be capital gain or loss.

6. ENFORCEMENT. This Agreement shall be construed, administered and enforced in accordance with the laws of the State of Delaware.

ACCEPTANCE

By executing the Agreement, you represent that you are familiar with the terms and provisions of the Plan and accept your Incentive Stock Award subject to all of the terms and provisions thereof. You hereby agree to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors of the Company upon any questions arising under the Plan.

EXHIBIT A
TO INCENTIVE STOCK AWARD AGREEMENT

ACKNOWLEDGMENT AND STATEMENT OF DECISION
REGARDING SECTION 83(b) ELECTION

The undersigned (which term includes the undersigned's spouse) has been issued ___________[NUMBER OF UNVESTED SHARES] unvested shares (the "Incentive Stock") of Common Stock of Cadence Design Systems, Inc., a Delaware corporation (the "Company"), under Section ___ of the Company's ______ Nonstatutory Equity Incentive Plan (the "Plan"), and is returning to Company a signed Nonstatutory Incentive Stock Award Agreement (the "Agreement") together with this Acknowledgment and Statement of Decision Regarding Section 83(b) Election. Capitalized terms not otherwise defined herein have the meanings set forth in the Agreement and in the Plan. The undersigned hereby states as follows:

1. The undersigned acknowledges receipt of a copy of the Plan, the Agreement and the Nonstatutory Incentive Stock Terms (the "Terms") relating to the issuance of such Incentive Stock. The undersigned has carefully reviewed the Plan, the Agreement and the Terms.

2. The undersigned either [check and complete as applicable]:

(a) ____ has consulted, and has been fully advised by, the undersigned's own tax advisor, _____________________________________, whose business address is ______________________________, regarding all federal, state and local tax consequences of acquiring the Incentive Stock, including the tax rules governing the issuance, vesting and forfeiture of the Incentive Stock, advisability of making an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended (an "83(b) Election") and the consequences of the sale of shares to pay Withholding Obligations; or

(b) ____ has knowingly chosen not to consult such a tax advisor.

3. The undersigned hereby states that the undersigned has decided
[check as applicable]:

(a) ____ to make an 83(b) Election with respect to the Incentive Stock, and will submit to the Company no later than 30 days following the date hereof an executed 83(b) Election form; or

(b) ____ not to make an 83(b) Election with respect to the Incentive Stock.

4. The undersigned acknowledges that, if an 83(b) Election is to be filed, he/she/they will be solely responsible for the accuracy of the information set forth in, and the tax consequences of filing, the 83(b) Election, and for properly filing such election with the Internal Revenue Service (and any other applicable taxing authority) on a timely basis and including a copy thereof in the undersigned's income tax return. In addition, the undersigned understands that the 83(b) Election must be filed no later than 30 days after the date the Incentive Stock is deemed issued, which could be as early as the date the Company provided you with the Agreement.

5. Neither the Company nor any of its affiliates, employees, officers, directors, attorneys or accountants has made any warranty or representation to the undersigned with respect to the tax consequences of the undersigned's acquisition, holding, vesting, or forfeiture of Incentive Stock, the making or failure to make an 83(b) Election, the sale of shares to pay Withholding Obligations, or any other tax consequences pertaining to the Plan or the Agreement. THE COMPANY MAKES NO RECOMMENDATION REGARDING THE ADVISABILITY OF MAKING AN 83(b) ELECTION, BUT CAUTIONS THAT THERE ARE SIGNIFICANT TAX CONSEQUENCES THAT WOULD ARISE FROM MAKING THE ELECTION, AND THAT THE AGREEMENT SHOULD NOT BE SIGNED AND THE ELECTION SHOULD NOT BE MADE WITHOUT A COMPLETE UNDERSTANDING THOSE CONSEQUENCES. THE UNDERSIGNED ACKNOWLEDGES THAT IT IS THE UNDERSIGNED'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO ASCERTAIN AND UNDERSTAND THE TAX CONSEQUENCES OF PARTICIPATING IN THE PLAN AND TO FILE, OR REFRAIN FROM FILING, ANY 83(b) ELECTION, EVEN IF THE UNDERSIGNED REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO EXPLAIN THOSE CONSEQUENCES OR MAKE THAT FILING ON THE UNDERSIGNED'S BEHALF.

Date: ___________________________                 ______________________________
                                                  [NAME]

Date: ___________________________                 ______________________________
                                                  Spouse of [NAME]

EXHIBIT B

INDEMNITY AGREEMENT

This Indemnity Agreement, dated as of May 12, 2004, is made by and between Cadence Design Systems, Inc., a Delaware corporation (the "Company"), and, the President and Chief Executive Officer 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 area 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 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 in connection with claims against such persons in connection with their service, 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. 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

H. 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) COVERED PERSON. For purposes of this Agreement, a "covered person" shall include the Indemnitee and any heir, executor, administrator or other legal representative of the Indemnitee following his death or incapacity.

(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.

(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, and including any of the foregoing commenced by or on behalf of the Company, derivatively or otherwise.

(d) SUBSIDIARY. For 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, 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 the Company and/or its subsidiaries in his present capacity, so long as he is duly appointed or elected 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 officer or director of the Company or any of its subsidiaries, and thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of such service, the Company, subject to Section 3(b), shall use reasonable efforts to obtain and maintain in full force and effect directors' and officers' liability insurance ("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.

(a) RIGHT TO INDEMNIFICATION. In the event a covered person was or is made a party or is threatened to be made a party to or is involved in any proceeding, by reason of the fact that the Indemnitee is or was a director, officer or employee of the Company (including any subsidiary or affiliate thereof or any constituent corporation or any of the foregoing absorbed in any merger) or is or was serving at the request of the Company (including such subsidiary, affiliate or constituent corporation) as a director, officer or employee

of another corporation, or of a partnership, joint venture, trust or other entity, including service with respect to employee benefit plans, such person shall be indemnified and held harmless by the Company to the fullest extent permitted by applicable law, against all expenses, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise and other taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Such indemnification shall continue after the Indemnitee has ceased to serve in such capacity and shall inure to the benefit of his heirs, executors and administrators; provided, however, that except for a proceeding pursuant to
Section 7, the Company shall indemnify any such person in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Company.

(b) EXCEPTION FOR AMOUNTS COVERED BY INSURANCE. Notwithstanding the foregoing, the Company shall not be obligated to indemnify a covered person 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 such person by D&O Insurance.

(c) PARTIAL INDEMNIFICATION. If a covered person 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 such person for such total amount except as to the portion thereof to which the Indemnitee is not entitled.

5. MANDATORY ADVANCEMENT OF EXPENSES. The Company shall pay all expenses incurred by a covered person, or in defending any such proceeding as they are incurred in advance of its final disposition; provided, however, that if the Delaware General Corporations Law then so requires, the payment of such expenses incurred in advance of the final disposition of such proceeding shall be made only upon delivery to the Company of an undertaking, by or on behalf of such covered person, to repay all amounts so advanced if it should be determined ultimately that such person is not entitled to the payment of such expenses by the Company.

6. NOTICE AND OTHER INDEMNIFICATION PROCEDURES.

(a) Promptly after receipt by a covered person of notice of the commencement of or the threat of commencement of any proceeding, such

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

7. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the Company within sixty (60) days after a written claim has been received by the Company, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the covered person may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Company to recover and advancement of expenses pursuant to the terms of an undertaking, the covered person shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by a covered person to enforce a right to indemnification hereunder (but not in a suit brought by a covered person to enforce a right to an advancement of expenses) it shall be a defense that indemnification is not permitted by applicable law, and

(ii) in any suit by the Company to recover an advancement of expenses pursuant to the terms hereof, the Company shall be entitled to recover such expenses upon a final adjudication that indemnification is not permitted by applicable law. Neither the failure of the Company (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the covered person is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or its stockholders) that indemnification is not proper, shall create a presumption that the covered person is not entitled to indemnification or, in the case of such a suit brought by a covered person, be a defense to such suit. In any suit brought by a covered person to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the covered person is not entitled to be indemnified, or to such advancement of expenses, shall be on the Company.

8. 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 of 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 8 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.

9. 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 or any covered person 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 officer, director or employee of the Company, and the Indemnitee's right hereunder shall continue after the

Indemnitee has ceased to so act and shall inure to the benefit of any heir, executor, administrator or other legal representative of the Indemnitee.

10. 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.

11. 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 Section 10 hereof.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. GENDER. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate.

The parties hereto have entered into this Indemnity Agreement effective as of the date first above written.

CADENCE DESIGN SYSTEMS, INC.

By: _______________________________

Its: _______________________________

Address: ___________________________

INDEMNITEE

By: _______________________________

Address: ___________________________

EXHIBIT C

EXECUTIVE TRANSITION AND RELEASE AGREEMENT

This Executive Transition and Release Agreement (this "Agreement") is entered into between Michael J. Fister ("Executive") and Cadence Design Systems, Inc., a Delaware corporation ("Cadence" or the "Company").

1. TRANSITION COMMENCEMENT DATE. As of ((Transition Commencement Date)) (the "Transition Commencement Date"), Executive will no longer hold the position of President and Chief Executive Officer ("CEO") and will be relieved of all of Executive's authority and responsibilities in those positions. Executive will be paid (a) any earned but unpaid base salary for his services as CEO prior to the Transition Commencement Date and any outstanding expense reimbursements submitted and approved pursuant to Section 3.1 of Executive's Employment Agreement with the Company dated as of May 12, 2004 (the "Employment Agreement"); (b) any amounts owed to Executive pursuant to Sections 2.3 and 3.3 of the Employment Agreement; and (c) other unpaid vested amounts or benefits under the compensation, incentive and benefit plans of the Company in which Executive participates, in each case under this clause (c) as of the Transition Commencement Date. The payment of the foregoing amounts shall be made to Executive by not later than the next regular payroll date following the Transition Commencement Date.

As of the first day of the month following the Transition Commencement Date, Executive will no longer participate in Cadence's medical, dental, and vision insurance plans (unless Executive elects to continue coverage pursuant to COBRA), and will not be eligible for a bonus for any services rendered after that date, except as expressly provided herein.

2. TRANSITION PERIOD. The period from the Transition Commencement Date to the date when Executive's employment with Cadence pursuant to this Agreement terminates (the "Transition Termination Date") is called the "Transition Period" in this Agreement. Executive's Transition Termination Date will be the earliest to occur of:

a. the date on which Executive provides Cadence with his written resignation from his employment with Cadence pursuant to this Agreement;

b. the date on which Cadence terminates Executive's employment due to a material breach by Executive of his duties or obligations under paragraph 3(b), 3(c) or 3(d) of this Agreement, after written notice delivered to Executive identifying such breach and his failure to cure such breach, if curable, within thirty (30) days following delivery of such notice; and

c. one year from the Transition Commencement Date.

3. DUTIES AND OBLIGATIONS DURING THE TRANSITION PERIOD AND AFTERWARDS.

a. During the Transition Period, Executive will assume the position of ((New Position Title)). In this position, Executive will render those services requested by Cadence's ((Management Representative)) on an as-needed basis. Executive's time rendering those services is not expected to exceed 20 hours per month. Executive shall not be required to perform those services on the Company's premises and shall instead be permitted to perform those services at a location determined by Executive. Except as otherwise provided in paragraph 3(b) of this Agreement, Executive's obligations hereunder will not preclude Executive from accepting and holding full-time employment elsewhere.

b. As a Cadence ((New Position)), as well as other positions Executive may have held with Cadence, Executive has obtained extensive and valuable knowledge and information concerning Cadence's business (including confidential information relating to Cadence and its operations, intellectual property, assets, contracts, customers, personnel, plans, marketing plans, research and development plans and prospects). Executive acknowledges and agrees that it would be virtually impossible for Executive to work as an employee, consultant or advisor in the electronic design automation industry without inevitably disclosing confidential and proprietary information belonging to Cadence. Accordingly, during the Transition Period, Executive will not, directly or indirectly, provide services, whether as an employee, consultant, independent contractor, agent, sole proprietor, partner, joint venture, corporate officer or director, on behalf of any corporation, limited liability company, partnership, or other entity or person or successor thereto that (i) is listed on Exhibit A attached hereto, as modified or amended by Cadence's Board of Directors from time to time and delivered to Executive prior to the Company's termination of his employment as CEO or the Company's notifying him of such termination as CEO (or, in the event Executive terminates his employment as CEO, prior to the date on which Executive has notified the Company of his decision to terminate such employment), or (ii) is named as a competitor of Cadence in the most recent applicable document filed by Cadence before the Transition Commencement Date with the Securities and Exchange Commission that contains such information; provided, however, that the number of competitors designated pursuant to clause
(i) above shall not, when added to the competitors designated pursuant to clause
(ii) above, result in the total number of competitors being greater than ten (10).

c. During the Transition Period and for a period of one year following the Transition Termination Date, Executive will be prohibited, to the fullest extent allowed by applicable law, and except with the written advance approval of the then CEO or General Counsel, from voluntarily or involuntarily, for any reason whatsoever, directly or indirectly, individually or on behalf of persons or entities not now parties to this Agreement, encouraging, inducing, attempting to induce, soliciting or attempting to solicit for employment, contractor or consulting opportunities anyone who is employed at that time, or was employed during the previous one year, by Cadence or any Cadence affiliate.

d. During the Transition Period, Executive will be prohibited, to the fullest extent allowed by applicable law, and except with the written advance approval of the then CEO or General Counsel, from directly or indirectly, individually or on behalf of persons or entities not now parties to this Agreement, intentionally and knowingly interfering or attempting to interfere with the relationship or prospective relationship of Cadence or any Cadence affiliate with any former, present or future client, customer, joint venture partner, or financial backer of Cadence or any Cadence affiliate.

e. Executive will fully cooperate with Cadence in all matters relating to his employment, including the winding up of work performed in Executive's prior position and the orderly transition of such work to other Cadence employees. Executive also agrees to participate as a witness in any litigation or regulatory proceeding to which the Company or any of its affiliates is a party at the request of the Company upon delivery to Executive of reasonable advance notice and the Company's written commitment to reimburse Executive for all reasonable expenses incurred in connection therewith.

f. Executive will not make any statement, written or oral, that disparages Cadence or any of its affiliates, or any of Cadence's or its affiliates' products, services, policies, business practices, employees, executives, officers or directors. The foregoing provision shall not preclude Executive from making any statements required by law.

g. Notwithstanding paragraph 9 hereof, the parties agree that damages would be an inadequate remedy for Cadence in the event of a breach or threatened breach by Executive of paragraph 3(b), 3(c), 3(d) or 3(f) hereof. In the event of any such breach or threatened breach, Cadence may, either with or without pursuing any potential damage remedies, obtain from a court of competent jurisdiction, and enforce, an injunction prohibiting Executive from violating this Agreement and requiring Executive to comply with the terms of this Agreement.

4. TRANSITION COMPENSATION AND BENEFITS. In consideration and compensation for Executive's services during the Transition Period, Cadence will provide the following to Executive:

a. a monthly salary of $2,000 less applicable tax withholdings and deductions, payable in accordance with Cadence's regular payroll schedule;

b. all of the unvested options and other outstanding stock awards held by Executive on the Transition Commencement Date that would have vested over the succeeding twenty four (24) month period had Executive continued to serve as CEO under his Employment Agreement during that period shall immediately vest and become exercisable in full on the Effective Date of this Agreement, and there shall be no further vesting of those options or stock awards during the Transition Period. This acceleration will have no effect on any other provisions of the stock awards;

c. Executive's employment pursuant to this Agreement shall be considered a continuation of employee status and continuous service for all purposes under any stock options previously granted to Executive by the Company and outstanding on the Transition Commencement Date; and

d. if Executive elects to continue coverage under Cadence's medical, dental, and vision insurance plans pursuant to COBRA following the Transition Commencement Date, Cadence will pay the COBRA premiums for Executive and his qualified beneficiaries during the Transition Period.

Except as so provided or as otherwise set forth in paragraph 6 hereof, Executive will receive no other compensation or benefits from Cadence in consideration of Executive's services during the Transition Period.

5. TERMINATION PAYMENTS AND BENEFITS. In consideration for Executive's acceptance of this Agreement, Cadence will provide to Executive within or commencing within ten (10) business days after the Effective Date (as defined in paragraph 8 hereof) and after Executive has returned to the Company all hard and soft copies of records, documents, materials and files relating to confidential, proprietary or sensitive company information in his possession or control during his period of employment as CEO, as well as all other company-owned property then in his possession, the following termination payments and benefits to which Executive would not otherwise be entitled:

a. a lump-sum payment equal to 180% of Executive's annual Base Salary at the highest rate in effect during Executive's employment as CEO, less applicable tax deductions and withholdings; and

b. an amount equal to 180% of Executive's annual Target Bonus at the highest target rate in effect during Executive's employment as CEO, less applicable tax deductions and withholdings, payable in twelve (12) monthly pro rata installments, provided that the twelfth payment is contingent upon Executive's further execution of a Release of Claims in the form of Attachment 1 to this Agreement; provided, further, that the Company shall have no further obligation to make any monthly installments after the Transition Termination Date should such date occur pursuant to paragraph 2(a) or 2(b) hereof.

6. CHANGE IN CONTROL. If this Agreement is executed by Executive pursuant to Section 4.5 of the Employment Agreement in connection with a Change in Control (as defined in Section 4.5 of the Employment Agreement), then the following adjustments shall be made to paragraphs 4 and 5 hereof:

a. all of the unvested options and other outstanding stock awards held by Executive on the Transition Commencement Date shall

immediately vest in full and become exercisable on the Transition Commencement Date as to all the underlying shares of the Company's common stock;

b. the lump sump payment to be made to Executive pursuant to paragraph 5(a) hereof shall be equal to 200% of Executive's annual Base Salary at the highest rate in effect during Executive's employment as CEO, less applicable tax deductions and withholdings; and

c. the amount to be paid to Executive pursuant to paragraph 5(b) hereof shall be equal, in the aggregate, to 200% of Executive's annual Target Bonus at the highest target rate in effect during Executive's employment as CEO, less applicable tax deductions and withholdings.

7. GENERAL RELEASE OF CLAIMS.

a. Executive hereby irrevocably, fully and finally releases Cadence, its parent, subsidiaries, affiliates, directors, officers, agents and employees ("Releasees") from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, suspected or unsuspected, that Executive ever had or now has as of the time that Executive signs this Agreement which relate to his hiring, his employment with the Company, the termination of his employment with the Company and claims asserted in shareholder derivative actions or shareholder class actions against the Company and its officers and Board of Directors, to the extent those derivative or class actions relate to the period during which Executive served as CEO. The claims released include, but are not limited to, any claims arising from or related to Executive's employment with Cadence, such as claims arising under (as amended) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1974, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the California Fair Employment and Housing Act, the California Labor Code, the Employee Retirement Income and Security Act of 1974 (except for any vested right Executive has to benefits under an ERISA plan), the state and federal Worker Adjustment and Retraining Notification Act, and the California Business and Professions Code; any other local, state, federal, or foreign law governing employment; and the common law of contract and tort. In no event, however, shall any claims, causes of action, suits, demands or other obligations or liabilities be released pursuant to the foregoing if and to the extent they relate to:

i. any amounts or benefits to which Executive is or becomes entitled to pursuant to the provisions of this Agreement (including, without limitation, paragraphs 1, 4, 5 and 6 hereof) or pursuant to the provisions designated in Section 9.9 of the Employment Agreement to survive the termination of Executive's full-time employment as CEO;

ii. claims for workers' compensation benefits under any of the Company's workers' compensation insurance policies or funds; and

iii. claims related to Executive's COBRA rights.

b. Executive represents and warrants that he has not filed any claim, charge or complaint against any of the Releasees.

c. Executive acknowledges that the payments provided in this Agreement constitute adequate consideration for the release set forth in this paragraph 7.

d. Executive intends that this release of claims cover all claims subject to this release, whether or not known to Executive. Executive further recognizes the risk that, subsequent to the execution of this Agreement, Executive may incur loss, damage or injury which Executive attributes to the claims encompassed by this release. Executive expressly assumes this risk by signing this Agreement and voluntarily and specifically waives any rights conferred by California Civil Code section 1542 which provides as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor which if known by him must have materially affected his settlement with the debtor.

e. Executive represents and warrants that there has been no assignment or other transfer of any interest in any claim by Executive that is covered by this release.

8. REVIEW OF AGREEMENT; REVOCATION OF ACCEPTANCE. Executive has been given at least 21 days in which to review and consider this Agreement, although Executive is free to accept this Agreement anytime within that 21-day period. Executive is advised to consult with an attorney about the Agreement. If Executive accepts this Agreement, Executive will have an additional 7 days from the date that Executive signs this Agreement to revoke that acceptance, which Executive may effect by means of a written notice sent to both the General Counsel and the Senior Vice President of Human Resources of Cadence. If this 7-day period expires without a timely revocation, this Agreement will become final and effective on the eighth day following the date of Executive's signature will be the "Effective Date" of this Agreement.

9. ARBITRATION. Subject to paragraph 3(g) hereof, all claims, disputes, questions, or controversies arising out of or relating to this Agreement, including without limitation the construction or application of any of the terms, provisions, or conditions of this Agreement, will be resolved exclusively in final and binding arbitration in accordance with the Arbitration Rules and Procedures, or successor rules then in effect, of Judicial Arbitration & Mediation Services, Inc. ("JAMS"). The arbitration will be held in the San Jose, California, metropolitan area, and will be conducted and administered by JAMS, or in the event JAMS does not then conduct arbitration proceedings, a similarly reputable arbitration administrator. Executive and Cadence will select a mutually

acceptable, neutral arbitrator from among the JAMS panel of arbitrators. Except as provided by this Agreement, the Federal Arbitration Act will govern the administration of the arbitration proceedings. The arbitrator will apply the substantive law (and the law of remedies, if applicable) of the State of California, or federal law, as applicable, and the arbitrator is without jurisdiction to apply any different substantive law. Executive and Cadence will each be allowed to engage in adequate discovery, the scope of which will be determined by the arbitrator consistent with the nature of the claim[s] in dispute. The arbitrator will have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and will apply the standards governing such motions under the Federal Rules of Civil Procedure. The arbitrator will render a written award and supporting opinion that will set forth the arbitrator's findings of fact and conclusions of law. Judgment upon the award may be entered in any court of competent jurisdiction. Cadence will pay the arbitrator's fees, as well as all administrative fees, associated with the arbitration. Each party will be responsible for paying its own attorneys' fees and costs (including expert witness fees and costs, if any), except as provided in paragraph 13 hereof.

10. NO ADMISSION OF LIABILITY. Nothing in this Agreement will constitute or be construed in any way as an admission of any liability or wrongdoing whatsoever by Cadence or Executive.

11. INTEGRATED AGREEMENT. This Agreement, together with the provisions designated in Section 9.9 of the Employment Agreement to survive the termination of Executive's full-time employment as CEO, is intended by the parties to be a complete and final expression of their rights and duties respecting the subject matter of this Agreement. Except as expressly provided herein, nothing in this Agreement is intended to negate Executive's agreement to abide by Cadence's policies while serving as a Cadence employee, including but not limited to Cadence's Employee Handbook, Sexual Harassment Policy and Code of Business Conduct, or Executive's continuing obligations under Executive's Employee Proprietary Information and Inventions Agreement, or any other agreement governing the disclosure and/or use of proprietary information, which Executive signed while working with Cadence or its predecessors; nor to waive any of Executive's obligations under state and federal trade secret laws.

12. FULL SATISFACTION OF COMPENSATION OBLIGATIONS; ADEQUATE CONSIDERATION. Executive agrees that the payments and benefits provided herein, together with any payments or benefits to which Executive is or may become entitled to pursuant to the provisions of the Employment Agreement that survive the termination of Executive's full-time employment as CEO pursuant to Section 9.9 of the Employment Agreement, are in full satisfaction of all obligations of Cadence to Executive arising out of or in connection with Executive's employment through the Transition Termination Date, including, without limitation, all compensation, salary, bonuses, reimbursement of expenses, and benefits.

13. ATTORNEYS' FEES. In the event of any dispute, controversy, claim, litigation or arbitration arising out of or concerning Executive's employment by Cadence or the termination of Executive's employment or this Agreement, the prevailing party in any

such dispute, controversy, claim, litigation or arbitration shall be entitled to reasonable attorneys' fees (excluding expert fees and costs).

14. TAXES AND OTHER WITHHOLDINGS. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable hereunder all federal, state, local and foreign taxes and other amounts that are required to be withheld by applicable laws or regulations, and the withholding of any amount shall be treated as payment thereof for purposes of determining whether Executive has been paid amounts to which he is entitled.

15. WAIVER. Neither party shall, by mere lapse of time, without giving notice or taking other action hereunder, be deemed to have waived any breach by the other party of any of the provisions of this Agreement. Further, the waiver by either party of a particular breach of this Agreement by the other shall neither be construed as, nor constitute, a continuing waiver of such breach or of other breaches of the same or any other provision of this Agreement.

16. MODIFICATION. This Agreement may not be modified unless such modification is embodied in writing, signed by the party against whom the modification is to be enforced.

17. ASSIGNMENT AND SUCCESSORS. Cadence shall have the right to assign its rights and obligations under this Agreement to an entity that, directly or indirectly, acquires all or substantially all of the assets of Cadence. The rights and obligations of Cadence under this Agreement shall inure to the benefit and shall be binding upon the successors and assigns of Cadence. Executive shall not have any right to assign his obligations under this Agreement and shall only be entitled to assign his rights under this Agreement upon his death, solely to the extent permitted by this Agreement, or as otherwise agreed to by Cadence.

18. SEVERABILITY. In the event that any part of this Agreement is found to be void or unenforceable, all other provisions of the Agreement will remain in full force and effect.

19. GOVERNING LAW. This Agreement will be governed and enforced in accordance with the laws of the State of California, without regard to its conflict of laws principles.

EXECUTION OF AGREEMENT

The parties execute this Agreement to evidence their acceptance of it.

Dated: __________________.                      Dated:  _______________.

Michael J. Fister                               CADENCE DESIGN SYSTEMS, INC.

___________________________                     By: ____________________________
                                                    Name
                                                    Title
                                       9

ATTACHMENT 1

RELEASE OF CLAIMS

1. For valuable consideration, I irrevocably, fully and finally release Cadence Design Systems, Inc. ("Cadence"), its parent, subsidiaries, affiliates, directors, officers, agents and employees from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, suspected or unsuspected, that I ever had or now have as of the time that I sign this Release which relate to my hiring, my employment with Cadence, the termination of my employment with Cadence and claims asserted in shareholder derivative actions or shareholder class actions against Cadence and its officers and Board of Directors, to the extent those derivative or class actions relate to the period during which I served as CEO. The claims released include, but are not limited to, any claims arising from or related to my employment with Cadence, such as claims arising under (as amended) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1974, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the California Fair Employment and Housing Act, the California Labor Code, the Employee Retirement Income and Security Act of 1974 (except for any vested right I have to benefits under an ERISA plan), the state and federal Worker Adjustment and Retraining Notification Act, and the California Business and Professions Code; any other local, state, federal, or foreign law governing employment; and the common law of contract and tort. This Release is not intended to, and does not, encompass (i) any right to compensation or benefits that I have under my Executive Transition and Release Agreement with Cadence (including, without limitation, paragraphs 1, 4, 5 and 6 thereof) or pursuant to those provisions of my Employment Agreement dated as of May 12, 2004 with Cadence, which, pursuant to Section 9.9 of such Employment Agreement, survive the termination of my full-time employment as CEO, (ii) any claims I may have for workers' compensation benefits under any of Cadence's workers' compensation insurance policies or funds, and (iii) any claims related to my COBRA rights.

2. I intend that this Release cover all claims subject hereto, whether or not known to me. I further recognize the risk that, subsequent to the execution of this Agreement, I may incur loss, damage or injury which I attribute to the claims encompassed by this Release. I expressly assume this risk by signing this Release and voluntarily and specifically waive any rights conferred by California Civil Code section 1542 which provides as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor which if known by him must have materially affected his settlement with the debtor.

3. I represent and warrant that there has been no assignment or other transfer of any interest in any claim by me that is covered by this Release.

4. I acknowledge that Cadence has given me 21 days in which to consider this Release and advised me to consult an attorney about it. I further acknowledge that

once I execute this Release, I will have an additional 7 days in which to revoke my acceptance of this Release by means of a written notice of revocation given to ________. This Release will not be final and effective until the expiration of this revocation period.

Dated: _______________________.             ____________________________________
                                                     Michael J. Fister

                                            ____________________________________
                                                        Sign Name

EXHIBIT D

PROPRIETARY INFORMATION AGREEMENT

EXHIBIT 10.79
TERM SHEET

DATE: May 18, 2004

RE: Employment Agreement - Lavi Lev

CATEGORY                                TERMS

ANNUAL BASE SALARY:                     -     $450,000

ANNUAL BONUS FOR 2004:                  -     $450,000 to be paid at the same
                                              times and in the same relative
                                              percentages as per the Senior
                                              Executive Bonus Plan

ANNUAL TARGET BONUS BEYOND 2004:        -     $450,000- under the terms of the
                                              Cadence Senior Executive Bonus
                                              Plan, based on criteria set
                                              annually by the Compensation
                                              Committee (currently operating
                                              margin, revenue, net product
                                              bookings and individual
                                              performance)

EQUITY GRANTS/OPTIONS:                  -     Subject to shareholder approval
                                              and Executive remaining employed,
                                              an award of 250,000 incentive
                                              shares, vesting over 3 years
                                              according to the following
                                              schedule: December 15, 2004
                                              (41,667 shares), June 15, 2005
                                              (41,667 shares), December 15, 2005
                                              (41,667 shares), June 15, 2006
                                              (41,667 shares), December 15, 2006
                                              (41,667 shares) and June 15, 2007
                                              (41,667 shares)

                                        -     In the event that the shareholders
                                              of the Company fail to approve
                                              Proposal 2 at the June 15, 2004
                                              Annual Meeting, the Company and
                                              Executive shall negotiate in good
                                              faith to provide Executive
                                              incentives consistent with this
                                              Term Sheet in alternative forms of
                                              compensation

SEPARATION AGREEMENT                    -     In exchange for a release of
                                              claims:

(TERMINATION WITHOUT CAUSE,                   -     12 months Annual Base Salary
CONSTRUCTIVE TERMINATION,                           (at the commencement of
RESIGNATION WITH EFFECTIVE                          employment transition
TERMINATION DATE BETWEEN                            period) and Annual Target
DECEMBER 15 AND DECEMBER 31,                        Bonus (at the conclusion of
2004, OR TERMINATION WITHIN                         the employment transition
13 MONTHS AFTER CHANGE IN                           period)
CONTROL)
                                              -     Continued vesting of options
                                                    and restricted stock for up
                                                    to 12 months (Executive is
                                                    available to consult -- up
                                                    to 20 hours per month)

                                              -     Paid COBRA coverage for 12
                                                    months

                                        -     Non-compete during 12-month
                                              Transition Period in EDA industry
                                              unless prior consent of Company
                                              obtained; such consent not to be
                                              unreasonably withheld. Executive
                                              to acknowledge reasonableness of
                                              Company's withholding of consent
                                              with respect to Synopsis, Mentor,
                                              Magma, Monterey Design, PDF
                                              Solutions and up to 5 other
                                              companies named by the Board of
                                              Directors or the most current list
                                              of competitors identified in the
                                              Company's SEC filings

                                        -     Non-solicit of employees for 2
                                              years

                                        2

CHANGE IN CONTROL BENEFITS:             -     Same as above plus accelerated
                                              vesting of all stock options and
                                              restricted stock upon termination
                                              without cause or constructive
                                              termination

OTHER:                                  -     During Executive's employment,
                                              Executive to participate in
                                              Cadence's health, life, disability
                                              insurance programs for
                                              self/family; retirement and
                                              non-qualified deferred
                                              compensation plans

                                        -     Executive commits to remaining
                                              employed with Cadence at least
                                              through December 15, 2004

                                        -     Indemnification by Company to
                                              maximum extent allowed by law

                                        -     Arbitration provision governing
                                              all aspects of Executive's
                                              employment, except IP-related
                                              issues and non-compete,
                                              non-solicit and non-disparagement
                                              provisions

CADENCE DESIGN SYSTEMS, INC.
EMPLOYMENT AGREEMENT
WITH LAVI LEV

THIS AGREEMENT (this "Agreement") is made effective as of May 24, 2004 (the "Effective Date"), between CADENCE DESIGN SYSTEMS, INC., a Delaware corporation (the "Company"), and LAVI LEV ("Executive").

WHEREAS, Executive is currently employed by the Company as Executive Vice President and General Manager; and

WHEREAS, the Company and Executive wish to enter into a formal employment agreement on the terms and conditions as set forth herein.

NOW, THEREFORE, in consideration of the premises and of the covenants and agreements set forth below, it is mutually agreed as follows:

1. TERM AND DUTIES.

1.1 EFFECTIVE DATE. The Company hereby employs Executive and Executive hereby accepts employment pursuant to the terms and provisions of this Agreement commencing on the Effective Date. Executive has been employed and shall continue to be employed on an at will basis, meaning that either Executive or the Company may terminate Executive's employment at any time, with or without Cause (as defined in Section 4.2 hereof), in the manner specified herein.

1.2 SERVICES.

(a) Executive shall continue to have the title of Executive Vice President and General Manager. Executive's duties will be assigned to Executive by the Company's Chief Executive Officer ("CEO"), or such other persons as may be specified by the CEO.

(b) Executive shall be required to comply with all applicable company policies and procedures, as such shall be adopted, modified or otherwise established by the Company from time to time.

1.3 SERVICES TO BE EXCLUSIVE. During his employment with the Company, Executive agrees to devote his full productive time and best efforts to the performance of Executive's duties hereunder. Executive further agrees, as a condition to the performance by the Company of each and all of its obligations hereunder, that so long as Executive is employed by the Company or receiving compensation or any other consideration from the Company, he will not directly or indirectly render services of any nature to, otherwise become employed by, serve on the board of directors of, or otherwise participate or engage in any other business without the CEO's prior written consent. Nothing herein contained shall be deemed to preclude Executive from having outside personal investments and involvement with appropriate community activities, or from devoting a reasonable amount of time to such matters, provided that they shall in no manner interfere with or derogate from Executive's work for the Company.

1.4 OFFICE. The Company shall maintain an office for Executive at the Company's corporate headquarters, which currently are located in San Jose, California.

2. COMPENSATION.

The Company shall pay to Executive, and Executive shall accept as full consideration for the Services, compensation consisting of the following:

2.1 BASE SALARY. The Company shall initially pay Executive a base salary of Four Hundred Fifty Thousand Dollars ($450,000) per year ("Base Salary"), payable in installments in accordance with the Company's customary payroll practices, less such deductions and withholdings required by law or authorized by Executive. The Board of Directors of the Company (the "Board") or the Compensation Committee of the Board (the "Compensation Committee") shall review the amount of the Base Salary from time to time, but no less frequently than annually.

2.2 BONUS. Executive shall participate in the Company's Senior Executive Bonus Plan or its successor (the "Bonus Plan") at an annual target bonus of Four Hundred Fifty Thousand Dollars ($450,000) (the "Target Bonus") pursuant to the terms

of such Bonus Plan (the criteria for earning a bonus thereunder are set annually by the Compensation Committee). For fiscal 2004, so long as Executive remains employed by the Company as Executive Vice President and General Manager through December 15, 2004, Executive shall be guaranteed a bonus of Four Hundred Fifty Thousand Dollars ($450,000), to be paid at the times and in the manner as set forth in the Bonus Plan. The Board or the Compensation Committee shall review the amount of the Target Bonus from time to time, but no less frequently than annually.

2.3 EQUITY GRANTS.

Executive has previously been granted stock options by the Company which remain in full force and effect in accordance with the terms of the stock option agreements documenting such grants. In addition to the grant described above, Executive shall be eligible to receive additional grants of either restricted stock or stock options or both as the Compensation Committee may determine from time to time. All stock options shall be granted at one hundred percent (100%) of the fair market value of the Company's common stock on the date of grant. Any awards shall vest in accordance with the Company's vesting policy for additional grants to executive officers of the Company in effect on the date of the grant by the Compensation Committee, and shall contain such other terms and conditions as shall be set forth in the agreement documenting the grant.

2.4 INDEMNIFICATION. In the event Executive is made, or threatened to be made, a party to any legal action or proceeding, whether civil or criminal, by reason of the fact that Executive is or was a director or officer of the Company or serves or served any other corporation or other person which is at least fifty percent (50%) or more owned by the Company or controlled by the Company in any capacity at the Company's request, Executive shall be indemnified by the Company, and the Company shall pay Executive's related expenses when and as incurred, all to the fullest extent not prohibited by law, as more fully described in that Indemnification Agreement between

the Company and Executive dated as of January 1, 2003, and attached hereto as Exhibit A.

3. EXPENSES AND BENEFITS.

3.1 REASONABLE AND NECESSARY BUSINESS EXPENSES. In addition to the compensation provided for in Section 2 hereof, the Company shall reimburse Executive for all reasonable, customary and necessary expenses incurred in the performance of Executive's duties hereunder. Executive shall first account for such expenses by submitting a signed statement itemizing such expenses prepared in accordance with the policy set by the Company for reimbursement of such expenses. The amount, nature and extent of reimbursement for such expenses shall always be subject to the control, supervision and direction of the CEO, Chief Financial Officer and the Board, or such other persons as may be specified from time to time by the CEO.

3.2 BENEFITS. During Executive's full-time employment with the Company, pursuant to this Agreement:

(a) Executive shall be eligible to participate in the Company's standard U.S. health insurance, life insurance and disability insurance plans, as such plans may be modified from time to time; and

3.3 SARBANES-OXLEY ACT LOAN PROHIBITION. To the extent that any company benefit, program, practice, arrangement, or any term of this Agreement would or might otherwise result in the Company's extension of a credit arrangement to Executive not permissible under the Sarbanes-Oxley Act of 2002 (a "Loan"), the Company will use reasonable efforts to provide Executive with a substitute for such Loan, which is lawful and of at least equal value. If this cannot be done, or if doing so

would be significantly more expensive to the Company than making a Loan, then the Company need not make or maintain a Loan or provide a substitute for it.

4. TERMINATION OF EMPLOYMENT.

4.1 GENERAL. Executive's employment by the Company under this Agreement shall terminate immediately upon delivery to Executive of written notice of termination by the Company, upon the Company's receipt of written notice of termination by Executive within thirty (30) days before the specified effective date of such termination, or upon Executive's death or Permanent Disability (as defined in Section 4.4 hereof). In the event that (i) the Company terminates Executive's employment, except where Executive is terminated for Cause (as defined in Section 4.2 hereof) or as the result of a Permanent Disability or death, or (ii) where Executive voluntarily terminates his employment in connection with a Constructive Termination (as defined in Section 4.3 hereof), or (iii) where Executive voluntarily terminates his employment, for any reason, with an effective date between December 15, 2004 and December 30, 2004, the Company shall provide Executive with the benefits as set forth in the Executive Transition and Release Agreement, in the form attached hereto as Exhibit B ("Transition Agreement") upon execution by Executive at or about the effective date of such termination of the Transition Agreement.

Section 8 hereof); (6) Executive's material failure/refusal to perform his assigned duties, and, where such failure/refusal is curable, if such failure/refusal is not cured within thirty (30) days following delivery of written notice thereof from the Company; or (7) Executive's material breach of the Company's Code of Business Conduct, as such code may be revised from time to time, after written notice delivered to Executive identifying such breach and his failure to cure such breach, if curable, within thirty (30) days following delivery of such notice.

4.3 CONSTRUCTIVE TERMINATION. Notwithstanding anything in this Section 4 to the contrary, Executive may, upon written notice to the Company, voluntarily end his employment upon or within ninety (90) days following the occurrence of an event constituting a Constructive Termination and be eligible to receive the benefits set forth in the Transition Agreement in exchange for executing and delivering that agreement in accordance with Section 9.3 hereof. For purposes of this Agreement, "Constructive Termination" shall mean:

(a) a reduction, without Executive's written consent, in Executive's Base Salary in effect on the Effective Date (or such higher level as may be in effect in the future) by more than ten percent (10%) or a reduction by more than ten percent (10%) in Executive's stated Target Bonus in effect on the Effective Date (or such greater Target Bonus amount as may be in effect in the future) under the Bonus Plan;

(b) a relocation of Executive's principal place of employment by more than thirty (30) miles, unless Executive consents in writing to such relocation;

(c) any material breach by the Company of any provision of this Agreement, after written notice delivered to the Company of such breach and the Company's failure to cure such breach, if curable, within thirty (30) days following delivery of such notice; or

(d) any failure by the Company to obtain the written assumption of this Agreement by any successor to the Company.

4.4 PERMANENT DISABILITY. For purposes of this Agreement, "Permanent Disability" shall mean any medically determinable physical or mental impairment that can reasonably be expected to result in death or that has lasted or can reasonably be expected to last for a continuous period of not less than twelve
(12) months and that renders Executive unable to perform effectively the Services pursuant to this Agreement.

4.5 CHANGE IN CONTROL.

(a) Should there occur a Change in Control (as defined below) and if within ninety (90) days prior to, or thirteen (13) months following, the Change in Control either (i) Executive is terminated without Cause or (ii) Executive resigns his employment as a result of an event constituting a Constructive Termination, then, in exchange for signing the Transition Agreement, Executive shall be entitled to all of the benefits set forth therein, except that Section 4(b) of the Transition Agreement will be replaced by the following provision: "all outstanding stock options granted and restricted stock issued by the Company to the Executive prior to the Change in Control (as defined in Section 4.5 of Executive's Employment Agreement) shall have their vesting fully accelerated so as to be 100% vested as of the Effective Date of this Agreement. This acceleration will have no effect on any other provisions of the plans governing the stock options and restricted stock."

(b) For purposes of this Section 4.5, a Change in Control shall be deemed to occur upon the consummation of any one of the following events:

(i) any "person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by the Company's then outstanding voting securities;

(ii) except pursuant to the exception applicable to clause
(iii) below, 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 ("Incumbent Directors" means directors who either (i) are directors of the Company as of the Effective Date, 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, but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Board);

(iii) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation in which-the holders of the Company's outstanding voting securities immediately prior to such merger or consolidation receive, in exchange for their voting securities of the Company in consummation of such merger or consolidation, securities possessing at least fifty percent (50%) of the total voting power represented by the outstanding voting securities of the surviving entity (or parent thereof) 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.

voluntarily terminates his employment with the Company, except if Executive voluntarily terminates his employment for any reason with an effective date between December 15, 2004 and December 30, 2004, then Executive will be paid only (a) any earned but unpaid base salary and any outstanding expense reimbursements submitted and approved pursuant to Section 3.1 hereof, and (b) other unpaid vested amounts or benefits under Company compensation, incentive and benefit plans, in each case as of the effective date of such termination.

5. EXCISE TAX.

In the event that any benefits payable to Executive pursuant to the Transition Agreement ("Termination Benefits") (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any comparable successor provisions, and (ii) but for this Section 5 would be subject to the excise tax imposed by Section 4999 of the Code, or any comparable successor provisions (the "Excise Tax"), then Executive's Termination Benefits hereunder shall be either (a) provided to Executive in full, or (b) provided to Executive as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, when taking into account applicable federal, state, local and foreign income and employment taxes, the Excise Tax, and any other applicable taxes, results in the receipt by Executive, on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under the Excise Tax. Unless the Company and Executive otherwise agree in writing, any determination required under this
Section 5 shall be made in writing in good faith by a nationally recognized accounting firm selected by the Company (the "Accountants"). In the event of a reduction of benefits hereunder, Executive shall be given the choice of which benefits to reduce. If Executive does not provide written identification to the Company of which benefits he chooses to reduce within ten (10) days after written notice of the Accountants' determination, and

Executive has not disputed the Accountants' determination, then the Company shall select the benefits to be reduced. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code, and other applicable legal authority. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 5. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5.

If, notwithstanding any reduction described in this Section 5, the IRS determines that Executive is liable for the Excise Tax as a result of the receipt of any Termination Benefits, then Executive shall be obligated to pay back to the Company, within thirty (30) days after a final IRS determination or in the event that Executive challenges the final IRS determination, a final judicial determination, a portion of the Termination Benefits equal to the "Repayment Amount." The Repayment Amount shall be the smallest such amount, if any, as shall be required to be paid to the Company so that Executive's net after-tax proceeds with respect to the Termination Benefits (after taking into account the payment of the Excise Tax and all other applicable taxes imposed on such benefits) shall be maximized. The Repayment Amount shall be zero if a Repayment Amount of more than zero would not result in Executive's net after-tax proceeds with respect to the Termination Benefits being maximized. If the Excise Tax is not eliminated pursuant to this paragraph, Executive shall pay the Excise Tax.

Executive's benefits had not previously been reduced), and (3) Executive pays the Excise Tax, then the Company shall pay to Executive those Termination Benefits which were reduced pursuant to this subsection as soon as administratively possible after Executive pays the Excise Tax so that Executive's net after-tax proceeds with respect to the payment of the Termination Benefits are maximized.

6. DISPUTE RESOLUTION.

(a) Each of the parties expressly agrees that, to the extent permitted by applicable law and to the extent that the enforceability of this Agreement is not thereby impaired, any and all disputes, controversies or claims between Executive and the Company arising under this Agreement (as opposed to the Transition Agreement), except those arising under Section 6(d) hereof or under the Proprietary Information Agreement (as defined in Section 8 hereof), shall be determined exclusively by final and binding arbitration before a single arbitrator in accordance with the JAMS Arbitration Rules and Procedures, or successor rules then in effect, and that judgment upon the award of the arbitrator may be rendered in any court of competent jurisdiction. This includes, without limitation, any and all disputes, controversies, and/or claims arising out of or concerning Executive's employment by the Company or the termination of his employment or this Agreement, and includes, without limitation, claims by Executive against directors, officers or employees of the Company, whether arising under theories of liability or damages based on contract, tort or statute, to the full extent permitted by law. As a material part of this agreement to arbitrate claims, the parties expressly waive all rights to a jury trial in court on all statutory or other claims. This Section 6 does not purport to limit either party's ability to recover any remedies provided for by statute, including attorneys' fees.

proceeding, the parties shall select a mutually acceptable, neutral arbitrator from among the JAMS panel of arbitrators. Except as provided herein, the Federal Arbitration Act shall govern the interpretation and enforcement of such arbitration proceeding. The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the State of California, or federal law, if California law is preempted, and the arbitrator is without jurisdiction to apply any different substantive law. The parties agree that they will be allowed to engage in adequate discovery, the scope of which will be determined by the arbitrator, consistent with the nature of the claims in dispute. The arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. The arbitrator shall render an award that shall include a written statement of opinion setting forth the arbitrator's findings of fact and conclusions of law. Judgment upon the award may be entered in any court having jurisdiction thereof. The parties intend this arbitration provision to be valid, enforceable, irrevocable and construed as broadly as possible.

(c) The Company shall be responsible for payment of the arbitrator's fees as well as all administrative fees associated with the arbitration. The parties shall be responsible for their own attorneys' fees and costs (including expert fees and costs), except that if any party prevails on a statutory claim that entitles the prevailing party to a reasonable attorneys' fees (with or without expert fees) as part of the costs, the arbitrator may award reasonable attorneys' fees (with or without expert fees) to the prevailing party in accord with such statute.

competent jurisdiction, and enforce, an injunction prohibiting Executive from violating Section 1.3 of this Agreement or any provision of the Proprietary Information Agreement (as defined in Section 8 hereof) and requiring Executive to comply with the terms of those agreements.

7. COOPERATION WITH THE COMPANY AFTER TERMINATION OF THE EMPLOYMENT PERIOD.

Following his termination of full-time employment for any reason (other than death), Executive shall cooperate with the Company in all matters relating to the winding up of his pending work on behalf of the Company and the orderly transfer of any such pending work to other employees of the Company as may be designated by the Company. Such cooperation shall be provided by Executive at mutually-convenient times. Executive also agrees to participate as a witness in any litigation or regulatory proceeding to which the Company is a party at the request of the Company upon delivery to Executive of reasonable advance notice. With respect to the cooperation/participation described in the preceding sentences, the Company will reimburse Executive for all reasonable expenses incurred by Executive in the course of such cooperation/participation. Furthermore, Executive agrees to return to the Company all property of the Company, including all hard and soft copies of records, documents, materials and files relating to confidential, proprietary or sensitive company information in his possession or control, as well as all other company-owned property in his possession or control, at the time of the termination of his full-time employment, except to the extent that retention of any of such property is necessary or desirable or convenient in order to permit Executive to satisfy his obligations under this Section 7 or under the Transition Agreement, after which time Executive shall promptly return all such retained company property.

8. PROPRIETARY INFORMATION AGREEMENT.

9. GENERAL.

9.1 WAIVER. Neither party shall, by mere lapse of time, without giving notice or taking other action hereunder, be deemed to have waived any breach by the other party of any of the provisions of this Agreement. Further, the waiver by either party of a particular breach of this Agreement by the other shall neither be construed as, nor constitute, a continuing waiver of such breach or of other breaches of the same or any other provision of this Agreement.

9.2 SEVERABILITY. If for any reason a court of competent jurisdiction or arbitrator finds any provision of this Agreement to be unenforceable, the provision shall be deemed amended as necessary to conform to applicable laws or regulations, or if it cannot be so amended without materially altering the intention of the parties, the remainder of the Agreement shall continue in full force and effect as if the offending provision were not contained herein.

9.3 NOTICES. All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be considered effective either (a) upon personal service or (b) upon delivery by facsimile and depositing such notice in the U.S. Mail, postage prepaid, return receipt requested and, if addressed to the Company, in care of the General Counsel at the Company's principal corporate address, and, if addressed to Executive, at his most recent address shown on the Company's corporate records or at any other address which Executive may specify in any appropriate notice to the Company, or
(c) upon only depositing such notice in the U.S. Mail as described in clause (b) of this paragraph.

9.4 COUNTERPARTS. This Agreement may be executed by facsimile and in any number of counterparts, each of which shall be deemed an original and all of which taken together constitutes one and the same instrument and in making proof hereof it shall not be necessary to produce or account for more than one such counterpart.

9.5 ENTIRE AGREEMENT. The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement, the exhibits to this Agreement, any existing stock option agreements between the parties, and the documents, plans and policies referred to in this Agreement (which are hereby incorporated herein by reference) constitute the complete and exclusive statement of the agreement between the parties and supersedes all proposals (oral or written), understandings, agreements (including, but not limited to, the Executive Retention Agreement signed by Executive on or about July 1, 2003), representations, conditions, covenants, and all other communications between the parties relating to the subject matter hereof; provided, however, that the Employee Invention and Confidential Information Agreement signed by Executive on or about December 8, 2000 and Executive's agreement, made prior to the Effective Date of this Agreement, to abide by the Company's policies, including but not limited to the Company's Employee Handbook, Sexual Harassment Policy and Code of Business Conduct, remain in full force and effect and govern Executive's conduct from the date of execution of such agreements until the Effective Date of this Agreement.

9.6 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, without regard to its conflict of laws principles.

any right to assign his obligations under this Agreement and shall only be entitled to assign his rights under this Agreement upon his death, solely to the extent permitted by this Agreement, or as otherwise agreed to by the Company.

9.8 AMENDMENTS. This Agreement, and the terms and conditions of the matters addressed in this Agreement, may only be amended in writing executed both by the Executive and the General Counsel or CEO of the Company.

9.9 TERMINATION AND SURVIVAL OF CERTAIN PROVISIONS. This Agreement shall terminate upon the termination of Executive's full-time employment for any reason; provided, however, that the following provisions of this Agreement shall survive its termination: Executive's obligations under Section 7 hereof, the Company's obligations to provide compensation earned through the termination of the employment relationship under Sections 2 and 3 hereof, the Company's obligations and Executive's obligations under Section 5 hereof, the Company's obligations and Executive's obligations enumerated in the Transition Agreement, if applicable, the Company's obligation to indemnify Executive pursuant to
Section 2.4 hereof and the referenced Indemnification Agreement, the dispute resolution provisions of Section 6 hereof and, to the extent applicable, this
Section 9.

9.10 DEPARTMENT OF HOMELAND SECURITY VERIFICATION REQUIREMENT. If Executive has not already done so, he will timely file all documents required by the Department of Homeland Security to verify his identity and his lawful employment in the United States. Notwithstanding any other provision of this Agreement, if Executive fails to meet any such requirements promptly after receiving a written request from the Company to do so, his employment will terminate immediately upon notice from the Company and he will not be entitled to any compensation from the Company of any type.

9.11 HEADINGS. The headings of the several sections and paragraphs of this Agreement are inserted solely for the convenience of reference and are not a part of

and are not intended to govern, limit or aid in the construction of any term or provision hereof.

9.12 TAXES AND OTHER WITHHOLDINGS. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable hereunder all federal, state, local and foreign taxes and other amounts that are required to be withheld by applicable laws or regulations, and the withholding of any amount shall be treated as payment thereof for purposes of determining whether Executive has been paid amounts to which he is entitled.

IN WITNESS WHEREOF, the parties have executed this Agreement on this 24th day of May, 2004.

CADENCE DESIGN SYSTEMS, INC.                    EXECUTIVE

By: /s/ R.L. Smith McKeithen                    /s/ Lavi Lev
    ------------------------------              --------------------------------
    R.L. Smith McKeithen Lavi Lev               Lavi Lev

Title: Sr. VP & General Counsel

EXHIBIT A

INDEMNIFICATION AGREEMENT

INDEMNITY AGREEMENT

This Indemnity Agreement (this "Agreement"), dated as of January 1, 2003, is made by and between Cadence Design Systems, Inc., a Delaware corporation (the "Company"), and Lavi Lev, Executive Vice President of the Company (the "Indemnitee").

RECITALS

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;

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 the Indemnitee 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 the Indemnitee, after retirement or in the event of the Indemnitee's death, the Indemnitee's 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 claims against such persons in connection with their service;

G. 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

H. The Indemnitee is willing to serve, or to continue to serve, the Company and/or the subsidiaries of the Company that the Indemnitee 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) Covered Person. For purposes of this Agreement, a "covered person" shall include the Indemnitee and any heir, executor, administrator or other legal representative of the Indemnitee following the Indemnitee's death or incapacity.

(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 of the Delaware General Corporation Law or otherwise.

(c) Proceeding. For the purposes of this Agreement, "proceeding" means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, legislative, investigative or any other type whatsoever, and including any of the foregoing commenced by or on behalf of the Company, derivatively or otherwise.

(d) Subsidiary. For 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, 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 the Company and/or its subsidiaries in the Indemnitee's present capacity, so long as the Indemnitee is duly appointed or elected or until such time as the Indemnitee tenders a written resignation; 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 officer or director of the Company or any of its subsidiaries, and thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of such service, the Company, subject to Section 3(b), shall use reasonable efforts to obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers.

4. Mandatory Indemnification.

(a) Right to Indemnification. In the event a covered person was or is made a party or is threatened to be made a party to or is involved in any proceeding, by reason of the fact that the Indemnitee is or was a director, officer or employee of the Company (including any subsidiary or affiliate thereof or any constituent corporation or any of the foregoing absorbed in any merger) or is or was serving at the request of the Company (including such subsidiary, affiliate or constituent corporation) as a director, officer or employee of another corporation, or of a partnership, joint venture, trust or other entity, including service with respect to employee benefit plans, such person shall be indemnified and held harmless by the Company to the fullest extent permitted by applicable law, against all expenses, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise and other taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Such indemnification shall continue after the Indemnitee has ceased to serve in such capacity and shall inure to the benefit of the Indemnitee's heirs, executors and administrators; provided, however, that except for a proceeding pursuant to
Section 7, the Company shall indemnify any such person in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Company.

(b) Exception for Amounts Covered by Insurance. Notwithstanding the foregoing, the Company shall not be obligated to indemnify a covered person for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, forfeitures, attorneys' fees, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to such person by D&O Insurance.

(c) Partial Indemnification. If a covered person 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, forfeitures, attorneys' fees, ERISA excise taxes or penalties, and amounts paid in settlement) incurred by the Indemnitee in the investigation, defense, settlement or appeal of a proceeding,

but is not entitled, however, to indemnification for all of the total amount thereof, the Company shall nevertheless indemnify such person for such total amount except as to the portion thereof to which the Indemnitee is not entitled.

5. Mandatory Advancement of Expenses. The Company shall pay all expenses incurred by a covered person, or in defending any such proceeding as they are incurred in advance of its final disposition; provided, however, that if the Delaware General Corporation Law then so requires, the payment of such expenses incurred in advance of the final disposition of such proceeding shall be made only upon delivery to the Company of an undertaking, by or on behalf of such covered person, to repay all amounts so advanced if it should be determined ultimately that such person is not entitled to the payment of such expenses by the Company.

6. Notice and Other Indemnification Procedures.

(a) Promptly after receipt by a covered person of notice of the commencement of or the threat of commencement of any proceeding, such person shall, if such person 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.

(c) In the event the Company shall be obligated to advance the expenses for any proceeding against the covered person, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the covered person (such approval not to be unreasonably withheld or delayed), upon the delivery to the covered person of written notice of its election so to do. After delivery of such notice, approval of such counsel by the covered person and the retention of such counsel by the Company, the Company will not be liable to the covered person under this agreement for any fees of counsel subsequently incurred by the covered person with respect to the same proceeding, provided that (i) the covered person shall have the right to employ separate counsel in any such proceeding at the covered person's expense; and (ii) if (A) the employment of counsel by the covered person has been previously authorized by the Company, (B) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, or (C) it is determined by legal counsel for the Company and the Indemnitee that a conflict of interest exists requiring the Indemnitee to retain separate counsel, the fees and expenses of the covered person's counsel shall be at the expense of the Company.

7. Right of Indemnitee to Bring Suit. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the Company within sixty days after a written claim has been received by the Company, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the covered person may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim. If

successful in whole or in part in any such suit, or in a suit brought by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the covered person shall be entitled to be paid also the expense of prosecuting or defending such suit. In any suit brought by a covered person to enforce a right to indemnification hereunder (but not in a suit brought by a covered person to enforce a right to an advancement of expenses) it shall be a defense that indemnification is not permitted by applicable law. Further, in any suit by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the Company shall be entitled to recover such expenses upon a final adjudication that indemnification is not permitted by applicable law. Neither the failure of the Company (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the covered person is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or its stockholders) that indemnification is not proper, shall create a presumption that the covered person is not entitled to indemnification or, in the case of such a suit brought by a covered person, be a defense to such suit. In any suit brought by a covered person to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the covered person is not entitled to be indemnified, or to such advancement of expenses, shall be on the Company.

8. 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, the Indemnitee's 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 of 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 8 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.

9. 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 or any covered person 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 the Indemnitee's official capacity and to action in another capacity while occupying the Indemnitee's position as an officer, director or employee of the Company, and the Indemnitee's right hereunder shall continue after the Indemnitee has ceased to so act and shall inure to the benefit of any heir, executor, administrator or other legal representative of the Indemnitee.

10. 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.

11. 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 Section 10 hereof.

12. 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.

13. 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.

14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) upon receipt, if delivered by hand, or (ii) on the third business day after the mailing date, if mailed by certified or registered mail with postage prepaid. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.

15. 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.

16. 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.

CADENCE DESIGN SYSTEMS, INC.

By: R.L. Smith McKeithen

R.L. Smith McKeithen Sr. Vice President, General Counsel and Secretary 2655 Seely Avenue San Jose, CA 95134

INDEMNITEE

/s/ Lavi Lev
---------------------------------------
Name: Lavi Lev

Address: 21771 HEBER WAY
SARITOGA, CA 95070
f

EXHIBIT B

EXECUTIVE TRANSITION AND RELEASE AGREEMENT

This Executive Transition and Release Agreement (this "Agreement") is entered into between Lavi Lev ("Executive") and Cadence Design Systems, Inc. ("Cadence" or the "Company").

1. TRANSITION COMMENCEMENT DATE. As of <<Transition Commencement Date>> (the "Transition Commencement Date"), Executive will no longer hold the position of Executive Vice President and General Manager and will be relieved of all of Executive's authority and responsibilities in that position. Executive will be paid all accrued salary for his services as Executive Vice President and General Manager to the Transition Commencement Date by not later than the following regular payroll date. Following the Transition Commencement Date, Executive will no longer participate in Cadence's medical, dental, and vision insurance plans (unless Executive elects to continue coverage pursuant to COBRA), and will not be eligible for a bonus for any services rendered after that date.

2. TRANSITION PERIOD. The period from the Transition Commencement Date to the date when Executive's employment with Cadence terminates (the "Termination Date") is called the "Transition Period" in this Agreement. Executive's Termination Date will be the earliest to occur of:

a. the date on which Executive resigns from all employment with Cadence;

b. the date on which Cadence terminates Executive's employment due to a breach by Executive of Executive's duties or obligations under this Agreement; and

c. one year from the Transition Commencement Date; if, however, that year concludes on or before December 15, 2005, then it is agreed that the period shall end on December 16, 2005.

3. DUTIES AND OBLIGATIONS DURING THE TRANSITION PERIOD AND AFTERWARDS.

a. During the Transition Period, Executive will assume the position of <<New Position Title>>. In this position, Executive will render those services requested by Cadence's <<Management Representative>> on an as-needed basis. Executive's time rendering those services is not expected to exceed twenty (20) hours per week but is expected to consume 20 hours per month.

b. As a Cadence Executive Vice President and General Manager, as well as other positions Executive may have held with Cadence, Executive has obtained extensive and valuable knowledge and information concerning Cadence's business (including confidential information relating to Cadence and its operations, intellectual property assets, contracts, customers, personnel, plans, marketing plans, research and development plans and prospects). Executive acknowledges and agrees that it would be virtually impossible for Executive to work as an employee, consultant or advisor in

the electronic design automation ("EDA") industry (as defined below) without inevitably disclosing confidential and proprietary information belonging to Cadence. Accordingly, during the Transition Period, Executive will not, without the prior written consent of Cadence, directly or indirectly, provide services, whether as an employee, consultant, independent contractor, agent, sole proprietor, partner, joint venture, corporate officer or director, on behalf of any corporation, limited liability company, partnership, or other entity or person that (i) is engaged in the EDA industry, (ii) directly competes against Cadence or any of its existing or future affiliates in the EDA industry anywhere in the world, or (iii) produces, markets, distributes or sells any products, directly or indirectly through intermediaries, that are competitive with EDA industry products produced, marketed, sold or distributed by Cadence. Such prior written consent shall not be unreasonably withheld by Cadence; provided, however, that such consent may be in all cases withheld with respect to the companies listed in Exhibit A attached hereto and up to five (5) other companies as may be designated by the Board of Directors of Cadence from time to time and delivered to Executive prior to the Company's termination of his employment (or, in the event Executive terminates his employment, prior to the date on which Executive has notified the Company of his decision to terminate such employment) or are named as a competitor of Cadence in the most recent applicable document filed by Cadence before the Transition Commencement Date with the Securities and Exchange Commission that contains such information.

As used in this paragraph, the term "EDA industry" means the research, design or development of electronic design automation software, electronic design verification, emulation hardware and related products, such products containing hardware, software and both hardware and/or software products, designs or solutions for, and all intellectual property embodied in the foregoing, or in commercial electronic design and/or maintenance services, such services including all intellectual property embodied in the foregoing.

c. During the Transition Period, Executive will be prohibited, to the full extent allowed by applicable law, and except with the written advance approval of Cadence's CEO (or his successor(s)), from voluntarily or involuntarily, for any reason whatsoever, directly or indirectly, individually or on behalf of persons or entities not now parties to this Agreement: (i) encouraging, inducing, attempting to induce, soliciting or attempting to solicit for employment, contractor or consulting opportunities anyone who is employed at that time, or was employed during the previous one year, by Cadence or any Cadence affiliate; (ii) interfering or attempting to interfere with the relationship or prospective relationship of Cadence or any Cadence affiliate with any former, present or future client, customer, joint venture partner, or financial backer of Cadence or any Cadence affiliate; or (iii) soliciting, diverting or accepting business, in any line or area of business engaged in by Cadence or any Cadence affiliate, from any former or present client, customer or joint venture partner of Cadence or any Cadence affiliate (other than on behalf of Cadence), except that Executive may solicit or accept business, in a line of business engaged in by Cadence or a Cadence affiliate, from a former or present client, if and only if Executive had previously provided consulting services in such line of business, to such client, prior to ever being employed by Cadence, but in no event may Executive violate paragraph 3(b) hereof. The restrictions contained in subparagraph (i)

of this paragraph 3(c) shall also be in effect for a period of one year following the Termination Date. This paragraph 3(c) does not alter any of the obligations the Executive may have under the Employee Proprietary Information Agreement, dated as of May 24, 2004.

d. Executive will fully cooperate with Cadence in all matters relating to his employment, including the winding up of work performed in Executive's prior position and the orderly transition of such work to other Cadence employees.

e. Executive will not make any statement, written or oral, that disparages Cadence or any of its affiliates, or any of Cadence's or its affiliates' products, services, policies, business practices, employees, executives, officers, or directors. Similarly, Cadence agrees to instruct its executive officers and members of the Company's Board of Directors not to make any statement, written or oral, that disparages Executive. The restrictions described in this paragraph shall not apply to any truthful statements made in response to a subpoena or other compulsory legal process.

f. Notwithstanding paragraph 10 hereof, the parties agree that damages would be an inadequate remedy for Cadence in the event of a breach or threatened breach by Executive of paragraph 3(b) or 3(c), or for Cadence or Executive in the event of a breach or threatened breach of paragraph 3(e). In the event of any such breach or threatened breach, the non-breaching party may, either with or without pursuing any potential damage remedies, obtain from a court of competent jurisdiction, and enforce, an injunction prohibiting the other party from violating this Agreement and requiring the other party to comply with the terms of this Agreement.

4. TRANSITION COMPENSATION AND BENEFITS. In consideration and compensation for Executive's services during the Transition Period, Cadence will provide the following to Executive:

a. a monthly salary of $2,000 less applicable tax withholdings and deductions, payable in accordance with Cadence's regular payroll schedule;

b. continued vesting of stock options and restricted stock granted to Executive prior to the Termination Date, provided that Executive has executed all necessary stock option and restricted stock agreements on or before <<Stock Option Agreement Execution Date>>, and with the understanding that upon Executive's Termination Date, all vested options may be exercised in accordance with the applicable stock option agreement, any unvested options will expire, and any unvested restricted stock will be forfeited;

c. if Executive elects to continue coverage under Cadence's medical, dental, and vision insurance plans pursuant to COBRA following

the Transition Commencement Date, Cadence will pay Executive's COBRA premiums during the Transition Period; and

d. continued access to Cadence voicemail.

Except as so provided, Executive will receive no other compensation or benefits from Cadence in consideration of Executive's services during the Transition Period.

5. FIRST TERMINATION PAYMENT AND BENEFITS. Provided that Executive does not resign from employment with Cadence and Cadence does not terminate Executive's employment with Cadence due to a breach by Executive of Executive's duties under this Agreement, and in consideration for Executive's acceptance of this Agreement and Executive's further execution and delivery of a Release of Claims in the form of Attachment 1 hereto, Cadence will provide to Executive within ten business days after the Effective Date (as defined in paragraph 9 hereof) of this Agreement and after Executive has returned to the Company all hard and soft copies of records, documents, materials and files relating to confidential, proprietary or sensitive company information in his possession or control, as well as all other Company-owned property, the following termination payment to which Executive would not otherwise be entitled:

a. a lump-sum payment of one year's base salary at the highest rate in effect during Executive's employment as Executive Vice President and General Manager, less applicable tax deductions and withholdings.

6. SECOND TERMINATION PAYMENT AND BENEFITS. Provided that Executive does not resign from employment with Cadence and Cadence does not terminate Executive's employment with Cadence due to a breach by Executive of Executive's duties under this Agreement, upon the Termination Date, and in consideration for Executive's acceptance of this Agreement and Executive's further execution of a Release of Claims in the form of Attachment 2 to this Agreement, Cadence will provide to Executive within ten business days after the expiration of the revocation period of the Release of Claims (as defined in that document) the following termination payment to which Executive would not otherwise be entitled:

a. a lump-sum payment of one year's target bonus at the highest rate in effect during Executive's employment as Executive Vice President and General Manager, less applicable tax deductions and withholdings.

7. GENERAL RELEASE OF CLAIMS.

derivative or class actions relate to the period during which Executive served as Executive Vice President and General Manager. The claims released include, but are not limited to, any claims arising from or related to Executive's employment with Cadence, such as claims arising under (as amended) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1974, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the California Fair Employment and Housing Act, the California Labor Code, the Employee Retirement Income and Security Act of 1974 (except for any vested right Executive has to benefits under an ERISA plan), the state and federal Worker Adjustment and Retraining Notification Act, and the California Business and Professions Code; any other local, state, federal, or foreign law governing employment; and the common law of contract and tort. In no event, however, shall any claims, causes of action, suits, demands or other obligations or liabilities be released pursuant to the foregoing if and to the extent they relate to:

i. any amounts or benefits to which Executive is or becomes entitled to pursuant to the provisions of this Agreement or pursuant to the provisions designated in Section 9.9 of the Employment Agreement to survive the termination of Executive's full-time employment;

ii. claims for workers' compensation benefits under any of the Company's workers' compensation insurance policies or funds;

iii. claims related to Executive's COBRA rights; and

iv. any rights that Executive has or may have to be indemnified by Cadence pursuant to any contract, statute, or common law principle.

b. Executive represents and warrants that he has not filed any claim, charge or complaint against any of the Releasees.

c. Executive acknowledges that the payments provided in this Agreement constitute adequate consideration for the release set forth in this paragraph 7.

d. Executive intends that this release of claims cover all claims, whether or not known to Executive. Executive further recognizes the risk that, subsequent to the execution of this Agreement, Executive may incur loss, damage or injury which Executive attributes to the claims encompassed by this release. Executive expressly assumes this risk by signing this Agreement and voluntarily and specifically waives any rights conferred by California Civil Code section 1542 which provides as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor which if known by him must have materially affected his settlement with the debtor.

e. Executive represents and warrants that there has been no assignment or other transfer of any interest in any claim by Executive that is covered by this release.

8. REVIEW OF AGREEMENT; REVOCATION OF ACCEPTANCE. Executive has been given at least 21 days in which to review and consider this Agreement, although Executive is free to accept this Agreement anytime within that 21-day period. Executive is advised to consult with an attorney about the Agreement. If Executive accepts this Agreement, Executive will have an additional 7 days from the date that Executive signs this Agreement to revoke that acceptance, which Executive may effect by means of a written notice sent to the CEO or General Counsel. If this 7-day period expires without a timely revocation, this Agreement will become final and effective on the eighth day following the date of Executive's signature, which eighth day will be the "Effective Date" of this Agreement.

9. ARBITRATION. Subject to paragraph 3(f) hereof, all claims, disputes, questions, or controversies arising out of or relating to this Agreement, including without limitation the construction or application of any of the terms, provisions, or conditions of this Agreement, will be resolved exclusively in final and binding arbitration in accordance with the Arbitration Rules and Procedures, or successor rules then in effect, of Judicial Arbitration & Mediation Services, Inc. ("JAMS"). The arbitration will be held in the San Jose, California, metropolitan area, and will be conducted and administered by JAMS or, in the event JAMS does not then conduct arbitration proceedings, a similarly reputable arbitration administrator. Executive and Cadence will select a mutually acceptable, neutral arbitrator from among the JAMS panel of arbitrators. Except as provided by this Agreement, the Federal Arbitration Act will govern the administration of the arbitration proceedings. The arbitrator will apply the substantive law (and the law of remedies, if applicable) of the State of California, or federal law, as applicable, and the arbitrator is without jurisdiction to apply any different substantive law. Executive and Cadence will each be allowed to engage in adequate discovery, the scope of which will be determined by the arbitrator consistent with the nature of the claim[s] in dispute. The arbitrator will have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and will apply the standards governing such motions under the Federal Rules of Civil Procedure. The arbitrator will render a written award and supporting opinion that will set forth the arbitrator's findings of fact and conclusions of law. Judgment upon the award may be entered in any court of competent jurisdiction. Cadence will pay the arbitrator's fees, as well as all administrative fees, associated with the arbitration. Each party will be responsible for paying its own attorneys' fees and costs (including expert witness fees and costs, if any). However, in the event a party prevails at arbitration on a statutory claim that entitles the prevailing party to reasonable attorneys' fees as part of the costs, then the arbitrator may award those fees to the prevailing party in accordance with that statute.

10. NO ADMISSION OF LIABILITY. Nothing in this Agreement will constitute or be construed in any way as an admission of any liability or wrongdoing whatsoever by Cadence or Executive.

11. INTEGRATED AGREEMENT. This Agreement is intended by the parties to be a complete and final expression of their rights and duties respecting the subject matter of this Agreement. Except as expressly provided herein, nothing in this Agreement is intended to negate Executive's agreement to abide by Cadence's policies while serving as a Cadence employee, including but not limited to Cadence's Employee Handbook, Sexual Harassment Policy and Code of Business Conduct, or Executive's continuing obligations under Executive's Employee Proprietary Information and Inventions Agreement, or any other agreement governing the disclosure and/or use of proprietary information, which Executive signed while working with Cadence or its predecessors; nor to waive any of Executive's obligations under state and federal trade secret laws.

12. FULL SATISFACTION OF COMPENSATION OBLIGATIONS; ADEQUATE CONSIDERATION. Executive agrees that the payments and benefits provided herein are in full satisfaction of all obligations of Cadence to Executive arising out of or in connection with Executive's employment through the Termination Date, including, without limitation, all compensation, salary, bonuses, reimbursement of expenses, and benefits.

13. TAXES AND OTHER WITHHOLDINGS. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable hereunder all federal, state, local and foreign taxes and other amounts that are required to be withheld by applicable laws or regulations, and the withholding of any amount shall be treated as payment thereof for purposes of determining whether Executive has been paid amounts to which he is entitled.

14. WAIVER. Neither party shall, by mere lapse of time, without giving notice or taking other action hereunder, be deemed to have waived any breach by the other party of any of the provisions of this Agreement. Further, the waiver by either party of a particular breach of this Agreement by the other shall neither be construed as, nor constitute, a continuing waiver of such breach or of other breaches of the same or any other provision of this Agreement.

15. MODIFICATION. This Agreement may not be modified unless such modification is embodied in writing, signed by the party against whom the modification is to be enforced.

16. ASSIGNMENT AND SUCCESSORS. Cadence shall have the right to assign its rights and obligations under this Agreement to an entity that, directly or indirectly, acquires all or substantially all of the assets of Cadence. The rights and obligations of Cadence under this Agreement shall inure to the benefit and shall be binding upon the successors and assigns of Cadence. Executive shall not have any right to assign his obligations under this Agreement and shall only be entitled to assign his rights under this Agreement upon his death, solely to the extent permitted by this Agreement, or as otherwise agreed to by Cadence.

17. SEVERABILITY. In the event that any part of this Agreement is found to be void or unenforceable, all other provisions of the Agreement will remain in full force and effect.

18. GOVERNING LAW. This Agreement will be governed and enforced in accordance with the laws of the State of California, without regard to its conflict of laws principles.

EXECUTION OF AGREEMENT

The parties execute this Agreement to evidence their acceptance of it.

Dated: ____________________________.         Dated: ___________________________.

Lavi Lev                                     CADENCE DESIGN SYSTEMS, INC.

____________________________________         By: _______________________________
                                                        <<HRVP_Name>>
                                                        <<HRVP_ Title_1>>

ATTACHMENT 1

RELEASE OF CLAIMS

1. For valuable consideration, I irrevocably, fully and finally release Cadence Design Systems, Inc. ("Cadence"), its parent, subsidiaries, affiliates, directors, officers, agents and employees from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, suspected or unsuspected, that I ever had or now have as of the time that I sign this Release which relate to my hiring, my employment with Cadence, the termination of my employment with Cadence and claims asserted in shareholder derivative actions or shareholder class actions against Cadence and its officers and Board of Directors, to the extent those derivative or class actions relate to the period during which I served as Executive Vice President and General Manager. The claims released include, but are not limited to, any claims arising from or related to my employment with Cadence, such as claims arising under (as amended) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1974, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the California Fair Employment and Housing Act, the California Labor Code, the Employee Retirement Income and Security Act of 1974 (except for any vested right I have to benefits under an ERISA plan), the state and federal Worker Adjustment and Retraining Notification Act, and the California Business and Professions Code; any other local, state, federal, or foreign law governing employment; and the common law of contract and tort. This Release is not intended to, and does not, encompass any right to compensation or benefits that I have under my Executive Transition and Release Agreement with Cadence. In no event, however, shall any claims, causes of action, suits, demands or other obligations or liabilities be released pursuant to the foregoing if and to the extent they relate to:

i. any amounts or benefits to which I am or become entitled to pursuant to the provisions of this Agreement or pursuant to the provisions designated in Section 9.9 of the Employment Agreement to survive the termination of my full-time employment;

ii. claims for workers' compensation benefits under any of the Company's workers' compensation insurance policies or funds;

iii. claims related to my COBRA rights; and

iv. any rights that I have or may have to be indemnified by Cadence pursuant to any contract, statute, or common law principle.

2. I intend that this Release cover all claims, whether or not known to me. I further recognize the risk that, subsequent to the execution of this Agreement, I may incur loss, damage or injury which I attribute to the claims encompassed by this Release. I expressly assume this risk by signing this Release and voluntarily and specifically waive any rights conferred by California Civil Code section 1542 which provides as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor which if known by him must have materially affected his settlement with the debtor.

3. I represent and warrant that there has been no assignment or other transfer of any interest in any claim by me that is covered by this Release.

4. I acknowledge that Cadence has given me 21 days in which to consider this Release and advised me to consult an attorney about it. I further acknowledge that once I execute this Release, I will have an additional 7 days in which to revoke my acceptance of this Release by means of a written notice of revocation given to ______________. This Release will not be final and effective until the expiration of this revocation period.

Dated: ____________________                _____________________________________
                                                        Print Name
                                           _____________________________________
                                                        Sign Name

ATTACHMENT 2

RELEASE OF CLAIMS

1. For valuable consideration, I irrevocably, fully and finally release Cadence Design Systems, Inc. ("Cadence"), its parent, subsidiaries, affiliates, directors, officers, agents and employees from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, suspected or unsuspected, that I ever had or now have as of the time that I sign this Release which relate to my hiring, my employment with Cadence, the termination of my employment with Cadence and claims asserted in shareholder derivative actions or shareholder class actions against Cadence and its officers and Board of Directors, to the extent those derivative or class actions relate to the period during which I served as Executive Vice President and General Manager. The claims released include, but are not limited to, any claims arising from or related to my employment with Cadence, such as claims arising under (as amended) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1974, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the California Fair Employment and Housing Act, the California Labor Code, the Employee Retirement Income and Security Act of 1974 (except for any vested right I have to benefits under an ERISA plan), the state and federal Worker Adjustment and Retraining Notification Act, and the California Business and Professions Code; any other local, state, federal, or foreign law governing employment; and the common law of contract and tort. This Release is not intended to, and does not, encompass any right to compensation or benefits that I have under my Executive Transition and Release Agreement with Cadence. In no event, however, shall any claims, causes of action, suits, demands or other obligations or liabilities be released pursuant to the foregoing if and to the extent they relate to:

ii. claims for workers' compensation benefits under any of the Company's workers' compensation insurance policies or funds;

iii. claims related to my COBRA rights; and

iv. any rights that I have or may have to be indemnified by Cadence pursuant to any contract, statute, or common law principle.

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor which if known by him must have materially affected his settlement with the debtor.

3. I represent and warrant that there has been no assignment or other transfer of any interest in any claim by me that is covered by this Release.

Dated: ____________________.               _____________________________________
                                                       Print Name
                                           _____________________________________
                                                       Sign Name

EXHIBIT C

EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT

AMENDMENT TO THE CADENCE DESIGN SYSTEMS, INC. EMPLOYMENT
AGREEMENT WITH LAVI LEV

The following provision is substituted for the existing Paragraph 2 in the Executive Transition and Release Agreement, which is attached to the Cadence Design Systems, Inc. Employment Agreement with Lavi Lev ("Employment Agreement"):

a. the date on which Executive resigns from all employment with Cadence;

b. the date on which Cadence terminates Executive's employment due to a breach by Executive of Executive's duties or obligations under this Agreement; and

c. one year from the Transition Commencement Date; if, however, that year concludes on or before February 1, 2006, then it is agreed that the period shall end on February 2, 2006.

Except as expressly provided by this amendment, the Employment Agreement and its exhibits remain in full force and effect.

IN WITNESS WHEREOF, the parties have executed this Amendment to the Employment Agreement on this 24th day of June, 2004.

CADENCE DESIGN SYSTEMS, INC.                        EXECUTIVE

By: /s/ R.L. Smith McKeithen                        /s/ lavi Lev
    ---------------------------------------         ---------------------------
    R.L. Smith McKeithen                            Lavi Lev

Title: Sr. VP & General Counsel

EXHIBIT 10.80

CADENCE DESIGN SYSTEMS, INC.
EMPLOYMENT AGREEMENT
WITH KEVIN BUSHBY

THIS AGREEMENT (this "Agreement") is made effective as of May 26, 2004 (the "Effective Date"), between CADENCE DESIGN SYSTEMS, INC., a Delaware corporation (the "Company"), and KEVIN BUSHBY ("Executive").

WHEREAS, Executive is currently employed by the Company as Executive Vice President, Worldwide Field Operations;

WHEREAS, Executive and 849 College Avenue, Inc., a wholly-owned subsidiary of the Company (the "Landlord"), have entered into that certain Residential Lease dated as of March 1, 2003 (the "Residential Lease"); and

WHEREAS, the Company and Executive wish to enter into a formal employment agreement on the terms and conditions as set forth herein.

NOW, THEREFORE, in consideration of the premises and of the covenants and agreements set forth below, it is mutually agreed as follows:

1. TERM AND DUTIES.

1.1 EFFECTIVE DATE. The Company hereby employs Executive and Executive hereby accepts employment pursuant to the terms and provisions of this Agreement commencing on the Effective Date. Executive has been employed and shall continue to be employed on an at will basis, meaning that either Executive or the Company may terminate Executive's employment at any time, with or without Cause (as defined in Section 4.2 hereof), in the manner specified herein.

1.2 SERVICES.

(a) Executive shall continue to have the title of Executive Vice President, Worldwide Field Operations. Executive's duties will be assigned to Executive by the Company's Chief Executive Officer ("CEO"), to whom Executive will report at all

times during his employment (other than during any Transition Period described in Exhibit B), unless Executive otherwise agrees in writing.

(b) Executive shall be required to comply with all applicable company policies and procedures, as such shall be adopted, modified or otherwise established by the Company from time to time.

1.3 SERVICES TO BE EXCLUSIVE. During his employment with the Company, Executive agrees to devote his full productive time and best efforts to the performance of Executive's duties hereunder. Executive further agrees, as a condition to the performance by the Company of each and all of its obligations hereunder, that so long as Executive is employed by the Company or receiving compensation or any other consideration from the Company, he will not directly or indirectly render services of any nature to, otherwise become employed by, serve on the board of directors of, or otherwise participate or engage in any other business without the CEO's prior written consent. Nothing herein contained shall preclude Executive from (a) serving on the board of directors of up to two other companies so long as such companies are not engaged in the "EDA industry" (as that phrase is defined in Exhibit B), and (b) having outside personal investments and involvement with appropriate community activities. With respect to the activities described in the previous sentence, Executive may devote a reasonable amount of time to such matters, provided that they shall in no manner interfere with or derogate from Executive's work for the Company.

1.4 OFFICE. The Company shall maintain an office for Executive at the Company's corporate headquarters, which currently are located in San Jose, California.

2. COMPENSATION.

The Company shall pay to Executive, and Executive shall accept as full consideration for the Services, compensation consisting of the following:

2.1 BASE SALARY. The Company shall pay Executive a base salary of Four Hundred Fifty Thousand Dollars ($450,000) per year ("Base Salary"), payable in

installments in accordance with the Company's customary payroll practices, less such deductions and withholdings required by law or authorized by Executive. The Board of Directors of the Company (the "Board") or the Compensation Committee of the Board (the "Compensation Committee") shall review the amount of the Base Salary from time to time, but no less frequently than annually.

2.2 BONUS. Executive shall participate in the Company's Senior Executive Bonus Plan or its successor (the "Bonus Plan") at an annual target bonus of Six Hundred Fifty Thousand Dollars ($650,000) (the "Target Bonus") pursuant to the terms of such Bonus Plan (the criteria for earning a bonus thereunder are set annually by the Compensation Committee). The Board or the Compensation Committee shall review the amount of the Target Bonus from time to time, but no less frequently than annually.

2.3 EQUITY GRANTS. Executive has previously been granted stock options by the Company which remain in full force and effect in accordance with the terms of the stock option agreements documenting such grants. Executive shall be eligible to receive additional grants of either restricted stock or stock options or both as the Compensation Committee may determine from time to time. All stock options shall be granted at one hundred percent (100%) of the fair market value of the Company's common stock on the date of grant. Any awards shall vest in accordance with the Company's vesting policy for additional grants to executive officers of the Company in effect on the date of the grant by the Compensation Committee, and shall contain such other terms and conditions as shall be set forth in the agreement documenting the grant.

request, Executive shall be indemnified by the Company, and the Company shall pay Executive's related expenses when and as incurred, all to the fullest extent not prohibited by law, as more fully described in that Indemnification Agreement between the Company and Executive dated as of May 14, 2004, and attached hereto as Exhibit A.

3. EXPENSES AND BENEFITS.

3.2 BENEFITS. During Executive's full-time employment with the Company, pursuant to this Agreement:

(a) Executive shall be eligible to participate in the Company's standard U.S. health insurance, life insurance and disability insurance plan, as such plans may be modified from time to time;

(c) In lieu of payments to the Cadence UK Employee Benefit Trust 2002, to provide funding for a private retirement plan for Executive, the Company shall pay Executive, through fiscal 2005 (1) each month, an amount equal to 0.833% of Executive's annual Base Salary, and (2) an amount equal to 10% of any bonus paid to

Executive at the time any bonus payments are made (even if the bonus for fiscal 2005 is paid in 2006);

(d) The Company shall provide Executive with cost of living adjustment payments in the net amount (after deduction of all applicable taxes and other withholdings) of $6,600 per month until the later of (i) the end of the Transition Period defined in Exhibit B, or (ii) the termination of Executive's full-time employment for any reason;

(e) The Company shall provide, at its cost, the legal and other assistance necessary to process "green cards" (or other permanent resident status) for Executive and the other members of Executive's immediate family, who are eligible as derivative beneficiaries, as well as to address any other U.S. immigration issues that may arise for Executive and his family during Executive's employment with the Company, including during the Transition Period, if applicable, described in the Executive Transition and Release Agreement, in the form attached hereto as Exhibit B (the "Transition Agreement"). However, this paragraph shall not be construed as a guarantee by the Company that the Executive will be able to obtain a "green card";

(f) In the event Executive's employment with the Company is terminated other than for Cause (as defined in Section 4.2 hereof) or if Executive resigns his employment as a result of an event constituting a Constructive Termination (as defined in Section 4.3 hereof), and Executive relocates from the San Francisco Bay Area to the United Kingdom within twelve
(12) months after such termination of Executive's full-time employment, or such other date agreed to in writing by the Company in its sole discretion, the Company shall reimburse Executive for all reasonable, customary and necessary moving and relocation expenses, including airfare for Executive's family, incurred by Executive;

(g) The Company will cause the Landlord not to exercise its right to terminate the Residential Lease, except upon Executive's default thereunder, during

Executive's full-time employment with the Company. If the Residential Lease expires during Executive's employment with the Company, the Company will negotiate in good faith to extend the term of the Residential Lease. In the event Executive's employment with the Company is terminated other than for Cause (as defined in Section 4.2 hereof) or if Executive resigns his employment as a result of an event constituting Constructive Termination (as defined in Section 4.3 hereof), the Company will cause the Landlord not to exercise its right to terminate the Residential Lease, except upon Executive's default thereunder, such that Executive will remain a tenant until 12 months following the date upon which Executive's employment is terminated other than for Cause or as a result of a Constructive Termination;

(h) The Company shall, pursuant to its standard tax equalization practices and subject to the limitation set forth below, pay such additional amounts to Executive as may be necessary to cause Executive's overall income tax expense with respect to his (a) base salary and cash bonus received, and ordinary income from the exercise of stock options during the year ended December 31, 2003, and (b) base salary and cash bonus received from the Company during the calendar years ended December 31, 2004 and 2005, to be no greater than what such income tax expense would have been with respect to such base salary, cash bonus and, in the case of the year ended December 31, 2003, ordinary income from the exercise of stock options, had Executive resided in the United Kingdom for the entirety of each such year. The equalization payments hereunder shall be determined by taking into account such factors as the Company reasonably determines are relevant to the determination of Executive's overall tax cost and tax cost applicable to base salary and cash bonus, and shall be grossed up as necessary to take into account any taxes imposed on the amounts paid pursuant to the preceding sentence. Notwithstanding anything in this paragraph to the contrary, the amount payable by the Company to Executive hereunder (not including any "gross up" payment pursuant to the preceding sentence) with respect

to each of the years ended December 31, 2004 and 2005 shall in no event exceed the amount that would be payable with respect to such year if the aggregate tax rate applicable to Executive for such year exceeded the aggregate tax rate that would have been applicable to Executive had he been a resident of the United Kingdom for the entirety of such year by no more than three percent (3%). In addition to the foregoing, the Company shall pay to Executive, on an after-tax basis, the following (1) any fines, penalties and interest incurred as a result of a delay in filing caused, or incorrect information provided to Executive, by the Company, and (2) the reasonable cost incurred by Executive to prepare his income tax returns for the taxable year ended December 31, 2003, and, to the extent related to items pertaining solely to his income from the Company, for the taxable years ended December 31, 2004 and 2005.

4. TERMINATION OF EMPLOYMENT.

Disability or death, or where Executive voluntarily terminates his employment other than a Constructive Termination (as defined in Section 4.3 hereof), and upon execution by Executive at or about the effective date of such termination of the Transition Agreement, in the form attached hereto as Exhibit B, the Company shall provide Executive with the benefits as set forth in the Transition Agreement.

4.2 DEFINITION OF CAUSE. For purposes of this Agreement, "Cause" shall be deemed to mean: (1) Executive's gross misconduct or fraud in the performance of his duties under this Agreement; (2) Executive's conviction or guilty plea or plea of nolo contendere with respect to any felony or act of moral turpitude;
(3) Executive's engaging in any material act of theft or material misappropriation of company property in connection with his employment; (4) Executive's material breach of this Agreement, after written notice delivered to Executive of such breach and failure to cure such breach, if curable, within thirty (30) days following delivery of such notice;(5) Executive's material breach of the Proprietary Information Agreement (as defined in Section 8 hereof); (6) Executive's material refusal to perform his assigned duties, and, where such refusal is curable, if such refusal is not cured within thirty (30) days following delivery of written notice thereof from the Company; or (7) Executive's material breach of the Company's Code of Business Conduct as such code may be revised from time to time.

4.3 CONSTRUCTIVE TERMINATION. Notwithstanding anything in this Section 4 to the contrary, Executive may, upon written notice to the Company, voluntarily end his employment upon or within ninety (90) days following the occurrence of an event constituting a Constructive Termination and be eligible to receive the benefits set forth in the Transition Agreement in exchange for executing and delivering that agreement in accordance with Section 9.3 hereof. For purposes of this Agreement, "Constructive Termination" shall mean:

(a) a material adverse change, without Executive's written consent, in Executive's authority or duties causing Executive's position to be of materially less stature or responsibility, after written notice delivered to the Company of such change and the Company's failure to cure such change, if curable, within thirty (30) days following delivery of such notice; or any change, without Executive's written consent, to Executive's title or Executive's reporting structure causing Executive to no longer report to the CEO of the Company, after written notice delivered to the Company of such change and the Company's failure to cure such change, if curable, within thirty (30) days following delivery of such notice;

(b) a reduction, without Executive's written consent, in Executive's Base Salary in effect on the Effective Date (or such higher level as may be in effect in the future) by more than ten percent (10%) or a reduction in Executive's stated Target Bonus in effect on the Effective Date (or such greater Target Bonus amount as may be in effect in the future) under the Bonus Plan;

(c) a relocation of Executive's principal place of employment by more than thirty (30) miles, unless Executive consents in writing to such relocation;

(e) any failure by the Company to obtain the written assumption of this Agreement by any successor to the Company.

4.4 PERMANENT DISABILITY. For purposes of this Agreement, "Permanent Disability" shall mean any medically determinable physical or mental impairment that renders Executive unable to perform effectively his duties under this Agreement for a continuous period of not less than twelve (12) months.

4.5 CHANGE IN CONTROL.

(b) For purposes of this Section 4.5, a Change in Control shall be deemed to occur upon the consummation of any one of the following events:

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, but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Board);

(iv) the consummation of the sale or disposition by the Company of all or substantially all the Company's assets.

4.6 TERMINATION FOR CAUSE, ON ACCOUNT OF DEATH, PERMANENT DISABILITY, OR VOLUNTARY TERMINATION. In the event Executive's employment is terminated for Cause, or on account of death or Permanent Disability, or Executive voluntarily terminates his employment with the Company, then Executive will be paid only,
(a) any earned but unpaid base salary and any outstanding expense reimbursements submitted and approved pursuant to Section 3.1 hereof, and (b) other unpaid vested amounts or benefits under Company compensation, incentive and benefit plans, in each case as of the effective date of such termination.

5. EXCISE TAX.

In the event that any benefits payable to Executive pursuant to the Transition Agreement ("Termination Benefits") (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any comparable successor provisions, and (ii) but for this Section 5 would be subject to the excise tax imposed by Section 4999 of the Code, or any comparable successor provisions (the "Excise Tax"), then Executive's Termination Benefits hereunder shall be either (a) provided to Executive in full, or (b) provided to Executive as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, when taking into account applicable federal, state, local and foreign income and employment taxes, the Excise Tax, any other applicable taxes, and the tax equalization described in paragraph 3.2(h), results in the receipt by Executive, on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under the Excise Tax. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 5 shall be made in writing in good faith by a nationally recognized accounting firm selected by the Company (the "Accountants"). In the event of a reduction of benefits hereunder, Executive shall be given the choice of which benefits to reduce. If Executive does not provide written identification to the Company of which benefits he chooses to reduce within ten (10) days after written notice of the Accountants' determination, and Executive has not disputed the Accountants' determination, then the Company shall select the benefits to be reduced. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code, and other applicable legal authority. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably

request in order to make a determination under this Section 5. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5.

Notwithstanding any other provision of this Section 5, if (1) there is a reduction in the payment of the Termination Benefits as described in this
Section 5, (2) the IRS later determines that Executive is liable for the Excise Tax, the payment of which would result in the maximization of Executive's net after-tax proceeds (calculated as if Executive's benefits had not previously been reduced), and (3) Executive pays the Excise Tax, then the Company shall pay to Executive those Termination Benefits which were reduced pursuant to this subsection as soon as administratively possible after Executive pays the Excise Tax so that Executive's net after-tax proceeds with respect to the payment of the Termination Benefits are maximized.

6. DISPUTE RESOLUTION.

(a) Each of the parties expressly agrees that, to the extent permitted by applicable law and to the extent that the enforceability of this Agreement is not thereby impaired, any and all disputes, controversies or claims between Executive and the Company arising under this Agreement (as opposed to the Transition Agreement), except those arising under Section 6(d) hereof or under the Proprietary Information Agreement (as defined in Section 8 hereof), shall be determined exclusively by final and binding arbitration before a single arbitrator in accordance with the JAMS Arbitration Rules and Procedures, or successor rules then in effect, and that judgment upon the award of the arbitrator may be rendered in any court of competent jurisdiction. This includes, without limitation, any and all disputes, controversies, and/or claims arising out of or concerning Executive's employment by the Company or the termination of his employment or this Agreement, and includes, without limitation, claims by Executive against directors, officers or employees of the Company, whether arising under theories of liability or damages based on contract, tort or statute, to the full extent permitted by law. As a material part of this agreement to arbitrate claims, the parties expressly waive all rights to a jury trial in court on all statutory or other claims. This Section 6 does not purport to limit either party's ability to recover any remedies provided for by statute, including attorneys' fees.

without jurisdiction to apply any different substantive law. The parties agree that they will be allowed to engage in adequate discovery, the scope of which will be determined by the arbitrator, consistent with the nature of the claims in dispute. The arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. The arbitrator shall render an award that shall include a written statement of opinion setting forth the arbitrator's findings of fact and conclusions of law. Judgment upon the award may be entered in any court having jurisdiction thereof. The parties intend this arbitration provision to be valid, enforceable, irrevocable and construed as broadly as possible.

(c) The Company shall be responsible for payment of the arbitrator's fees as well as all administrative fees associated with the arbitration. The parties shall be responsible for their own attorneys' fees and costs (including expert fees and costs), except that if any party prevails on a statutory claim that entitles the prevailing party to a reasonable attorneys' fee (with or without expert fees) as part of the costs, the arbitrator may award reasonable attorneys' fees (with or without expert fees) to the prevailing party in accord with such statute.

(d) The parties agree, however, that damages would be an inadequate remedy for the Company in the event of a breach or threatened breach of Section 1.3 of this Agreement or any provision of the Proprietary Information Agreement (as defined in Section 8 hereof). In the event of any such breach or threatened breach, Cadence may, either with or without pursuing any potential damage remedies, obtain from a court of competent jurisdiction, and enforce, an injunction prohibiting Executive from violating Section 1.3 of this Agreement or any provision of the Proprietary Information Agreement (as defined in Section 8 hereof) and requiring Executive to comply with the terms of those agreements.

7. COOPERATION WITH THE COMPANY AFTER TERMINATION OF THE EMPLOYMENT PERIOD.

8. PROPRIETARY INFORMATION AGREEMENT.

Executive has executed and delivered to the Company an Employee Proprietary Information and Inventions Agreement, in the form attached hereto as Exhibit C (the "Proprietary Information Agreement").

9. GENERAL.

9.2 SEVERABILITY. If for any reason a court of competent jurisdiction or arbitrator finds any provision of this Agreement to be unenforceable, the provision shall be deemed amended as necessary to conform to applicable laws or regulations, or if it cannot be so amended without materially altering the intention of the parties, the remainder of the Agreement shall continue in full force and effect as if the offending provision were not contained herein.

9.4 COUNTERPARTS. This Agreement may be executed by facsimile and in any number of counterparts, each of which shall be deemed an original and all of which taken together constitutes one and the same instrument and in making proof hereof it shall not be necessary to produce or account for more than one such counterpart.

9.5 ENTIRE AGREEMENT. The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement, the exhibits to this Agreement, the Residential Lease, any existing stock option agreements between the parties, and the documents, plans and policies referred to in this Agreement (which are hereby incorporated herein by reference) constitute the complete and exclusive statement of the agreement between the parties and supersedes all proposals (oral or written), understandings, agreements (including, but not limited to, the Executive Retention Agreement signed by Executive on or about August 7, 2000), representations, conditions, covenants, and all other communications between the parties relating to the subject matter hereof; provided, however, that the Employee Invention and Confidential Information Agreement signed by Executive on or about November 13,1995 and Executive's agreement, made prior to the Effective Date of this Agreement, to abide by the Company's policies, including but not limited to the Company's Employee Handbook, Sexual Harassment Policy and Code of Business Conduct, remain in full force and effect and govern Executive's conduct from the date of execution of such agreements until the Effective Date of this Agreement.

9.6 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, without regard to its conflict of laws principles.

9.9 TERMINATION AND SURVIVAL OF CERTAIN PROVISIONS. This Agreement shall terminate upon the termination of Executive's full-time employment for any reason; provided, however, that the following provisions of this Agreement shall survive its termination: Executive's obligations under Section 7 hereof, the Company's obligations to provide compensation earned through the termination of the employment relationship under Sections 2 and 3 hereof, the Company's obligations and Executive's obligations under Section 5 hereof, the Company's obligations and Executive's obligations enumerated in the Transition Agreement, if applicable, the Company's obligation to indemnify Executive pursuant to
Section 2.4 hereof and the referenced Indemnification Agreement, the dispute resolution provisions of Section 6 hereof and, to the extent applicable, this
Section 9.

9.10 DEPARTMENT OF HOMELAND SECURITY VERIFICATION

REQUIREMENT. If Executive has not already done so, he will timely file all documents required by the Department of Homeland Security to verify his identity and his lawful employment in the United States. Notwithstanding any other provision of this Agreement, if Executive fails to meet any such requirements promptly after receiving a written request from the Company to do so, his employment will terminate immediately upon notice from the Company and he will not be entitled to any compensation from the Company of any type, other than that compensation earned through his date of termination. The preceding sentence shall not apply to any failure by Executive that results from circumstances entirely outside Executive's control, including, but not limited to, any delay in the issuance of immigration or other necessary paperwork to Executive by any government agency.

9.11 HEADINGS. The headings of the several sections and paragraphs of this Agreement are inserted solely for the convenience of reference and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement on this 26th day of May, 2004.

CADENCE DESIGN SYSTEMS, INC.                    EXECUTIVE

By: /s/  R.L. Smith McKeithen                   /s/ Kevin Bushby
    ---------------------------------           --------------------------------
         R.L. Smith McKeithen                       Kevin Bushby

Title: Sr. VP & General Counsel

EXHIBIT A

INDEMNIFICATION AGREEMENT

INDEMNITY AGREEMENT

This Indemnity Agreement, dated as of May 14, 2004, is made by and between Cadence Design Systems, Inc., a Delaware corporation (the "Company"), and Kevin Bushby, the Executive Vice President, Worldwide Field Operations of the Company (the "Indemnitee").

RECITALS

defense, which may discourage such a director or officer from serving in that position;

H. 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.

3. MAINTENANCE OF LIABILITY INSURANCE.

4. MANDATORY INDEMNIFICATION.

6. NOTICE AND OTHER INDEMNIFICATION PROCEDURES.

(a) Promptly after receipt by a covered person of notice of the commencement of or the threat of commencement of any proceeding, such

Indemnitee has ceased to so act and shall inure to the benefit of any heir, executor, administrator or other legal representative of the Indemnitee.

13. 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.

14. NOTICE. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) 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.

16. 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.

17. GENDER. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate.

The parties hereto have entered into this Indemnity Agreement effective as of the date first above written.

CADENCE DESIGN SYSTEMS, INC.

By: /s/ R.L. Smith Mckeithen
    ------------------------------
Its:    Sr. V.P. and General Counsel

Address: 2655 Seely Avenue, Bldg. 5 San Jose, CA 95134

INDEMNITEE

By: /s/ R. Kevin Bushby
    ------------------------------

Address:

DOCUMENT 3

EXHIBIT B

EXECUTIVE TRANSITION AND RELEASE AGREEMENT

This Executive Transition and Release Agreement (this "Agreement") is entered into between Kevin Busbhy ("Executive") and Cadence Design Systems, Inc. ("Cadence" or the "Company").

1. TRANSITION COMMENCEMENT DATE. As of <<Transition Commencement>> (the "Transition Commencement Date"), Executive will no longer hold the position of Executive Vice President, Worldwide Field Operations and will be relieved of all of Executive's authority and responsibilities in that position. Executive will be paid all accrued salary for his services as Executive Vice President, Worldwide Field Operations to the Transition Commencement Date by not later than the following regular payroll date. Following the Transition Commencement Date, Executive will no longer participate in Cadence's medical, dental, and vision insurance plans (unless Executive elects to continue coverage pursuant to COBRA), and will not be eligible for a bonus for any services rendered after that date.

a. the date on which Executive resigns from all employment with Cadence;

b. the date on which Cadence terminates Executive's employment due to a breach by Executive of Executive's duties or obligations under this Agreement; and

c. One year from the Transition Commencement Date.

3. DUTIES AND OBLIGATIONS DURING THE TRANSITION PERIOD AND AFTERWARDS.

b. As a Cadence Executive Vice President, as well as other positions Executive may have held with Cadence, Executive has obtained extensive and valuable knowledge and information concerning Cadence's business (including confidential information relating to Cadence and its operations, intellectual property assets, contracts, customers, personnel, plans, marketing plans, research and development plans and prospects). Executive acknowledges and agrees that it would be virtually impossible for Executive to work as an employee, consultant or advisor in the electronic design automation ("EDA") industry (as defined below) without inevitably disclosing confidential and proprietary information belonging to Cadence. Accordingly, during the

Transition Period, Executive will not, directly or indirectly, provide services, whether as an employee, consultant, independent contractor, agent, sole proprietor, partner, joint venture, corporate officer or director, on behalf of any corporation, limited liability company, partnership, or other entity or person that (i) is engaged in the EDA industry, (ii) directly competes against Cadence or any of its existing or future affiliates in the EDA industry anywhere in the world, or (iii) produces, markets, distributes or sells any products, directly or indirectly through intermediaries, that are competitive with EDA industry products produced, marketed, sold or distributed by Cadence. As used in this paragraph, the term "EDA industry" means the research, design or development of electronic design automation software, electronic design verification, emulation hardware and related products, such products containing hardware, software and both hardware and/or software products, designs or solutions for, and all intellectual property embodied in the foregoing, or in commercial electronic design and/or maintenance services, such services including all intellectual property embodied in the foregoing. If Executive receives an offer of employment or consulting from any person or entity during the Transition Period, then Executive must first obtain written approval, which will not be unreasonably withheld, from Cadence's Chief Executive Officer ("CEO") or General Counsel before accepting said offer.

4. TRANSITION COMPENSATION AND BENEFITS. In consideration and compensation for Executive's services during the Transition Period, Cadence will provide the following to Executive:

a. a monthly salary of $2,000 less applicable tax withholdings and deductions, payable in accordance with Cadence's regular payroll schedule;

b. continued vesting of stock options and restricted stock granted to Executive prior to the Termination Date, provided that Executive has executed all necessary stock option and restricted stock agreements on or before<<Term Date>>, and with the understanding that upon Executive's Termination Date, all vested options may be exercised in accordance with the applicable stock option agreement, any unvested options will expire, and any unvested restricted stock will be forfeited; and

c. if Executive elects to continue coverage under Cadence's medical, dental, and vision insurance plans pursuant to COBRA following the Transition Commencement Date, Cadence will pay Executive's COBRA premiums during the Transition Period.

Except as so provided, Executive will receive no other compensation or benefits from Cadence in consideration of Executive's services during the Transition Period.

Executive's further execution and delivery of a Release of Claims in the form of Attachment 1 hereto, Cadence will provide to Executive within ten business days after the Effective Date (as defined in paragraph 9 hereof) of this Agreement and after Executive has returned to the Company all hard and soft copies of records, documents, materials and files relating to confidential, proprietary or sensitive company information in his possession or control, as well as all other company-owned property, the following termination payment to which Executive would not otherwise be entitled:

a. a lump-sum payment of one year's base salary at Executive's highest annual base salary rate in effect during Executive's employment as Executive Vice President, Worldwide Field Operations, less applicable tax deductions and withholdings. Provided, however, should this payment be made in fiscal 2005, then it shall be increased by 10%.

a. a lump-sum payment of one year's target bonus at Executive's highest target bonus rate in effect during Executive's employment as Executive Vice President, Worldwide Field Operations, less applicable tax deductions and withholdings. Provided, however, should this payment be made in fiscal 2005, then it shall be increased by 10%.

7. GENERAL RELEASE OF CLAIMS.

a. Executive hereby irrevocably, fully and finally releases Cadence, its parent, subsidiaries, affiliates, directors, officers, agents and employees ("Releasees") from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, suspected or unsuspected, that Executive ever had or now has as of the time that Executive signs this Agreement which relate to his hiring, his employment with the Company, the termination of his employment with the Company and claims asserted in shareholder derivative actions or shareholder class actions against the Company and its officers and Board of Directors, to the extent those derivative or class actions relate to the period during Executive's employment with the Company. The claims released include, but are not limited to, any claims arising from or related to Executive's employment with Cadence, such as claims arising under (as amended) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1974, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the California Fair Employment and Housing Act, the California Labor Code, the Employee Retirement Income and Security

Act of 1974 (except for any vested right Executive has to benefits under an ERISA plan), the state and federal Worker Adjustment and Retraining Notification Act, and the California Business and Professions Code; any other local, state, federal, or foreign law governing employment; and the common law of contract and tort. In no event, however, shall any claims, causes of action, suits, demands or other obligations or liabilities be released pursuant to the foregoing if and to the extent they relate to:

ii. claims for workers' compensation benefits under any of the Company's workers' compensation insurance policies or funds;

iii. claims related to Executive's COBRA rights; and

iv. any rights that Executive has or may have to be indemnified by Cadence pursuant to any contract, statute, or common law principle.

b. Executive represents and warrants that he has not filed any claim, charge or complaint against any of the Releasees.

c. Executive acknowledges that the payments provided in this Agreement constitute adequate consideration for the release set forth in this paragraph 7.

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor which if known by him must have materially affected his settlement with the debtor.

e. Executive represents and warrants that there has been no assignment or other transfer of any interest in any claim by Executive that is covered by this release.

this Agreement to revoke that acceptance, which Executive may effect by means of a written notice sent to the CEO or General Counsel. If this 7-day period expires without a timely revocation, this Agreement will become final and effective on the eighth day following the date of Executive's signature, which eighth day will be the "Effective Date" of this Agreement.

10. NO ADMISSION OF LIABILITY. Nothing in this Agreement will constitute or be construed in any way as an admission of any liability or wrongdoing whatsoever by Cadence or Executive.

information, which Executive signed while working with Cadence or its predecessors; nor to waive any of Executive's obligations under state and federal trade secret laws.

12. FULL SATISFACTION OF COMPENSATION OBLIGATIONS; ADEQUATE CONSIDERATION. Executive agrees that the payments and benefits described herein, together with any payments or benefits to which Executive is or may become entitled to pursuant to the provisions of the Employment Agreement that survive the termination of Executive's full-time employment pursuant to Section 9.9 of the Employment Agreement, are in full satisfaction of all obligations of Cadence to Executive arising out of or in connection with Executive's employment through the Transition Termination Date, including, without limitation, all compensation, salary, bonuses, reimbursement of expenses, and benefits.

15. MODIFICATION. This Agreement may not be modified unless such modification is embodied in writing, signed by the party against whom the modification is to be enforced.

17. SEVERABILITY. In the event that any part of this Agreement is found to be void or unenforceable, all other provisions of the Agreement will remain in full force and effect.

18. GOVERNING LAW. This Agreement will be governed and enforced in accordance with the laws of the State of California, without regard to its conflict of laws principles.

EXECUTION OF AGREEMENT

The parties execute this Agreement to evidence their acceptance of it.

Dated: ____________________________.          Dated: _____________________.

Kevin Bushby                                  CADENCE DESIGN SYSTEMS, INC.

____________________________________          By: ______________________________
                                                          <<HRVP Name>>
                                                          <<HRVP Title 1>>

ATTACHMENT 1

RELEASE OF CLAIMS

1. For valuable consideration, I irrevocably, fully and finally release Cadence, its parent, subsidiaries, affiliates, directors, officers, agents and employees ("Releasees") from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, suspected or unsuspected, that I ever had or now have as of the time that I sign this Agreement which relate to my hiring, my employment with the Company, the termination of my employment with the Company and claims asserted in shareholder derivative actions or shareholder class actions against the Company and its officers and Board of Directors, to the extent those derivative or class actions relate to the period during my employment with the Company. The claims released include, but are not limited to, any claims arising from or related to Executive's employment with Cadence, such as claims arising under (as amended) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1974, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the California Fair Employment and Housing Act, the California Labor Code, the Employee Retirement Income and Security Act of 1974 (except for any vested right Executive has to benefits under an ERISA plan), the state and federal Worker Adjustment and Retraining Notification Act, and the California Business and Professions Code; any other local, state, federal, or foreign law governing employment; and the common law of contract and tort. This Release is not intended to, and does not, encompass any right to compensation or benefits that I have under my Executive Transition and Release Agreement with Cadence. In no event, however, shall any claims, causes of action, suits, demands or other obligations or liabilities be released pursuant to the foregoing if and to the extent they relate to:

ii. claims for workers' compensation benefits under any of the Company's workers' compensation insurance policies or funds;

iii. claims related to my COBRA rights; and

iv. any rights that I have or may have to be indemnified by Cadence pursuant to any contract, statute, or common law principle.

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor which if known by him must have materially affected his settlement with the debtor.

3. I represent and warrant that there has been no assignment or other transfer of any interest in any claim by me that is covered by this Release.

Dated: _______________________________.       __________________________________
                                                           Print Name

                                              __________________________________
                                                           Sign Name

ATTACHMENT 2

RELEASE OF CLAIMS

1. 1. For valuable consideration, I irrevocably, fully and finally release Cadence, its parent, subsidiaries, affiliates, directors, officers, agents and employees ("Releasees") from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, suspected or unsuspected, that I ever had or now have as of the time that I sign this Agreement which relate to my hiring, my employment with the Company, the termination of my employment with the Company and claims asserted in shareholder derivative actions or shareholder class actions against the Company and its officers and Board of Directors, to the extent those derivative or class actions relate to the period during my employment with the Company. The claims released include, but are not limited to, any claims arising from or related to Executive's employment with Cadence, such as claims arising under (as amended) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1974, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the California Fair Employment and Housing Act, the California Labor Code, the Employee Retirement Income and Security Act of 1974 (except for any vested right Executive has to benefits under an ERISA plan), the state and federal Worker Adjustment and Retraining Notification Act, and the California Business and Professions Code; any other local, state, federal, or foreign law governing employment; and the common law of contract and tort. This Release is not intended to, and does not, encompass any right to compensation or benefits that I have under my Executive Transition and Release Agreement with Cadence. In no event, however, shall any claims, causes of action, suits, demands or other obligations or liabilities be released pursuant to the foregoing if and to the extent they relate to:

ii. claims for workers' compensation benefits under any of the Company's workers' compensation insurance policies or funds;

iii. claims related to my COBRA rights; and

iv. any rights that I have or may have to be indemnified by Cadence pursuant to any contract, statute, or common law principle.

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor which if known by him must have materially affected his settlement with the debtor.

3. I represent and warrant that there has been no assignment or other transfer of any interest in any claim by me that is covered by this Release.

Dated: _____________________________.             ______________________________
                                                            Print Name

                                                  ______________________________
                                                            Sign Name

EXHIBIT C

EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT

EXHIBIT 10.81

CADENCE DESIGN SYSTEMS, INC.
EMPLOYMENT AGREEMENT
WITH R.L. SMITH MCKEITHEN

THIS AGREEMENT (this "Agreement") is made effective as of May 18, 2004 (the "Effective Date"), between CADENCE DESIGN SYSTEMS, INC., a Delaware corporation (the "Company"), and R.L. SMITH MCKEITHEN ("Executive").

WHEREAS, Executive is currently employed by the Company as Senior Vice President and General Counsel; and

WHEREAS, the Company and Executive wish to enter into a formal employment agreement on the terms and conditions as set forth herein.

NOW, THEREFORE, in consideration of the premises and of the covenants and agreements set forth below, it is mutually agreed as follows:

1. TERM AND DUTIES.

1.1 EFFECTIVE DATE. The Company hereby employs Executive and Executive hereby accepts employment pursuant to the terms and provisions of this Agreement commencing on the Effective Date. Executive has been employed and shall continue to be employed on an at will basis, meaning that either Executive or the Company may terminate Executive's employment at any time, with or without Cause (as defined in Section 4.2 hereof), in the manner specified herein.

1.2 SERVICES.

(a) Executive shall continue to have the title of Senior Vice President and General Counsel. Executive's duties will be assigned to Executive by the Company's Chief Executive Officer ("CEO"), or such other persons as may be specified by the CEO.

(b) Executive shall be required to comply with all applicable company policies and procedures, as such shall be adopted, modified or otherwise established by the Company from time to time.

1.3 SERVICES TO BE EXCLUSIVE. During his employment with the Company, Executive agrees to devote his full productive time and best efforts to the performance of Executive's duties hereunder. Executive further agrees, as a condition to the performance by the Company of each and all of its obligations hereunder, that so long as Executive is employed by the Company or receiving compensation or any other consideration from the Company, he will not directly or indirectly render services of any nature to, otherwise become employed by, serve on the board of directors of, or otherwise participate or engage in any other business without the CEO's prior written consent. Nothing herein contained shall be deemed to preclude Executive from having outside personal investments and involvement with appropriate community activities, or from devoting a reasonable amount of time to such matters, provided that they shall in no manner interfere with or derogate from Executive's work for the Company.

1.4 OFFICE. The Company shall maintain an office for Executive at the Company's corporate headquarters, which currently are located in San Jose, California.

2. COMPENSATION.

The Company shall pay to Executive, and Executive shall accept as full consideration for the Services, compensation consisting of the following:

2.1 BASE SALARY. The Company shall initially pay Executive a base salary of Four Hundred Thousand Dollars ($400,000) per year ("Base Salary"), payable in installments in accordance with the Company's customary payroll practices, less such deductions and withholdings required by law or authorized by Executive. The Board of Directors of the Company (the "Board") or the Compensation Committee of the Board (the "Compensation Committee") shall review the amount of the Base Salary from time to time, but no less frequently than annually.

2.2 BONUS. Executive shall participate in the Company's Senior Executive Bonus Plan or its successor (the "Bonus Plan") at an annual target bonus of Three Hundred Thousand Dollars ($300,000) (the "Target Bonus") pursuant to the terms of

such Bonus Plan (the criteria for earning a bonus thereunder are set annually by the Compensation Committee). The Board or the Compensation Committee shall review the amount of the Target Bonus from time to time, but no less frequently than annually.

3. EXPENSES AND BENEFITS.

3.1 REASONABLE AND NECESSARY BUSINESS EXPENSES. In addition to the compensation provided for in Section 2 hereof, the Company shall reimburse

Executive for all reasonable, customary and necessary expenses incurred in the performance of Executive's duties hereunder. Executive shall first account for such expenses by submitting a signed statement itemizing such expenses prepared in accordance with the policy set by the Company for reimbursement of such expenses. The amount, nature and extent of reimbursement for such expenses shall always be subject to the control, supervision and direction of the CEO, Chief Financial Officer and the Board, or such other persons as may be specified from time to time by the CEO.

3.2 BENEFITS. During Executive's full-time employment with the Company, pursuant to this Agreement:

(a) Executive shall be eligible to participate in the Company's standard U.S. health insurance, life insurance and disability insurance plans, as such plans may be modified from time to time; and

4. TERMINATION OF EMPLOYMENT.

termination by Executive within thirty (30) days before the specified effective date of such termination, or upon Executive's death or Permanent Disability (as defined in Section 4.4 hereof). In the event of such termination, except where Executive is terminated for Cause (as defined in Section 4.2 hereof) or as the result of a Permanent Disability or death, or where Executive voluntarily terminates his employment other than a Constructive Termination (as defined in
Section 4.3 hereof), and upon execution by Executive at or about the effective date of such termination of the Executive Transition and Release Agreement, in the form attached hereto as Exhibit B (the "Transition Agreement"), the Company shall provide Executive with the benefits as set forth in the Transition Agreement.

4.2 DEFINITION OF CAUSE. For purposes of this Agreement, "Cause" shall be deemed to mean (1) Executive's gross misconduct or fraud in the performance of his duties under this Agreement; (2) Executive's conviction or guilty plea or plea of nolo contendere with respect to any felony or act of moral turpitude;
(3) Executive's engaging in any material act of theft or material misappropriation of company property in connection with his employment; (4) Executive's material breach of this Agreement, after written notice delivered to Executive of such breach and failure to cure such breach, if curable, within thirty (30) days following delivery of such notice; (5) Executive's material breach of the Proprietary Information Agreement (as defined in Section 8 hereof); (6) Executive's material failure/refusal to perform his assigned duties, and, where such failure/refusal is curable, if such failure/refusal is not cured within thirty (30) days following delivery of written notice thereof from the Company; or (7) Executive's material breach of the Company's Code of Business Conduct as such code may be revised from time to time.

of an event constituting a Constructive Termination and be eligible to receive the benefits set forth in the Transition Agreement in exchange for executing and delivering that agreement in accordance with Section 9.3 hereof. For purposes of this Agreement, "Constructive Termination" shall mean:

(a) a material adverse change, without Executive's written consent, in Executive's authority, duties or title causing Executive's position to be of materially less stature or responsibility, after written notice delivered to the Company of such change and the Company's failure to cure such change, if curable, within thirty (30) days following delivery of such notice; provided, however, that such a material adverse change shall in all events be deemed to occur if Executive no longer serves as the General Counsel of a publicly traded company, unless Executive consents in writing to such change;

(b) any change, without Executive's written consent, to Executive's reporting structure causing Executive to no longer report to the CEO of the Company, after written notice delivered to the Company of such change and the Company's failure to cure such change, if curable, within thirty (30) days following delivery of such notice;

(c) a reduction, without Executive's written consent, in Executive's Base Salary in effect on the Effective Date (or such higher level as may be in effect in the future) by more than ten percent (10%) or a reduction by more than ten percent (10%) in Executive's stated Target Bonus in effect on the Effective Date (or such greater Target Bonus amount as may be in effect in the future) under the Bonus Plan;

(d) a relocation of Executive's principal place of employment by more than thirty (30) miles, unless Executive consents in writing to such relocation;

(e) any material breach by the Company of any provision of this Agreement, after written notice delivered to the Company of such breach and the Company's failure to cure such breach, if curable, within thirty (30) days following delivery of such notice;

(f) any failure by the Company to obtain the written assumption of this Agreement by any successor to the Company;

(g) in the event Executive, prior to a Change in Control (as defined in Section 4.5 hereof), is identified as an executive officer of the Company for purposes of the rules promulgated under Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and following a Change in Control in which the Company or any successor remains a publicly traded entity, Executive is not identified as an executive officer for purposes of Section 16 of the Exchange Act at any time within one (1) year after the Change in Control.

4.4 PERMANENT DISABILITY. For purposes of this Agreement, "Permanent Disability" shall mean any medically determinable physical or mental impairment that can reasonably be expected to result in death or that has lasted or can reasonably be expected to last for a continuous period of not less than twelve
(12) months and that renders Executive unable to perform effectively the Services pursuant to this Agreement.

4.5 CHANGE IN CONTROL.

(a) Should there occur a Change in Control (as defined below) and if within ninety (90) days prior to, or thirteen (13) months following the Change in Control either (i) Executive is terminated without Cause or (ii) Executive resigns his employment as a result of an event constituting a Constructive Termination, then, in exchange for signing the Transition Agreement, Executive shall be entitled to all of the benefits set forth therein, except that Section 4(b) of the Transition Agreement will be replaced by the following provision: "all outstanding stock options granted and restricted stock issued by the Company to the Executive prior to the Change in Control (as defined in Section 4.5 of Executive's Employment Agreement) shall have their vesting fully accelerated so as to be 100% vested as of the Effective Date of this Agreement. This

acceleration will have no effect on any other provisions of the plans governing the stock options and restricted stock."

(b) For purposes of this Section 4.5, a Change in Control shall be deemed to occur upon the consummation of any one of the following events:

securities of the Company in consummation of such merger or consolidation, securities possessing at least fifty percent (50%) of the total voting power represented by the outstanding voting securities of the surviving entity (or parent thereof) 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.

4.6 TERMINATION FOR CAUSE, ON ACCOUNT OF DEATH, PERMANENT DISABILITY, OR VOLUNTARY TERMINATION. In the event Executive's employment is terminated for Cause, or on account of death or Permanent Disability, or Executive voluntarily terminates his employment with the Company, then Executive will be paid only (a) any earned but unpaid base salary and any outstanding expense reimbursements submitted and approved pursuant to Section 3.1 hereof, and (b) other unpaid vested amounts or benefits under Company compensation, incentive and benefit plans, in each case as of the effective date of such termination.

5. EXCISE TAX.

basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under the Excise Tax. Unless the Company and Executive otherwise agree in writing, any determination required under this
Section 5 shall be made in writing in good faith by a nationally recognized accounting firm selected by the Company (the "Accountants"). In the event of a reduction of benefits hereunder, Executive shall be given the choice of which benefits to reduce. If Executive does not provide written identification to the Company of which benefits he chooses to reduce within ten (10) days after written notice of the Accountants' determination, and Executive has not disputed the Accountants' determination, then the Company shall select the benefits to be reduced. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code, and other applicable legal authority. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 5. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5.

such benefits) shall be maximized. The Repayment Amount shall be zero if a Repayment Amount of more than zero would not result in Executive's net after-tax proceeds with respect to the Termination Benefits being maximized. If the Excise Tax is not eliminated pursuant to this paragraph, Executive shall pay the Excise Tax.

6. DISPUTE RESOLUTION.

(a) Each of the parties expressly agrees that, to the extent permitted by applicable law and to the extent that the enforceability of this Agreement is not thereby impaired, any and all disputes, controversies or claims between Executive and the Company arising under this Agreement (as opposed to the Transition Agreement), except those arising under Section 6(d) hereof or under the Proprietary Information Agreement (as defined in Section 8 hereof), shall be determined exclusively by final and binding arbitration before a single arbitrator in accordance with the JAMS Arbitration Rules and Procedures, or successor rules then in effect, and that judgment upon the award of the arbitrator may be rendered in any court of competent jurisdiction. This includes, without limitation, any and all disputes, controversies, and/or claims arising out of or concerning Executive's employment by the Company or the termination of his employment or this Agreement, and includes, without limitation, claims by Executive against directors, officers or employees of the Company, whether arising under theories

of liability or damages based on contract, tort or statute, to the full extent permitted by law. As a material part of this agreement to arbitrate claims, the parties expressly waive all rights to a jury trial in court on all statutory or other claims. This Section 6 does not purport to limit either party's ability to recover any remedies provided for by statute, including attorneys' fees.

(b) The arbitration shall be held in the San Jose, California metropolitan area, and shall be administered by JAMS or, in the event JAMS does not then conduct arbitration proceedings, a similarly reputable arbitration administrator. Under such proceeding, the parties shall select a mutually acceptable, neutral arbitrator from among the JAMS panel of arbitrators. Except as provided herein, the Federal Arbitration Act shall govern the interpretation and enforcement of such arbitration proceeding. The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the State of California, or federal law, if California law is preempted, and the arbitrator is without jurisdiction to apply any different substantive law. The parties agree that they will be allowed to engage in adequate discovery, the scope of which will be determined by the arbitrator, consistent with the nature of the claims in dispute. The arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. The arbitrator shall render an award that shall include a written statement of opinion setting forth the arbitrator's findings of fact and conclusions of law. Judgment upon the award may be entered in any court having jurisdiction thereof. The parties intend this arbitration provision to be valid, enforceable, irrevocable and construed as broadly as possible.

reasonable attorneys' fees (with or without expert fees) as part of the costs, the arbitrator may award reasonable attorneys' fees (with or without expert fees) to the prevailing party in accord with such statute.

(d) The parties agree, however, that damages would be an inadequate remedy for the Company in the event of a breach or threatened breach of Section 1.3 of this Agreement or any provision of the Proprietary Information Agreement (as defined in Section 8 hereof). In the event of any such breach or threatened breach, Cadence may, either with or without pursuing any potential damage remedies, obtain from a court of competent jurisdiction, and enforce, an injunction prohibiting Executive from violating Section 1.3 of this Agreement or any provision of the Proprietary Information Agreement (as defined in Section 8 hereof) and requiring Executive to comply with the terms of those agreements.

7. COOPERATION WITH THE COMPANY AFTER TERMINATION OF THE EMPLOYMENT PERIOD.

information in his possession or control, as well as all other company-owned property in his possession or control, at the time of the termination of his full-time employment, except to the extent that retention of any of such property is necessary or desirable or convenient in order to permit Executive to satisfy his obligations under this Section 7 or under the Transition Agreement, after which time Executive shall promptly return all such retained company property.

8. PROPRIETARY INFORMATION AGREEMENT.

9. GENERAL.

9.2 SEVERABILITY. If for any reason a court of competent jurisdiction or arbitrator finds any provision of this Agreement to be unenforceable, the provision shall be deemed amended as necessary to conform to applicable laws or regulations, or if it cannot be so amended without materially altering the intention of the parties, the remainder of the Agreement shall continue in full force and effect as if the offending provision were not contained herein.

the Company, in care of the CEO at the Company's principal corporate address, and, if addressed to Executive, at his most recent address shown on the Company's corporate records or at any other address which Executive may specify in any appropriate notice to the Company, or (c) upon only depositing such notice in the U.S. Mail as described in clause (b) of this paragraph.

9.4 COUNTERPARTS. This Agreement may be executed by facsimile and in any number of counterparts, each of which shall be deemed an original and all of which taken together constitutes one and the same instrument and in making proof hereof it shall not be necessary to produce or account for more than one such counterpart.

9.5 ENTIRE AGREEMENT. The parties hereto acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement, the exhibits to this Agreement, any existing stock option agreements between the parties, and the documents, plans and policies referred to in this Agreement (which are hereby incorporated herein by reference) constitute the complete and exclusive statement of the agreement between the parties and supersedes all proposals (oral or written), understandings, agreements (including, but not limited to, the Executive Retention Agreement signed by Executive on or about September 20,1999), representations, conditions, covenants, and all other communications between the parties relating to the subject matter hereof; provided, however, that the Employee Invention and Confidential Information Agreement signed by Executive on or about April 19, 1996 and Executive's agreement, made prior to the Effective Date of this Agreement, to abide by the Company's policies, including but not limited to the Company's Employee Handbook, Sexual Harassment Policy and Code of Business Conduct, remain in full force and effect and govern Executive's conduct from the date of execution of such agreements until the Effective Date of this Agreement.

9.6 GOVERNING LAW. This Agreement shall be governed by the laws of the State of California, without regard to its conflict of laws principles.

9.8 AMENDMENTS. This Agreement, and the terms and conditions of the matters addressed in this Agreement, may only be amended in writing executed both by the Executive and the CEO of the Company.

9.9 TERMINATION AND SURVIVAL OF CERTAIN PROVISIONS. This Agreement shall terminate upon the termination of Executive's full-time employment for any reason; provided, however, that the following provisions of this Agreement shall survive its termination: Executive's obligations under Section 7 hereof; the Company's obligations to provide compensation earned through the termination of the employment relationship under Sections 2 and 3 hereof; the Company's obligations and Executive's obligations under Section 5 hereof; the Company's obligations and Executive's obligations enumerated in the Transition Agreement, if applicable; the Company's obligation to indemnify Executive pursuant to
Section 2.4 hereof and the referenced Indemnification Agreement; the dispute resolution provisions of Section 6 hereof; and, to the extent applicable, this
Section 9.

written request from the Company to do so, his employment will terminate immediately upon notice from the Company and he will not be entitled to any compensation from the Company of any type.

IN WITNESS WHEREOF, the parties have executed this Agreement on this 18th day of May, 2004.

CADENCE DESIGN SYSTEMS, INC.                EXECUTIVE

By:  /s/ H. Raymond Bingham                   /s/ R.L. Smith McKeithen
     ---------------------------------        ----------------------------
     H. Raymond Bingham                       R.L. Smith McKeithen

Title: Chairman of the Board of Directors

EXHIBIT A

INDEMNITY AGREEMENT

This Indemnity Agreement, dated as of August 4, 1999, is made by and between Cadence Design Systems, Inc., a Delaware corporation (the "Company"), and R.L. Smith McKeithen, an Officer of the Company (the "Indemnitee").

RECITALS

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.

(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.

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

By   /s/ H. Raymon Bingham
     ---------------------------
     H. Raymon Bingham
     President & CEO
Its  ___________________________

INDEMNITEE:

/s/ R.L. Smith Mckeithen
--------------------------------
R.L. Smith Mckeithen

Address: 2655 Seely Road San Jose, CA 95134

EXHIBIT B

EXECUTIVE TRANSITION AND RELEASE AGREEMENT

This Executive Transition and Release Agreement (this "Agreement") is entered into between R.L. Smith McKeithen ("Executive") and Cadence Design Systems, Inc. ("Cadence" or the "Company").

1. TRANSITION COMMENCEMENT DATE. As of << Transition Commencement Date>> (the "Transition Commencement Date"), Executive will no longer hold the position of Senior Vice President and General Counsel and will be relieved of all of Executive's authority and responsibilities in that position. Executive will be paid all accrued salary for his services as Senior Vice President and General Counsel to the Transition Commencement Date by not later than the following regular payroll date. Following the Transition Commencement Date, Executive will no longer participate in Cadence's medical, dental, and vision insurance plans (unless Executive elects to continue coverage pursuant to COBRA), and will not be eligible for a bonus for any services rendered after that date.

a. the date on which Executive resigns from all employment with Cadence;

b. the date on which Cadence terminates Executive's employment due to a breach by Executive of Executive's duties or obligations under this Agreement; and

c. One year from the Transition Commencement Date.

3. DUTIES AND OBLIGATIONS DURING THE TRANSITION PERIOD AND AFTERWARDS.

a. During the Transition Period, Executive will assume the position of<<New Position Title>>. In this position, Executive will render those services requested by Cadence's <<Management Representative>> on an as-needed basis. Executive's time rendering those services is not expected to exceed twenty (20) hours per week but is expected to consume twenty (20) hours per month.

b. As a Cadence executive, as well as other positions Executive may have held with Cadence, Executive has obtained extensive and valuable knowledge and information concerning Cadence's business (including confidential information relating to Cadence and its operations, intellectual property assets, contracts, customers, personnel, plans, marketing plans, research and development plans and prospects). Executive acknowledges and agrees that it would be virtually impossible for Executive to work as an employee, consultant or advisor in the electronic design automation ("EDA") industry (as defined below) without inevitably disclosing confidential and proprietary information belonging to Cadence. Accordingly, during the Transition

Period, Executive will not, directly or indirectly, provide services, whether as an employee, consultant, independent contractor, agent, sole proprietor, partner, joint venture, corporate officer or director, on behalf of any corporation, limited liability company, partnership, or other entity or person that (i) is engaged in the EDA industry, (ii) directly competes against Cadence or any of its existing or future affiliates in the EDA industry anywhere in the world, or (iii) produces, markets, distributes or sells any products, directly or indirectly through intermediaries, that are competitive with EDA industry products produced, marketed, sold or distributed by Cadence. As used in this paragraph, the term "EDA industry" means the research, design or development of electronic design automation software, electronic design verification, emulation hardware and related products, such products containing hardware, software and both hardware and/or software products, designs or solutions for, and all intellectual property embodied in the foregoing, or in commercial electronic design and/or maintenance services, such services including all intellectual property embodied in the foregoing. If Executive receives an offer of employment or consulting from any person or entity during the Transition Period, then Executive must first obtain written approval from Cadence's Chief Executive Officer ("CEO") before accepting said offer.

e. Executive will not make any statement, written or oral, that disparages Cadence or any of its affiliates, or any of Cadence's or its affiliates' products,

services, policies, business practices, employees, executives, officers, or directors. Similarly, Cadence agrees to instruct its executive officers and members of the Company's Board of Directors not to make any statement, written or oral, that disparages Executive. The restrictions described in this paragraph shall not apply to any truthful statements made in response to a subpoena or other compulsory legal process.

4. TRANSITION COMPENSATION AND BENEFITS. In consideration and compensation for Executive's services during the Transition Period, Cadence will provide the following to Executive:

a. a monthly salary of $2,000 less applicable tax withholdings and deductions, payable in accordance with Cadence's regular payroll schedule;

b. continued vesting of stock options and restricted stock granted to Executive prior to the Termination Date, provided that Executive has executed all necessary stock option and restricted stock agreements on or before<<Stock Option Agreement Execution Date>>, and with the understanding that upon Executive's Termination Date, all vested options may be exercised in accordance with the applicable stock option agreement, any unvested options will expire, and any unvested restricted stock will be forfeited; and

Except as so provided, Executive will receive no other compensation or benefits from Cadence in consideration of Executive's services during the Transition Period.

Attachment 1 hereto, Cadence will provide to Executive within ten business days after the Effective Date (as defined in paragraph 9 hereof) of this Agreement and after Executive has returned to the Company all hard and soft copies of records, documents, materials and files relating to confidential, proprietary or sensitive company information in his possession or control, as well as all other Company-owned property, the following termination payment to which Executive would not otherwise be entitled:

a. a lump-sum payment of one year's base salary at the highest rate in effect during Executive's employment as Senior Vice President and General Counsel, less applicable tax deductions and withholdings.

a. a lump-sum payment of one year's target bonus at the highest rate in effect during Executive's employment as Senior Vice President and General Counsel, less applicable tax deductions and withholdings.

7. GENERAL RELEASE OF CLAIMS.

a. Executive hereby irrevocably, fully and finally releases Cadence, its parent, subsidiaries, affiliates, directors, officers, agents and employees ("Releasees") from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, suspected or unsuspected, that Executive ever had or now has as of the time that Executive signs this Agreement which relate to his hiring, his employment with the Company, the termination of his employment with the Company and claims asserted in shareholder derivative actions or shareholder class actions against the Company and its officers and Board of Directors, to the extent those derivative or class actions relate to the period during which Executive was employed by the Company. The claims released include, but are not limited to, any claims arising from or related to Executive's employment with Cadence, such as claims arising under (as amended) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1974, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the California Fair Employment and Housing Act, the California Labor Code, the Employee Retirement Income and Security Act of 1974 (except for any vested right Executive has to benefits under an ERISA plan), the state and federal Worker Adjustment and Retraining Notification Act, and the California Business and Professions Code; any other local, state, federal, or foreign law governing employment; and the common law of contract and tort. In no event, however,

shall any claims, causes of action, suits, demands or other obligations or liabilities be released pursuant to the foregoing if and to the extent they relate to:

ii. claims for workers' compensation benefits under any of the Company's workers' compensation insurance policies or funds;

iii. claims related to Executive's COBRA rights; and

iv. any rights that Executive has or may have to be indemnified by Cadence pursuant to any contract, statute, or common law principle.

b. Executive represents and warrants that he has not filed any claim, charge or complaint against any of the Releasees.

c. Executive acknowledges that the payments provided in this Agreement constitute adequate consideration for the release set forth in this paragraph 7.

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor which if known by him must have materially affected his settlement with the debtor.

e. Executive represents and warrants that there has been no assignment or other transfer of any interest in any claim by Executive that is covered by this release.

8. REVIEW OF AGREEMENT; REVOCATION OF ACCEPTANCE. Executive has been given at least 21 days in which to review and consider this Agreement, although Executive is free to accept this Agreement anytime within that 21-day period. Executive is advised to consult with an attorney about the Agreement. If Executive accepts this Agreement, Executive will have an additional 7 days from the date that Executive signs this Agreement to revoke that acceptance, which Executive may effect by means of a written notice sent to the CEO. If this 7-day period expires without a timely revocation, this Agreement will become final and effective on the eighth day following the date of Executive's signature, which eighth day will be the "Effective Date" of this Agreement.

10. NO ADMISSION OF LIABILITY. Nothing in this Agreement will constitute or be construed in any way as an admission of any liability or wrongdoing whatsoever by Cadence or Executive.

without limitation, all compensation, salary, bonuses, reimbursement of expenses, and benefits.

15. MODIFICATION. This Agreement may not be modified unless such modification is embodied in writing, signed by the party against whom the modification is to be enforced.

17. SEVERABILITY. In the event that any part of this Agreement is found to be void or unenforceable, all other provisions of the Agreement will remain in full force and effect.

18. GOVERNING LAW. This Agreement will be governed and enforced in accordance with the laws of the State of California, without regard to its conflict of laws principles.

EXECUTION OF AGREEMENT

The parties execute this Agreement to evidence their acceptance of it.

Dated: ___________________________.        Dated: _____________________________.

R.L. SMITH MCKEITHEN                       CADENCE DESIGN SYSTEMS, INC.

___________________________________        By: ________________________________
                                                        <<HRVP_Name>>
                                                        <<HRVP_Title_1>>

ATTACHMENT 1

RELEASE OF CLAIMS

1. For valuable consideration, I irrevocably, fully and finally release Cadence Design Systems, Inc. ("Cadence"), its parent, subsidiaries, affiliates, directors, officers, agents and employees from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, suspected or unsuspected, that I ever had or now have as of the time that I sign this Release which relate to my hiring, my employment with Cadence, the termination of my employment with Cadence and claims asserted in shareholder derivative actions or shareholder class actions against Cadence and its officers and Board of Directors, to the extent those derivative or class actions relate to the period during which I was employed by Cadence. The claims released include, but are not limited to, any claims arising from or related to my employment with Cadence, such as claims arising under (as amended) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1974, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the California Fair Employment and Housing Act, the California Labor Code, the Employee Retirement Income and Security Act of 1974 (except for any vested right I have to benefits under an ERISA plan), the state and federal Worker Adjustment and Retraining Notification Act, and the California Business and Professions Code; any other local, state, federal, or foreign law governing employment; and the common law of contract and tort. This Release is not intended to, and does not, encompass any right to compensation or benefits that I have under my Executive Transition and Release Agreement with Cadence. In no event, however, shall any claims, causes of action, suits, demands or other obligations or liabilities be released pursuant to the foregoing if and to the extent they relate to:

ii. claims for workers' compensation benefits under any of the Company's workers' compensation insurance policies or funds;

iii. claims related to Executive's COBRA rights; and

iv. any rights that I have or may have to be indemnified by Cadence pursuant to any contract, statute, or common law principle.

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor which if known by him must have materially affected his settlement with the debtor.

3. I represent and warrant that there has been no assignment or other transfer of any interest in any claim by me that is covered by this Release.

Dated: ____________________________.         __________________________________
                                                         Print Name

                                             __________________________________
                                                         Sign Name

ATTACHMENT 2

RELEASE OF CLAIMS

1. For valuable consideration, I irrevocably, fully and finally release Cadence Design Systems, Inc. ("Cadence"), its parent, subsidiaries, affiliates, directors, officers, agents and employees from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, suspected or unsuspected, that I ever had or now have as of the time that I sign this Release which relate to my hiring, my employment with Cadence, the termination of my employment with Cadence and claims asserted in shareholder derivative actions or shareholder class actions against Cadence and its officers and Board of Directors, to the extent those derivative or class actions relate to the period during which I was employed by Cadence. The claims released include, but are not limited to, any claims arising from or related to my employment with Cadence, such as claims arising under (as amended) Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1974, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, the California Fair Employment and Housing Act, the California Labor Code, the Employee Retirement Income and Security Act of 1974 (except for any vested right I have to benefits under an ERISA plan), the state and federal Worker Adjustment and Retraining Notification Act, and the California Business and Professions Code; any other local, state, federal, or foreign law governing employment; and the common law of contract and tort. This Release is not intended to, and does not, encompass any right to compensation or benefits that I have under my Executive Transition and Release Agreement with Cadence. In no event, however, shall any claims, causes of action, suits, demands or other obligations or liabilities be released pursuant to the foregoing if and to the extent they relate to:

ii. claims for workers' compensation benefits under any of the Company's workers' compensation insurance policies or funds;

iii. claims related to Executive's COBRA rights; and

iv. any rights that I have or may have to be indemnified by Cadence pursuant to any contract, statute, or common law principle.

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor which if known by him must have materially affected his settlement with the debtor.

3. I represent and warrant that there has been no assignment or other transfer of any interest in any claim by me that is covered by this Release.

Dated: ____________________________.         __________________________________
                                                        Print Name

                                             __________________________________
                                                        Sign Name

EXHIBIT C

EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT

EXHIBIT 31.01

CERTIFICATIONS

I, Michael J. Fister, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Cadence Design Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 10, 2004

By: /s/ Michael J. Fister
    -------------------------------------
    Michael J. Fister
    President and Chief Executive Officer

EXHIBIT 31.02

CERTIFICATIONS

I, William Porter, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Cadence Design Systems, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 10, 2004

By: /s/ William Porter
    -------------------------------------------------
    William Porter
    Senior Vice President and Chief Financial Officer

EXHIBIT 32.01

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2004 of Cadence Design Systems, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael J. Fister, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael J. Fister
---------------------------------------
Michael J. Fister
President and Chief Executive Officer
Date: August 10, 2004

A signed original of this written statement required by Section 906 has been provided to Cadence Design Systems, Inc. and will be retained by Cadence and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.02

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the fiscal quarter ended July 3, 2004 of Cadence Design Systems, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William Porter, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William Porter
-------------------------------------------------
William Porter
Senior Vice President and Chief Financial Officer
Date: August 10, 2004


	•	revenue recognition;
	•	accounting for income taxes;
	•	valuation of long-lived and intangible assets, including goodwill; and
	•	restructuring charges.


	•	identifying a triggering event that arises from a change in circumstances;

	•	forecasting future operating results; and

	•	estimating the proceeds from the disposition of long-lived or intangible assets.


	•	Migration to nanometer design: the size of features such as wires, transistors and contacts on ICs is shrinking due to advances in semiconductor manufacturing processes. Process feature sizes refer to


		the width of the transistors and the width and spacing of the interconnect on the IC. Feature size is normally identified by the headline transistor length, which is shrinking from 180 nanometers to 130 nanometers and smaller. This is commonly referred to in the semiconductor industry as the migration to nanometer design. It represents a major challenge for participants in the semiconductor industry, from IC design and design automation to design of manufacturing equipment and the manufacturing process itself. Shrinkage of transistor length to such infinitesimal proportions is challenging fundamental laws of physics and chemistry.
	•	The ability to design System-on-Chip, or SoC, ICs increases the complexity of managing a design that at the lowest level is represented by billions of shapes on the fabrication mask. In addition, SoCs typically incorporate microprocessors and digital signal processors that are programmed with software, requiring simultaneous design of the IC and the related software embedded on the IC.
	•	Increased capability of Field-Programmable Gate Array technologies creates an alternative to IC implementation for some electronics companies. This could reduce demand for Cadence’s IC implementation products and services.
	•	A growing number of low-cost design services businesses could reduce the need for some IC companies to invest in EDA products.
	•	The challenges of nanometer design are leading some customers to work with older, less risky manufacturing processes. This may reduce their need to upgrade their EDA products and design flows.


	•	Difficulties in combining previously separate businesses into a single unit;
	•	The substantial diversion of management’s attention from day-to-day business when evaluating and negotiating these transactions and then integrating an acquired business;
	•	The discovery, after completion of the acquisition, of liabilities assumed from the acquired business or of assets acquired that are not realizable;
	•	The failure to realize anticipated benefits such as cost savings and revenue enhancements;
	•	The failure to retain key employees of the acquired business;
	•	Difficulties related to assimilating the products of an acquired business in, for example, distribution, engineering and customer support areas;
	•	Unanticipated costs;
	•	Customer dissatisfaction with existing license agreements with Cadence which may preclude access to products acquired by Cadence after the effective date of the license; and
	•	Failure to understand and compete effectively in markets in which we have limited previous experience.


	•	The development by others of competitive EDA products or platforms and design and methodology services could result in a shift of customer preferences away from our products and services and significantly decrease revenue;
	•	Decisions by electronics manufacturers to perform design and methodology services internally, rather than purchase these services from outside vendors due to budget constraints or excess engineering capacity;
	•	The challenges of developing (or acquiring externally-developed) technology solutions which are adequate and competitive in meeting the requirements of next-generation design challenges;
	•	The significant number of current and potential competitors in the EDA industry and the low cost of entry;
	•	Intense competition to attract acquisition targets, which may make it more difficult for us to acquire companies at an acceptable price or at all; and
	•	The combination of or collaboration among many EDA companies to deliver more comprehensive offerings than they could individually.


	•	Pay damages, license fees or royalties to the party claiming infringement;
	•	Stop licensing products or providing services that use the challenged intellectual property;
	•	Obtain a license from the owner of the infringed intellectual property to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or
	•	Redesign the challenged technology, which could be time-consuming and costly.


	•	The timing of customers’ competitive evaluation processes; or
	•	Customers’ budgetary constraints and budget cycles.


	•	Our cost of services employees is high and reduces our gross margin. Gross margin represents the difference between the amount of revenue from the sale of services and our cost of providing those services. We must pay high salaries to attract and retain professional services employees. This results in a lower gross margin than the gross margin in our software business. In addition, the high cost of training new services employees or not fully utilizing these employees can significantly lower gross margin. It is difficult to adjust staffing levels quickly to reflect customer demand for services; therefore, the services business has in the past and could continue to experience losses.
	•	A portion of services contracts consists of fixed-price contracts. Some of our customers pay a fixed price for services provided, regardless of the cost we must incur to perform the contract. If our cost in performing the services were to exceed the amount the customer has agreed to pay, we would experience a loss on the contract, which could harm our business, operating results and financial condition.
	•	We have historically suffered losses in our design services business. The market for electronics design services is sensitive to customer budgetary constraints and engineering capacity. Our design services business has historically suffered losses. If our design services business fails to increase its revenue to offset its expenses, the design services business will continue to experience losses. Our failure to succeed in the design services business may harm our business, operating results and financial condition.


	•	The adoption and expansion of government trade restrictions;
	•	Limitations on repatriation of earnings;
	•	Limitations on the conversion of foreign currencies;
	•	Reduced protection of intellectual property rights in some countries;
	•	Recessions in foreign economies;
	•	Longer collection periods for receivables 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 exports which may lengthen the sales cycle or restrict or prohibit the sale or licensing of certain products.


	•	Earnings being lower than anticipated in countries where we are taxed at lower statutory rates as compared to the U.S. statutory tax rate;
	•	An increase in expenses not deductible for tax purposes, including write-offs of acquired in-process technology and impairment of goodwill;
	•	Changes in the valuation of our deferred tax assets and liabilities;
	•	Changes in tax laws or the interpretation of such tax laws; or


	•	New accounting standards or interpretations of such standards.


	•	Loss of current customers and loss of or delay in revenue and loss of market segment share;
	•	Failure to attract new customers or achieve market acceptance;
	•	Diversion of development resources to resolve the problem;
	•	Increased service costs; and
	•	Liability for damages.


	•	make it difficult for us to satisfy our payment obligations on our debt as described below;
	•	make it difficult for us to incur additional debt or obtain any necessary financing in the future for working capital, capital expenditures, debt service, acquisitions or general corporate purposes;
	•	limit our flexibility in planning for or reacting to changes in our business;
	•	reduce funds available for use in our operations;
	•	make us more vulnerable in the event of a downturn in our business;
	•	make us more vulnerable in the event of an increase in interest rates if we must incur new debt to satisfy our obligations under the Notes; or
	•	place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have greater access to capital resources.


	•	Our certificate of incorporation allows our 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 of our preferred stock that may be issued in the future may be superior to the rights of holders of our common stock.
	•	We have a rights plan, commonly known as a “poison pill,” which would make it difficult for someone to acquire our company without the approval of our board of directors.
	•	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.


	2. A proposal to approve an amendment and restatement of the 1987 Stock Option Plan to enable Cadence to issue up to three million shares of incentive stock thereunder was approved by a vote of 166,450,882 for, 48,387,307 opposed, 2,140,958 withheld and 31,667,487 broker non-votes.

	3. A proposal to approve an amendment to the Amended and Restated Employee Stock Purchase Plan to increase the number of shares available for purchase thereunder by nine million was approved by a vote of 166,256,066 for, 48,648,522 opposed, 2,074,559 withheld and 31,667,487 broker non-votes.

	4. A proposal for the ratification of the selection of KPMG LLP as independent auditors for the fiscal year ending January 1, 2005 was approved by a vote of 245,777,350 for, 874,078 opposed, and 1,995,206 withheld and no broker non-votes.