10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to

Commission file number 1-10606

CADENCE DESIGN SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

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

(Address of Principal Executive Offices, including Zip Code)

(408) 943-1234

(Registrant’s Telephone Number, including Area Code)

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

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

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

None

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

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Act).     Yes þ     No o

      The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 29, 2002) was $4,279,174,416.

      On March 1, 2003 approximately 269,058,473 shares of the registrant’s Common stock, $0.01 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive proxy statement for the 2003 Annual Meeting are incorporated by reference into Part III hereof.

TABLE OF CONTENTS

PART I.
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote Of Security Holders
PART II.
	Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III.
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
	Item 14. Controls and Procedures
PART IV.
	Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
CERTIFICATIONS
List of Exhibits
EXHIBIT 10.06
EXHIBIT 10.08
EXHIBIT 10.12
EXHIBIT 10.16
EXHIBIT 10.67
EXHIBIT 21.01
EXHIBIT 23.01
EXHIBIT 23.02

CADENCE DESIGN SYSTEMS, INC.

2002 FORM 10-K ANNUAL REPORT

Table of Contents

		Page
PART I
Item 1.	Business		3
Item 2.	Properties		16
Item 3.	Legal Proceedings		16
Item 4.	Submission of Matters to a Vote of Security Holders		18
PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters		20
Item 6	Selected Financial Data		21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		45
Item 8.	Financial Statements and Supplementary Data		45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		45
PART III
Item 10.	Directors and Executive Officers of the Registrant		46
Item 11.	Executive Compensation		46
Item 12	Security Ownership of Certain Beneficial Owners and Management		46
Item 13.	Certain Relationships and Related Transactions		46
Item 14.	Controls and Procedures		46
PART IV
Item 15.	Exhibits, Financial Statements, Schedules and Reports on Form 8-K		48
	Signatures		97
	Certifications		99

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PART I.

Item 1. Business

      Certain statements contained in this Annual Report on Form 10-K, 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,” “plan,” “should,” “will” and “would” and words of similar import, constitute forward-looking statements. These statements are predictions based upon Cadence’s current expectations about future events and speak only as of the date of this annual report, and we assume no obligation to update any such forward-looking statement. Actual results could vary materially as a result of certain factors, including but not limited to, those expressed in these statements. Readers are referred to “Competition,” “Proprietary Technology,” “Factors That May Affect Future Results,” “Results of Operations,” “Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Annual Report on Form 10-K and the risks discussed in our other SEC filings, which identify important risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements. Unless specifically noted, references to Cadence in this annual report are references to Cadence and its subsidiaries.

Overview

      Cadence Design Systems, Inc. provides a broad range of software and other technology and offers design and methodology services for the product development requirements of the world’s leading electronics companies. Cadence licenses its electronic design automation, or EDA, software and hardware technology and provides a range of services to companies throughout the world to help accelerate and manage their product development processes. Cadence’s products and services are used by companies to design and develop complex integrated circuits, or ICs, and electronic systems, including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products and other advanced electronics. These industries are experiencing a general downturn.

      Cadence was formed as a Delaware corporation in May 1988. Cadence’s headquarters are located at 2655 Seely Avenue, San Jose, California 95134. Its telephone number at that location is (408) 943-1234 and its web-site can be accessed at www.cadence.com. Cadence makes available free of charge copies of its SEC filings and submissions on Cadence’s website as soon as practicable after electronically filing or furnishing such documents with the SEC.

      Cadence manages its business through three operating segments. The Products segment develops and markets Cadence® software and hardware technologies to Cadence’s customers. The Maintenance segment addresses the on-going, after-sale support requirements of those products through technical support and software updates. The Services segment provides Cadence customers with educational services focused on training customers for the efficient and effective use of Cadence technologies, methodologies services to assist customers to optimize the use of Cadence technologies within their design processes and design services focused on the development of complex IC and other electronic designs for Cadence customers who select Cadence as their design provider.

Factors Driving The Electronic Design Automation Industry

      During the last decade, the worldwide communications, business productivity and consumer electronics markets drove development in the electronics industry. Ever-decreasing silicon manufacturing process geometries coupled with the move to 300mm wafer production drive IC cost decreases, volume increases and greater complexity for providers of electronics devices. At the same time, the development of more comprehensive ICs complicates effective integration of components into complete electronic systems. These market and technology forces pose major challenges for the global electronics design community, and consequently create significant opportunities and challenges for EDA tool and services providers.

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      From a design perspective, many of today’s complex ICs are system-on-a-chip, referred to as SoC, devices. These SoC devices, as described in more detail below, contain one or more processors, memory and application-specific logic. SoC design requires implementing an entire electronics sub-system on a single IC. Smaller feature sizes make it more attractive to put additional circuitry on a single segment of silicon, or die. The ICs fabricated on these dies include one or more processors (microprocessors and digital signal processors), a high-performance bus for on-chip data communication, numerous memory devices and peripherals, custom digital logic, custom analog logic and millions of lines of software code. Such devices offer benefits in terms of price, performance, power and size. However, they are extremely difficult to design. Designing these SoC devices requires the convergence of what have previously been distinct domains for embedded software, digital logic, analog circuitry and printed circuit board, or PCB, design. This convergence is changing the way designs for these devices are created.

      The increasing complexity of electronic devices poses major challenges for design teams in the migration to nanometer, or one billionth of a meter, design and SoC design (for reference, the diameter of the period at the end of this sentence is approximately 400,000 nanometers). Nanometer design refers to the design of ICs that will have feature sizes smaller than 180 nanometers. IC feature sizes for wires, transistors and contacts decrease with each advance in the semiconductor manufacturing process. Each successive move to a smaller feature size (e.g., decreasing from 180 nanometers to 130 nanometers and smaller) requires introducing new capabilities throughout the entire design and manufacturing flow to account for new physical effects. For example, at 130 nanometers, signal integrity issues such as signal interference between wires, or crosstalk; power distribution management, or IR (voltage) drop; and electrical noise on the IC, have become critical.

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

Cadence Electronic Design Automation Tools

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

Functional Verification Platform

      Based on a single-kernel, or common, architecture, the Cadence Incisive^TM verification platform supports a unified methodology from design of the total system to design-in of particular ICs to specific systems, for all design domains. Compared to traditional register-transfer level, or RTL, simulation approaches, Incisive provides up to 100 times faster full-chip verification throughout the entire design cycle and reduces total verification time by up to 50%.

Digital IC Design Platform

      The Cadence Encounter platform leverages a unified architecture for full RTL-to-GDSII digital implementation of nanometer-scale designs. It is based on a single user interface and unified in-memory data model, and was specifically designed to focus on ensuring that interconnect is analyzed and optimized throughout the design process. It is comprised of the following core technologies: First Encounter® Ultra, a silicon virtual prototyping system that serves as a universal cockpit for the platform; NanoRoute^TM Ultra, which uses graph-based routing technologies to efficiently support variable-spacing, variable-width routes for nanometer process technologies; and the CeltIC^TM crosstalk analyzer, which is used by leading silicon foundries for precision signal integrity signoff.

      Unlike traditional “front-end/ back-end” systems, the Encounter platform does not require translations between common tasks such as placement, clock-tree synthesis, routing, and timing/crosstalk analysis. The SoC Encounter^TM configuration supports hierarchical designs, with full-chip RTL-to-GDSII support for designs containing more than 25 million gates. A gate is an electronic switch that allows or prevents the flow of

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current in a circuit. Nano Encounter^TM supports full-chip gates-to-GDSII implementation for non-hierarchical chips and blocks of up to 10 million gates.

Custom Design Tools

      Cadence offers a broad range of analog and mixed-signal design tools. The Cadence Analog Design Environment is a front-to-back analog design automation solution for a range of design styles including full-custom analog, digital mixed-signal and radio frequency, or RF, IC design. Within that environment, designers can use the Cadence Spectre® Circuit Simulator. RF designers can use the Cadence Spectre RF simulator on desktop workstations to perform full-chip, transistor-level circuit simulation of RF designs with more than 5,000 devices. In late 2002, Cadence acquired certain assets of Antrim Design Systems, Inc., bringing new tools to the standard custom IC flow that allow better management of design and simulation data, automation of time-consuming tasks, and improved handling of engineering changes in later stages. In early 2003, Cadence acquired Celestry Design Technologies, Inc. whose technology verifies designs against silicon measurements.

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

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

Design For Manufacturing

      The physical design of ICs requires detailed analysis and optimization to ensure the design can be manufactured. Cadence’s Fire & Ice products take the designer’s representation of the IC and extract the physical properties of the design to enable further analysis. The SignalStorm® and VoltageStorm® products address nanometer design challenges associated with on-chip distribution of power, timing and crosstalk effects. Cadence’s Assura products perform design rule checking to ensure the proposed design meets the requirements of the foundry’s manufacturing process rules. Cadence’s software and services are designed to provide comprehensive, high-speed verification that an IC will perform as designed, taking into account the complex effects of nanometer semiconductor physics.

Printed Circuit Board and IC Packaging Design Tools

      Cadence produces integrated PCB and IC packaging design flows targeted at solving the design complexities that today’s nanometer-scale devices are creating at the package and board level. PCB design products address both the high-speed, high-end of the market and the mainstream segment with scalable versions of Allegro® PCB layout, SPECCTRA® autorouter, SPECCTRAQuest^TM design and analysis environment, Concept® HDL schematic capture, Capture CIS, and PCB librarian.

      Recent product introductions include advances in signal integrity design and analysis technologies and first-in-class differential signal capabilities targeted at the network and communications design markets. For example, new capabilities in SPECCTRAQuest allow IC manufacturers to create silicon design-in kits, speeding the adoption of their advanced chips into systems, speeding design-to-volume for both themselves and their systems customers.

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      Unique IC package and PCB co-design methodologies allow engineers to consider the package in context of the board, and the board in context of the package, allowing them to make tradeoffs and optimize product performance.

      Cadence sells and supports its OrCAD product line of personal productivity PCB design tools through a worldwide network of value added resellers.

Third-Party Tool and Partner Support

      Cadence supports the integration of third-party design tools through its Connections® Program. The Connections Program provides other EDA companies with access to Cadence products to ensure that Cadence tools work well in multiple design environments. Many EDA providers are members of the Connections Program. Additionally, Cadence manages relationships with foundry and library provider partners to support customer-owned tooling, or COT, solutions for its customers. Cadence also assists and supports library providers in the integration of Cadence design and verification tools and model formats into COT library solutions. These relationships are an important aspect of providing complete solutions to semiconductor designers, because these designers depend on coordinated offerings from multiple suppliers. Cadence’s programs are designed to support its customers’ ability to address their business and technical challenges, from IC design through to production manufacturing in volume.

Maintenance and Support Services

      Support services include product maintenance and updates, and telephone and Internet-based technical support. Maintenance and support are offered to customers either in conjunction with Cadence product license agreements or under a separate maintenance agreement.

Electronic Design Automation Services

      To complement its tools, Cadence provides a range of electronic design services that help optimize design team productivity. These include educational, support, design, verification, application service provider, or ASP, and methodology services.

Education Services

      Cadence’s educational services include Internet, classroom and custom courses, the content of which ranges from how to use the most recent tool features to the latest design techniques.

Design Services

      The Cadence Design Foundry® offers engineering services and re-usable design technologies to aid customers with the design of complex ICs in advanced semiconductor process technologies. The Design Foundry focuses its offerings primarily on SoC devices including both Application Specific Integrated Circuits, or ASICS, and Application Specific Standard Parts, and on analog and mixed signal ICs. The market for these services is primarily the semiconductor and systems companies developing products for the communications, computing, and consumer market segments. Cadence Design Foundry offers engineering capabilities to assist customers from product concept through volume manufacturing.

      The Cadence Design Foundry also makes its intellectual property, or design IP, portfolio available to customers. These re-usable design technologies enable customers to reduce the design complexity and time to market for the development of complex SoCs. This IP portfolio includes technology in four critical design domains:

• Communications and networking (Ethernet MACs and encryption cores);

• Digital building blocks (peripherals and memory access);

• High speed Input/ Output (SPI4P2, PCI Express, RapidIO, FibreChannel);

• Analog building blocks (DAC, ADC, PLL).

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      Design IP may be licensed to customers as a component of an engineering service engagement, or sold on an “as is” basis. Customers generally pay a license fee for access to the design IP and a per unit royalty fee to use it in volume production.

      Through the Design Foundry’s collaboration with customers in the design of today’s most advanced ICs, Cadence is able to bridge what is often referred to as the “design gap.” The design gap refers to the inability of IC design techniques to keep pace with semiconductor process technology advances. By designing first-of-their-kind ICs, Cadence Design Foundry gains direct and early visibility to industry design issues that may not be addressed adequately by today’s design automation solutions. This enables Cadence to accelerate the development of new software technology to meet the market’s current and future design requirements.

Verification and ASP Services

      Cadence offers verification and ASP services through Time-to-Market Engineering, or TtME®, services and the QuickCycles^TM programs. The TtME staff provides customers with consulting services, project services and/or complete turnkey services for verification acceleration and system emulation. QuickCycles allows customers to access Palladium simulation acceleration and emulation products on a pay-as-you-go basis, either on the customer site or remotely over a high-speed, secure network connection.

Methodology Services

      Cadence’s Methodology Services group offers a variety of services to help customers effectively address electronic design challenges. It leverages Cadence’s cumulative experience and knowledge of design practices to improve productivity. Cadence also offers virtual computer aided design, or VCAD, through which engineering teams at one or more Cadence locations provide technical support through a virtual private network to customer design groups located at the customers design sites.

Marketing and Sales

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

      Cadence markets and supports its products and services internationally through its subsidiaries and various distributors. Cadence markets its emulation hardware and consulting and design services in Japan through a wholly-owned subsidiary. In Japan, Cadence licenses most of its software products through Innotech Corporation, in which Cadence is an approximately 15% stockholder.

Research and Development

      Cadence’s investment in research and development was $326.4 million in 2002, $297.3 million in 2001, and $263.9 million in 2000.

      The primary areas of Cadence’s research include SoC design, the design of silicon devices in the nanometer range, high-speed board design, architectural-level design, high-performance logic verification technology and hardware/ software co-design. Because the electronics industry combines rapid innovation with rapidly increasing design and manufacturing complexity, Cadence focuses significant investment on enhancing current products, as well as creating new products and techniques.

      Cadence’s future performance depends largely on its ability to maintain and enhance its current product lines, develop new products and services, maintain technological competitiveness and meet increasingly

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complex customer requirements. In addition to research and development conducted within each of our segments, Cadence maintains Cadence Laboratories, an advanced research group responsible for exploring new directions and applications of its technologies, migrating new technologies into Cadence’s existing offerings and maintaining strong industry relationships.

Competition

      Cadence currently competes primarily with two large companies: Mentor Graphics Corporation and Synopsys, Inc. In 2002, two large EDA companies, Synopsys, Inc. and Avant! Corporation merged, and the combined company offers a broader product range. Cadence also competes 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 Cadence because they wish to promote their own internal design departments.

Proprietary Technology

      Cadence’s success depends, in part, upon its proprietary technology. Cadence generally relies on patents, copyrights, trademarks, trade secret laws, licenses and restrictive agreements to establish and protect its proprietary rights in technology and products. Many Cadence products include software or other intellectual property licensed from third parties. Cadence may have to seek new or renew existing licenses for such software and other intellectual property in the future. The Cadence Design Foundry licenses certain software and other intellectual property of third parties, including that of competitors.

Manufacturing and Distribution

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

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

Backlog

      Cadence’s backlog on December 28, 2002 was approximately $1.4 billion. Backlog consists of:

• Revenue from subscription licenses for hardware and software products to be recognized on a ratable basis after December 28, 2002;

• Revenue for maintenance contracts on hardware and software products to be recognized on a ratable basis after December 28, 2002;

• Revenue from orders for hardware and software products sold on perpetual and term licenses on which customers have requested ship dates after December 28, 2002; and

• Revenue from the undelivered portion of services contracts that is recognized on a percentage of completion basis.

      Cadence has not historically experienced significant cancellation of its contracts with customers. Customers often reschedule the required completion dates of services contracts which has the effect of deferring revenue recognition under those contracts beyond the original expected completion date.

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Employees

      As of March 1, 2003, Cadence employed approximately 5,175 individuals, with approximately 2,455 in sales, services, marketing, support and manufacturing activities, 1,970 in product development and 750 in management, administration and finance. None of Cadence’s employees is represented by a labor union, and Cadence has experienced no work stoppages. Cadence believes that its employee relations are good.

Factors That May Affect Future Results

      The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. Additional risks and uncertainties not currently known to Cadence or that Cadence currently deems insignificant also may impair Cadence’s business operations. If any of the following risks actually occurs, Cadence’s business, operating results and financial condition could be materially harmed.

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

        the current downturn or any future downturns may reduce Cadence’s revenue

      Purchases of Cadence’s products and services are highly dependent upon the commencement of new design projects by IC manufacturers and electronics systems companies. The IC industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The IC and electronics systems industries have experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both these companies’ and their customers’ products and a decline in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. During these downturns, the number of new design projects may decrease. IC manufacturers and electronics systems companies experienced a downturn in demand and production in 2001 and in 2002, which has continued in 2003. Cadence expects revenue to continue to be adversely affected by the general downturn in the economy and, in particular, the electronics industry. The current downturn and any future downturns may reduce Cadence’s software and maintenance revenue and further reduce its services and hardware revenue and harm its results of operations.

Fluctuations in operating results for any fiscal period could hurt Cadence’s business and the market

        price of its stock

      Cadence has experienced, and may continue to experience, varied quarterly operating results. Various factors affect Cadence’s quarterly operating results and some of them are not within Cadence’s control. Cadence’s quarterly operating results are affected by the timing of significant orders for its software products because a significant number of contracts for software products are in excess of $5.0 million. The failure to close a contract for one or more orders for Cadence’s software products could seriously harm its quarterly operating results.

      Cadence’s operating results are also affected by the mix of license types executed in any given period. Cadence has three basic licensing models: term, subscription and perpetual. Product revenue associated with term and perpetual licenses is generally recognized at the beginning of the license period, while product revenue associated with subscription licenses is recognized ratably 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 non-linear payment terms or as cash is collected from customers with lower credit ratings.

      In 2002, Cadence experienced increasing customer preference for its subscription licenses, which give customers limited access to new technology. Revenue recognized on a ratable basis is expected to continue to increase as a percentage of overall revenue to the extent customers continue to prefer subscription licenses in the future, or continue to request more flexible payment terms, both of which cause revenue to be recognized ratably over time.

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      Cadence plans 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 being below expectations as Cadence may not be able to quickly reduce these fixed expenses in response to short-term business changes.

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

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

      predict and may cause its operating results to fluctuate unexpectedly

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

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

• Customers’ budgetary constraints and internal acceptance review procedures;

• The timing of customers’ budget cycles; or

• The timing of customers’ competitive evaluation processes.

      Lengthy sales cycles for acceleration and emulation hardware products subject Cadence to a number of significant risks over which Cadence has 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 its customers’ buying patterns, Cadence 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 Cadence common stock.

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

      and obsolete

      The industries in which Cadence competes experience rapid technology developments, changes in industry standards, changes in customer requirements and frequent new product introductions and improvements. Currently, the industries Cadence serves 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 all levels of the semiconductor industry, from IC design and design automation to design of manufacturing equipment and the manufacturing process itself. Shrinkage of transistor length to such infinitesimal proportions is challenging fundamental laws of physics and chemistry.

• The ability to design 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.

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

Cadence has historically suffered losses in its electronics design services business

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

The profitability of Cadence’s services business depends on factors that are difficult to control

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

• Cadence’s cost of services employees is high and reduces services gross margin. Gross margin represents the difference between the amount of revenue from the sale of services and Cadence’s cost of providing those services. Cadence must pay high salaries to attract and retain professional services employees. This results in a lower gross margin than the gross margin in Cadence’s software business. In addition, the high cost of training new services 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 could experience losses.

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

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

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

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

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

• The need to develop (or acquire externally-developed) technology solutions which are adequate and competitive in addressing the complexities of next-generation designs;

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

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• Many EDA companies have combined to deliver more comprehensive offerings than they could individually.

      Cadence currently competes primarily with two large companies: Mentor Graphics Corporation and Synopsys, Inc. In 2002, two large EDA companies, Synopsys, Inc. and Avant! Corporation merged, and the combined company offers a broader product range. Cadence also competes 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 Cadence because they wish to promote their own internal design departments.

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

      proprietary rights could seriously harm its business

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

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

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

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

• Pay damages, 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 Cadence were forced to take any of these actions, Cadence’s business and results of operations may suffer.

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

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

Cadence has acquired and expects to acquire other companies and businesses and may not realize the

        expected benefits of these acquisitions

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

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

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

• The discovery, after 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, including increases in the purchase price due to contingent consideration;

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

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

Cadence’s international operations may seriously harm its financial condition because of several weak
        foreign economies and the effect of foreign exchange rate fluctuations

      Cadence has significant operations outside the United States. Cadence’s revenue from international operations as a percentage of total revenue was approximately 45% in 2002 and 2001. Cadence expects that revenue from its international operations will continue to account for a significant portion of its total revenue. Cadence also transacts 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 euro, have had, and may continue to have, a seriously harmful effect on Cadence’s revenue and operating results.

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

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

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

      Cadence’s 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;

• Business interruptions or slowdowns from terrorism, military operations and war;

• Unexpected changes in regulatory requirements;

• Tariffs and other trade barriers; and

• U.S. government licensing requirements for exports which may lengthen the sales cycle or restrict or prohibit the sale or licensing of certain products.

Changes in effective tax rates could affect Cadence’s results of operations

      Cadence’s future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where Cadence is taxed at lower statutory rates, by changes in the valuation of Cadence’s deferred tax assets and liabilities, or by changes in tax laws or interpretations of such tax laws.

Failure to obtain export licenses could harm Cadence’s business

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

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

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

      In addition, new regulations proposed by the New York Stock Exchange requiring shareholder approval for all stock option plans, and prohibiting New York Stock Exchange member organizations from giving a

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proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions, could make it more difficult for Cadence to grant options to employees in the future. To the extent that new regulations make it more difficult or expensive to grant options to employees, Cadence may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, which could materially and adversely affect its business.

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

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

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

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

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

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

• Failure to attract new customers or achieve market acceptance;

• Diversion of development resources to resolve the problem;

• Increased service costs; and

• Liability for damages.

Anti-takeover defenses in Cadence’s certificate of incorporation, by-laws, and under Delaware law could
        prevent an acquisition of Cadence or limit the price that investors might be willing to pay for Cadence common stock

      Cadence’s by-laws and provisions of the Delaware General Corporation Law that apply to Cadence and its Certificate of Incorporation could make it difficult for another company to acquire control of Cadence. For example:

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

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

• 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 Cadence common stock and could delay, prevent or allow Cadence’s Board of Directors to resist an acquisition of Cadence, even if the proposed transaction was favored by a majority of Cadence’s independent stockholders.

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Cadence’s business is subject to the risk of earthquakes, floods and other natural catastrophic events

      Cadence’s corporate headquarters, including certain of Cadence’s research and development operations, and certain of Cadence’s 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 Cadence’s facilities, which include the corporate headquarters, certain of Cadence’s research and development operations, and certain of Cadence’s distribution operations, are in areas of San Jose, that have been identified by the Director of the Federal Emergency Management Agency (FEMA), as being located in a special flood area. The areas at risk are identified as being in a 100 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, Cadence’s operations may be interrupted, which would adversely impact its business.

Item 2. Properties

      Cadence’s headquarters are located in San Jose, California, and Cadence owns the related land and buildings. Additionally, Cadence owns buildings in India and land and buildings in Scotland. The total square footage of Cadence’s owned buildings is approximately 979,000 square feet.

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

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

Item 3. Legal Proceedings

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

      In February 1998, Aptix Corporation and Meta Systems, Inc. filed a lawsuit against Quickturn Design Systems, Inc. in the U.S. District Court for the Northern District of California alleging that Quickturn infringed a U.S. patent owned by Aptix and licensed to Meta. In June 2000, the District Court entered judgment in favor of Quickturn, dismissing the complaint and declaring the patent unenforceable. The Court also granted summary judgment to Aptix, denying Quickturn’s abuse of process counterclaim. On September 8, 2000, the Court ordered Aptix to pay $4.2 million to Quickturn as reimbursement of attorneys’ fees and costs it incurred in the litigation. Aptix appealed the District Court’s judgment and posted a $2.0 million bond to secure the judgment. On June 8, 2001, the U.S. Court of Appeals for the Federal Circuit affirmed the District Court’s dismissal of Quickturn’s abuse of process counterclaim. On November 5, 2001, the Federal Circuit vacated the District Court’s judgment of unenforceability, but affirmed the District Court’s dismissal of Aptix’s and Meta’s complaint and the award of attorneys fees and costs. Cadence received the bonded portion of the judgment in April 2002 and has taken steps to enforce the balance of the judgment.

      On January 7, 1999, in a suit captioned Mentor Graphics Corporation, et al. v. Lobo, et al., Delaware Chancery Court, New Castle County, Civ. Action No. 16843-NC (“Mentor II”), Mentor filed and served an amended complaint asserting claims against Cadence, Quickturn and the Quickturn Board of Directors for declaratory and injunctive relief for various alleged breaches of fiduciary duty purportedly owed by Quickturn and its Board of Directors to Quickturn’s shareholders in connection with the merger between Quickturn and Cadence. Mentor further alleged that Cadence aided and abetted Quickturn and its Board of Directors in those purported breaches. Mentor acknowledged that the suit became moot upon consummation of the Cadence acquisition of Quickturn, and on February 13, 2002, the Court dismissed the case on that basis. However, Mentor sought an award of attorney’s fees in the case, as well as in a prior related case in which Cadence was not a party. In May 2000, Mentor advised the Delaware Chancery Court of its objection to the settlement of a companion action brought on behalf of certain Quickturn shareholders, a settlement which is

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conditioned upon approval of the settlement by the Chancery Court and upon Mentor’s not being awarded attorneys’ fees in either Mentor II or the related case. In an order dated August 17, 2001, the Chancery Court denied Mentor’s fee application. Mentor filed a notice of appeal with the Delaware Supreme Court of the denial of the fee application. On July 25, 2002, the Chancery Court approved the settlement of the companion action. Mentor filed a notice of appeal from that order. The appeals were subsequently consolidated, and the Delaware Supreme Court heard argument on March 4, 2003. Cadence is vigorously defending this matter, but the ultimate outcome is currently unknown. Management believes that the ultimate resolution of this litigation will not have a material adverse effect on Cadence’s business, operating results or financial condition.

      On July 21, 1999, Mentor filed suit against Quickturn in the U.S. District Court for the District of Delaware, alleging that Quickturn’s Mercury^TM hardware emulation system infringed U.S. Patent Nos. 5,777,489 and 5,790,832, allegedly assigned to Mentor. Upon motion of Quickturn, the action was transferred to the U.S. District Court for the Northern District of California, Civil Action No. C 00-5464 SI. At Quickturn’s request, Cadence was added as a defendant. In response, Cadence and Quickturn filed counterclaims for declaratory judgment of non-infringement and invalidity of these patents. After filing the suit, Mentor additionally alleged that Quickturn’s Mercury Plus^TM product infringed these patents. Mentor subsequently filed Civil Action No. C 02-1426 SI, realleging that Quickturn’s Mercury^TM hardware emulation systems infringed U.S. Patent No. 5,777,489. This action was consolidated with Civil Action No. C 99-5464 SI. Cadence intends to vigorously defend this matter, but the ultimate outcome is currently unknown. Management believes that the ultimate resolution of this litigation will not have a material adverse effect on Cadence’s business, operating results or financial condition.

      On March 24, 2000, Mentor and Meta and several founders of Meta filed suit against Quickturn and Cadence and a former Quickturn employee in the U.S. District Court for the Northern District of California, Civil Action No. C-00-01030 SI. The suit alleged infringement of U.S. Patent No. 5,754,827 allegedly assigned to Mentor, misappropriation of trade secrets, common law misappropriation and breach of confidence, and sought unspecified damages, injunctive relief and the assignment to Mentor of a patent previously issued to Quickturn (U.S. Patent No. 5,943,490). Quickturn and Cadence filed counterclaims for declaratory judgment of non-infringement, unenforceability and invalidity of U.S. Patent No. 5,754,827. Quickturn and Cadence also counterclaimed for declaratory judgment of non-infringement, unenforceability and invalidity of two additional patents allegedly assigned to Mentor, U.S. Patent Nos. 5,999,725 and 6,057,706 which Mentor previously threatened to assert against Quickturn. Mentor’s response to Quickturn’s counterclaims affirmatively alleged infringement of both of these patents. This action was consolidated with the actions described in the preceding paragraph. Cadence intends to vigorously defend this matter, but the ultimate outcome is currently unknown. Management believes that the ultimate resolution of this litigation will not have a material adverse effect on Cadence’s business, operating results or financial condition.

      On September 11, 2000, Mentor filed a complaint against Quickturn and Cadence in the U.S. District Court for the Northern District of California, Civil Action No. C-00-03291 SI, accusing Quickturn and Cadence of infringing U.S. Patent No. 5,574,388, purportedly owned by Mentor, and seeking unspecified damages and injunctive relief. Cadence and Quickturn filed counterclaims for declaratory judgment of invalidity, unenforceability and non-infringement of this patent. The parties agreed to consolidate this action with Civil Action Nos. C 99-5464 SI, C 00-01030 SI and C 02-1426 SI, described above. Prior to trial, the Court ruled that the claims of the U.S. Patent Nos. 5,777,489, 6,057,706 and 5,574,388 at issue were invalid and, accordingly, dismissed from the case all allegations concerning those patents. On January 24, 2003, the Court dismissed Mentor’s breach of confidence claim with prejudice. Trial on the remaining allegations in all four lawsuits (Civil Action Nos. C 99-5464 SI, C 00-1030 SI, C-00-3291 SI and C 02-1426-SI) began on January 6, 2003. On February 19, 2003, the jury found in favor of Quickturn and Cadence on all remaining claims before them. Mentor has indicated that it intends to appeal the jury’s verdict. Cadence intends to vigorously defend this matter, but the ultimate outcome is currently unknown. Management believes that the ultimate resolution of this litigation will not have a material adverse effect on Cadence’s business, operating results or financial condition.

      On November 2, 2000, Mentor and Meta filed a complaint for declaratory judgment against Quickturn and Cadence in the U.S. District Court for the District of Oregon (Case No. C-00-1489) seeking a ruling that

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Mentor’s proposed design verification approach (in which IC designers would use U.S.-based computer terminals to operate SimExpress emulation systems located overseas) will not infringe Quickturn’s patents and will not violate the permanent injunction entered by the Oregon District Court on July 7, 1999 in Civil Action No. C-96-00342. In January 2001, Quickturn and Cadence filed a Motion to Dismiss the action, based on lack of subject matter jurisdiction. On May 1, 2001, the Court provisionally granted Quickturn’s motion to dismiss. Cadence and Quickturn believe that Mentor’s complaint is without merit. Cadence intends to vigorously defend this matter, but the ultimate outcome is currently unknown. Management believes that the ultimate resolution of this litigation will not have a material adverse effect on Cadence’s business, operating results or financial condition.

      On July 29, 2002, IKOS Systems, Inc., a subsidiary of Mentor, filed a complaint against Cadence and Quickturn in the U.S. District Court, District of Delaware, Civil Action No. 02-1335, accusing Quickturn’s Palladium^TM product of infringing IKOS’ U.S. Patent No. 5,847,578, and seeking unspecified damages and injunctive relief. On October 22, 2002, upon motion by Cadence and Quickturn, the court ordered the action to be transferred to the U.S. District Court, Northern District of California. Cadence believes the claim is without merit and is vigorously defending this matter, but the ultimate outcome is currently unknown. Management believes that the ultimate resolution of this litigation will not have a material adverse effect on Cadence’s business, operating results or financial condition.

      On December 30, 2002, Cadence filed a complaint against IKOS and Mentor in the U.S. District Court for the Northern District of California, Civil Action No. C 02-5343 JF, alleging that IKOS’ products infringe U.S. Patent No. 5,036,473 and seeking unspecified damages and injunctive relief. On January 6, 2003, Quickturn filed a motion to amend its Answer and Counterclaims in this suit to add a counterclaim alleging that IKOS’ products infringe U.S. Patent No. 5,036,473. On February 24, 2003, the Court granted this motion and agreed to consolidate this action with Civil Action No. 02-1335, described in the preceding paragraph.

      On February 25, 2000, Cadence and several of its officers were named as defendants in a lawsuit filed in the U.S. District Court for the Northern District of California, entitled Maxick v. Cadence Design Systems, Inc., File No. C 00-0658PJH. The action was brought on behalf of a class of shareholders of OrCAD, Inc., and alleged violations of the tender offer rules under the Securities Exchange Act of 1934. The lawsuit arose out of Cadence’s acquisition of OrCAD, which was completed in August 1999. The parties have settled the matter and Cadence has paid $1.25 million. The settlement was approved by the Court on November 13, 2002.

      For any of the disputes and litigation matters discussed above, were an unfavorable ruling to occur in any specific fiscal period, there exists the possibility of a material adverse impact on the results of operations for such period.

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

      None

Executive Officers Of Cadence

      The executive officers of Cadence are as follows:

Name	Age		Positions and Offices
H. Raymond Bingham		57	President, Chief Executive Officer and Director
Kevin Bushby		47	Executive Vice President, Worldwide Field Operations
David DeMaria		41	Executive Vice President, Systems Solutions
Lavi A. Lev		46	Executive Vice President, IC Solutions
R.L. Smith McKeithen		59	Senior Vice President, General Counsel and Secretary
William Porter		48	Senior Vice President and Chief Financial Officer

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

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

      KEVIN BUSHBY has served as Executive Vice President, Worldwide Field Operations of Cadence since 2001. From 1995 to 2001, Mr. Bushby served as Vice President and General Manager, European Operations of Cadence. Prior to joining Cadence, from 1990 to 1995 Mr. Bushby held several positions with Unisys Corporation, most recently as Vice President Sales and Marketing, Client Server Systems Division.

      DAVID DEMARIA has served as Executive Vice President, Systems Solutions Business since July 2002. Mr. DeMaria served as Cadence’s Senior Vice President of Worldwide Marketing from November 1999 to June 2002. Mr. DeMaria served as the General Manager of Cadence’s PCB business from May 1997 to October 1999. Mr. DeMaria joined Cadence upon consummation of the Cadence acquisition of Cooper & Chyan Technology, Inc. Prior to joining Cadence, Mr. DeMaria served in executive capacities with ViewLogic Systems, Inc., an EDA company, and Zuken, Inc., an EDA software company.

      LAVI A. LEV has served as Executive Vice President, IC Solutions since July 2002. From March 2001 to June 2002, Mr. Lev served as Senior Vice President and General Manager of the IC Solutions Group. Prior to joining Cadence, Mr. Lev was Senior Vice President of Engineering at MIPS Technologies, Inc. Mr. Lev has more than 20 years of experience in the semiconductor industry.

      R.L. SMITH MCKEITHEN has served as Senior Vice President, General Counsel and Secretary since 1998. From 1996 to 1998, Mr. McKeithen served as Vice President, General Counsel and Secretary of Cadence. Prior to joining Cadence, from 1994 to 1996, Mr. McKeithen served as Vice President, General Counsel and Secretary of Strategic Mapping, Inc., a software company. From 1988 to 1994, Mr. McKeithen served as Vice President, General Counsel and Secretary of Silicon Graphics, Inc.

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

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PART II.

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

      Cadence common stock is traded on the New York Stock Exchange under the symbol CDN. Cadence has never declared or paid any cash dividends on its common stock in the past, and does not plan to pay cash dividends in the foreseeable future. As of March 1, 2003, Cadence had approximately 1,600 registered stockholders and approximately 24,800 beneficial owners of its common stock.

      The following table sets forth the high and low sales price for Cadence common stock for each calendar quarter in the two-year period ended December 28, 2002:

		High		Low
2002:
	First Quarter	$	24.39	$	20.50
	Second Quarter	$	23.00	$	14.43
	Third Quarter	$	16.12	$	10.10
	Fourth Quarter	$	15.12	$	8.65
2001:
	First Quarter	$	32.31	$	18.22
	Second Quarter	$	24.07	$	16.69
	Third Quarter	$	23.48	$	15.48
	Fourth Quarter	$	24.65	$	16.12

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Item 6. Selected Financial Data

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

	Five fiscal years ended December 28, 2002
	2002		2001		2000		1999			1998
	(In thousands, except per share amounts)
Revenue	$	1,293,067	$	1,430,440	$	1,279,550	$	1,093,303		$	1,320,180
Net income (loss)*	$	71,949	$	141,287	$	49,977	$	(14,075	)	$	25,124
Net income (loss) per share — assuming dilution*	$	0.27	$	0.55	$	0.19	$	(0.06	)	$	0.10
Total assets	$	2,438,261	$	1,730,030	$	1,477,321	$	1,459,659		$	1,481,916
Long-term debt and capital lease obligations	$	52,659	$	1,476	$	3,298	$	25,024		$	136,380
Stockholders’ equity*	$	1,659,305	$	1,121,347	$	906,465	$	986,149		$	947,830

*  Beginning Cadence’s fiscal year 2002, Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets” was adopted and, as a result, Cadence has ceased to amortize approximately $178.8 million of goodwill, net of amortization, including workforce intangibles that were subsumed into goodwill upon adoption of SFAS No. 142. The 1998 to 2001 consolidated financial data include amortization of goodwill and workforce intangibles totaling $50.8 million for 2001, $36.5 million for 2000, $16.5 million for 1999 and $7.2 million for 1998.

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

      The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes, including without limitation the five-year summary of selected financial data and the Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. All references to years represent fiscal years unless otherwise noted. Except for the historical information contained in this Annual Report on Form 10-K, the following discussion contains forward-looking statements based on current expectations that involve certain risks and uncertainties, 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,” “plan,” “should,” “will” and “would” and words of similar import. These statements are predictions based upon Cadence’s current expectations about future events and speak only as of the date of this annual report, and we assume no obligation to update any such forward-looking statement. Actual results could vary materially as a result of certain factors, including but not limited to, those expressed in these statements. Readers are referred to “Competition,” “Proprietary Technology,” “Factors That May Affect Future Results,” “Results of Operations,” “Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Annual Report on Form 10-K and the risks discussed in our other SEC filings, which identify important risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements. Unless specifically noted, references to Cadence in this annual report are references to Cadence and its subsidiaries.

Overview

       General

      Cadence Design Systems, Inc. provides a broad range of software and other technology and offers design and methodology services for the product development requirements of the world’s leading electronics companies. Cadence licenses its electronic design automation, or EDA, software and hardware technology and provides a range of services to companies throughout the world to help accelerate and manage their product development processes. Cadence’s products and services are used by companies to design and develop complex ICs and electronic systems, including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products and other advanced electronics. These industries are experiencing a general downturn.

      IC manufacturers and electronics systems companies experienced a downturn in demand and production in 2001 and 2002, which has continued in 2003. Cadence expects revenue to continue to be adversely affected by the general downturn in the economy and, in particular, the electronics industry.

       Acquisitions

      Cadence has acquired companies and businesses, some of which are described below. Cadence expects to acquire other companies or businesses in the future. For each of these acquisitions the results of operations and the estimated fair value of the assets acquired and liabilities assumed have been included in Cadence’s Consolidated Financial Statements from the date of the acquisition. These acquisitions are described in more detail in Note 4 of Notes to Consolidated Financial Statements.

      In September 2002, Cadence acquired IBM’s Test Design Automation, or TDA, business and paid a total cash purchase price of approximately $70.0 million. Concurrent with the acquisition, Cadence licensed software to IBM under subscription and term licenses, and entered into an agreement to provide services. Payments for these arrangements are for cash to be paid over the duration of the respective contracts under Cadence’s standard payment terms. Cash expected to be paid by IBM will be significantly in excess of the cash paid by Cadence for the TDA business. The software licenses and services transactions were determined to have fair value based upon pricing for comparable transactions. Cadence purchased IBM’s TDA business to acquire key technology and personnel.

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      In June 2002, Cadence acquired 100% of the outstanding common stock of Simplex Solutions, Inc., a publicly-traded company that provides software and services for the design and verification of ICs. The aggregate purchase price was $329.7 million which included the issuance of approximately 14.6 million shares of Cadence common stock, valued at $267.3 million, 4.5 million shares of Cadence common stock issuable on the exercise of assumed options, with a fair value of $46.4 million, and acquisition costs of $16.0 million. The value of the common stock issued was determined based on the average market price of Cadence’s common stock for the five day period including two days before and after the acquisition was announced. Cadence purchased Simplex to acquire key personnel and technology.

      In December 2001, Cadence acquired Silicon Perspective Corporation, or SPC, a privately-held design technology firm, for approximately 6.2 million shares of Cadence common stock, valued at $129.4 million, 0.8 million shares of stock issuable upon the exercise of assumed options with a fair value of $2.0 million, and acquisition costs of $3.3 million, for a total initial purchase price of $134.7 million. The purchase price will increase as certain predetermined bookings and product development goals, referred to as earnouts, are achieved in fiscal 2002 and 2003. SPC provides electronic design tools that bridge the gap between front-end logic designers and the back-end physical design process. Earnouts totaling 12.2 million shares valued at $190.9 million were earned for the fiscal year ending December 28, 2002, and were issued in February 2003. Cadence recorded approximately 89% of the value associated with the 12.2 million shares as goodwill and the remaining 11% of the value as deferred stock-based compensation. In connection with the acquisition, Cadence initially allocated $108.8 million of the purchase price to goodwill, which has been adjusted to $280.2 million as a result of the earnouts. The goodwill, deferred stock compensation and shares issued as consideration will increase upon the achievement of earnouts in fiscal 2003. The goodwill is not expected to be deductible for tax purposes. The technology and other acquired intangibles are being amortized over one to five years. Compensation expense in connection with the earnouts for the year ended December 28, 2002 was $9.7 million.

      In February 2001, Cadence acquired CadMOS Design Technology, Inc., a privately-held design tools firm, for approximately 3.6 million shares of Cadence common stock and assumed options, valued at $92.7 million. The acquisition was accounted for as a purchase. CadMOS provides solutions to the signal integrity problems experienced in nanometer processes. In the first quarter of 2002, Cadence issued an additional 0.2 million shares, valued at $3.6 million, due to CadMOS’ achievement of certain predetermined performance goals. In addition, the purchase price will increase by up to an additional 0.3 million Cadence shares if certain predetermined performance goals are achieved during the second and third years following the acquisition. These goals are related to bookings, product development and continued employment of certain CadMOS employees. In connection with the acquisition, Cadence allocated the purchase price primarily to goodwill of $50.2 million, which has been adjusted to $53.8 million as a result of the achievement of performance goals. The goodwill is not expected to be deductible for tax purposes. Technology and other acquired intangibles of $12.9 million were also recorded and are being amortized over three to five years.

        Tality Separation, Restructuring and Reorganization

      In July 2000, Cadence announced its plan to separate its electronics design services group into a new company named Tality Corporation, or Tality, and Tality filed a registration statement with the SEC for Tality’s initial public offering, or IPO. Tality’s separation from Cadence was substantially completed in October 2000, and the electronic design services business thereafter operated as a subsidiary of Cadence. In October 2000, Cadence announced the postponement of Tality’s IPO due to unfavorable market conditions. As a result of the postponement of the Tality IPO, Cadence expensed $2.8 million of IPO-related costs in the first quarter of 2001. In addition to the $2.8 million, in 2001 Cadence also expensed $2.0 million of Tality separation costs related primarily to information systems separation, legal and consulting fees. In April 2001, Cadence announced the withdrawal of the Tality IPO registration statement. Tality was reorganized and restructured during 2001, and in the first and second quarters of 2002. With the acquisition of Simplex in June 2002, Simplex’s SoC Design Foundry business was combined with Tality to operate as Cadence Design Foundry. Cadence Design Foundry focuses on high-end digital, analog and mixed-signal IC design in close

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conjunction with Cadence technology development groups. As a result, Cadence no longer has a separate design services group named Tality.

        Avant! Restitution and Settlement

      On November 13, 2002, Cadence announced the settlement of civil litigation filed against Avant! seeking damages related to theft of Cadence intellectual property, including software code, as well as other trade secrets. The settlement with Avant!, its parent corporation Synopsys, Inc. and several individuals included an agreement to dismiss all pending claims and counterclaims in the litigation and required the payment to Cadence of $265.0 million, which was received in the fourth fiscal quarter of 2002. This amount, net of related costs, is recorded in Avant! restitution and settlement in Cadence’s Consolidated Income Statement.

      On July 25, 2001, Avant! was ordered to pay Cadence $195.4 million in criminal restitution after Avant! entered a plea of no contest and was found guilty by the Superior Court of the State of California of conspiracy to take and use Cadence’s trade secrets. This conspiracy included the theft by Avant! and certain individuals of Cadence intellectual property, including software code, as well as other trade secrets. As of December 29, 2001, approximately $196.0 million, consisting of all of the restitution award plus interest was received. This amount, net of related costs, is recorded in Avant! restitution and settlement in Cadence’s Consolidated Income Statement.

         Critical Accounting Policies

       Cadence’s critical accounting policies are as follows:

• revenue recognition;

• estimating valuation allowances and accrued liabilities;

• accounting for income taxes; and

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

        Revenue recognition.

      Cadence derives revenue from three sources:

• product revenue, which includes software licensing, hardware sales and hardware leases;

• maintenance revenue from software and hardware; and

• services revenue.

      As described below, significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period.

      Cadence applies the provisions of Statement of Position 97-2, “Software Revenue Recognition,” as amended by Statement of Position 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,” to all product revenue transactions where the software is not incidental. Cadence also applies the provisions of SFAS No. 13, “Accounting for Leases”, to all hardware lease transactions.

      Cadence recognizes product 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 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.

      Cadence’s VSOE for certain product elements of an arrangement is based upon the pricing for comparable transactions when the element is sold separately. Cadence’s VSOE for maintenance is based upon

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the customer’s annual renewal rates. VSOE for services is based on the price charged when the services are sold separately. The timing of revenue recognition for both delivered and undelivered elements is in accordance with the relevant provisions of SOP 97-2.

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

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

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

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

      For subscription and term licenses and hardware leases, Cadence uses the license agreement and a 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 its Japanese distributor are evidenced by a master agreement governing the relationship, together with binding purchase orders from the distributor on a transaction-by-transaction basis.

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

      Cadence assesses whether a fee is fixed or determinable primarily based on the payment terms associated with the transaction. Cadence uses installment contracts for subscription and term licenses and has established a history of collecting under the original contract without providing concessions on payments, products or services. The time periods of installment contracts are equal to or less than the time period of the licenses and payments are generally collected quarterly. If different conditions were to prevail, and Cadence no longer had a history of collecting under the original contract without providing concessions on term licenses, revenue from term licenses would be recognized as payments under the installment contract become due and payable. This change could have a material impact on Cadence’s results of operations.

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

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

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

• Term licenses and Perpetual licenses — all revenue associated with licensed software is recognized upon the effective date of the license and delivery of the licensed product.

      Maintenance revenue consists of fees for providing technical support and software updates on a when-and-if available basis. Cadence recognizes all maintenance revenue ratably over the maintenance period under each software license agreement. For term and perpetual licenses, customers renew maintenance agreements annually. For subscription licenses, a portion of the revenue is allocated to maintenance revenue.

      Services revenue consists primarily of revenue received for performing methodology and design services. Revenue from service contracts is recognized on either a time and materials basis as work is performed or using the percentage-of-completion method. Cadence estimates the percentage-of-completion on contracts with fixed or not-to-exceed fees on a monthly basis utilizing hours incurred to date as a percentage of total

25

estimated hours to complete the project. Cadence has a history of accurately estimating project status and the hours necessary to complete projects. 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 all revenue and costs would be deferred until the project was completed. This change could have a material impact on Cadence’s results of operations. For small fixed-price projects, such as training classes and small, standard methodology service engagements of approximately $10,000 or less, revenue is recognized when the work is completed.

      In September 2002, Cadence acquired IBM’s TDA business. Concurrent with the acquisition, Cadence licensed software to IBM and entered into an agreement to provide services.

      For concurrent transactions, Cadence considers SFAS No. 141, “Business Combinations”, and EITF Issue No. 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business”, to determine whether the acquisition of the TDA business qualified for accounting as a purchase business combination. In addition, Cadence considered APB Opinion No. 29, “Accounting for Nonmonetary Transactions” and EITF Issue No. 01-02, “Interpretation of APB Opinion No. 29,” to determine whether the concurrent transactions were appropriately recorded at their respective fair values. Monetary transactions and nonmonetary transactions that represent the culmination of an earnings process are recorded at the fair values of the products delivered or products or services received, whichever is more readily determinable, if the fair values are reasonably determinable. In concluding that the fair values were reasonably determinable, Cadence considered its recent history of cash sales for similar products or services in similar sized transactions with similar terms. Approximately 3% of revenue recognized in 2002 resulted from this concurrent transaction.

        Estimating valuation allowances and accrued liabilities.

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

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

      Cadence has restructured business units in the past and has established reserves at the low end of the range of estimable cost against outstanding commitments for leased properties that it has vacated. These reserves are based upon management’s estimate of the landlord’s willingness to negotiate a termination fee, the time required to sublet the properties and the amount of sublease income that Cadence estimates will be generated between the date the property was vacated and expiration of the lease for each of the vacated properties. These estimates are reviewed and revised quarterly and may result in a substantial change to restructuring expense should different conditions prevail than were anticipated in original management estimates. See Note 2 of Notes to Consolidated Financial Statements for the expected impact of new accounting standards on future restructuring charges.

        Accounting for income taxes.

      In preparing its Consolidated Financial Statements, Cadence is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Consolidated Balance Sheets. Cadence then assesses the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent it believes that recovery is not likely,

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Cadence must establish a valuation allowance. To the extent Cadence establishes a valuation allowance for deferred tax assets or increases this allowance in a period, Cadence may need to include an expense within the tax provision in its Consolidated Income Statements.

      Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. The valuation allowance is based on estimates of taxable income for each jurisdiction in which Cadence operates and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or Cadence adjusts these estimates in future periods, Cadence may need to establish an additional valuation allowance, which could materially affect its financial position and results of operations.

        Valuation of long-lived intangible assets and goodwill.

      Cadence reviews, at least annually, goodwill resulting from purchase business combinations for impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Cadence reviews long-lived assets, including certain identifiable intangibles, for impairment whenever events or changes in circumstances indicate that Cadence 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, Cadence initiates its review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows 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 the forecasting of future operating results and proceeds from disposition which are used in the preparation of projected cash flows and, should different conditions prevail or judgments be made, material impairment charges could be necessary.

Results of Operations

Revenue

								% Change
		2002		2001		2000		2002 vs. 2001			2001 vs. 2000
		(In millions)
Product		$	811.9	$	830.5	$	627.4		(2	)%		32	%
Services			149.8		263.3		336.0		(43	)%		(22	)%
Maintenance			331.4		336.6		316.2		(2	)%		6	%
	Total revenue	$	1,293.1	$	1,430.4	$	1,279.6		(10	)%		12	%

Sources of Revenue as a Percent of Total Revenue

	2002		2001		2000
Product		63%		58%		49%
Services		11%		18%		26%
Maintenance		26%		24%		25%

      Product revenue decreased $18.6 million in 2002 compared to 2001, primarily due to a shift in the mix of software license types executed in each period. In 2002, Cadence experienced increasing customer preference for its subscription licenses, which give customers limited access to new technology. Product revenue associated with subscription licenses is recognized ratably over the term of the license, which has the effect of deferring the timing of revenue recognition to future periods. Revenue may also be deferred under term and perpetual licenses until payments become due and payable from customers with non-linear payment terms or

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as cash is collected from customers with lower credit ratings. Product revenue from Cadence’s software licenses recognized on a ratable basis comprised 45%, 32% and 19% of software revenue for the years ended 2002, 2001 and 2000, respectively.

      Revenue recognized on a ratable basis is expected to continue to increase as a percentage of overall revenue to the extent customers continue to prefer subscription licenses in the future, or continue to request more flexible payment terms, both of which cause revenue to be recognized ratably over time.

      Product revenue increased $203.1 million in 2001 compared to 2000, primarily due to an overall increase in volume of license renewals with major customers, and to a lesser extent, an increase in sales of Cadence’s software products to new customers. The increase in sales volume was primarily due to an increase in sales volume of Cadence’s IC implementation products, which include synthesis place and route physical design and physical verification products. The increases were partially offset by a decrease in Cadence Verification Acceleration, or CVA, product sales.

      Services revenue decreased $113.5 million in 2002 compared to 2001, primarily due to a reduction in customer spending for external services as a result of the economic downturn experienced in the electronics industry which Cadence serves. Services revenue declined primarily due to fewer new engagements and fewer services hours billed on existing engagements. Reduced customer spending can be expected to affect services revenue in the future to the extent the economy in general, and the electronics industry in particular, continue to experience slow economic growth.

      Services revenue decreased $72.6 million in 2001 compared to 2000, primarily due to a reduction in customer spending for external services as a result of the economic downturn experienced in the industries Cadence serves, particularly telecommunication. Tality’s revenue declined $49.9 million in 2001 compared to 2000 primarily due to fewer new engagements and fewer services hours billed on existing engagements. Methodology Services revenue declined $22.2 million in 2001 compared to 2000, primarily due to a general weakness in customer demand for short-term consulting services.

      Maintenance revenue decreased $5.2 million in 2002 compared to 2001, primarily due to fewer renewals of maintenance contracts. Maintenance revenue increased $20.4 million in 2001 compared to 2000, primarily due to the growth of Cadence’s installed customer base and the renewal of maintenance and support contracts.

      Additional financial information about segments can be found in Note 19 of Notes to Consolidated Financial Statements.

Revenue by Geography

								% Change
		2002		2001		2000		2002 vs. 2001			2001 vs. 2000
		(In millions)
Domestic		$	715.2	$	785.4	$	720.8		(9	)%		9	%
International			577.9		645.0		558.8		(10	)%		15	%
	Total revenue	$	1,293.1	$	1,430.4	$	1,279.6		(10	)%		12	%

Revenue by Geography as a Percent of Total Revenue

	2002		2001		2000
Domestic		55%		55%		56%
International		45%		45%		44%

      International revenue decreased $67.1 million in 2002 compared to 2001, due to decreases in services revenue worldwide and decreases in product revenue in Europe, slightly offset by an increase in product revenue in Japan. Revenue in Japan accounted for 33% of total international revenue in 2002 compared to 28% in 2001. The slight increase in product revenue in Japan was due to the timing of license renewals for existing

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customers and was partially offset by a decrease in services revenue. Cadence does not expect significant revenue growth in Japan in the foreseeable future due to continuing stagnant economic conditions in Japan.

      International revenue increased $86.2 million in 2001 compared to 2000, primarily due to increases in product revenue worldwide, partially offset by a decrease in services revenue worldwide. Revenue in Japan accounted for 28% of total international revenue in 2001 compared to 35% in 2000. Revenue in Japan decreased as a result of lower services revenue.

      Differences in the rate of revenue growth over the periods presented, and as compared geographically, are primarily due to fluctuations in product sales volume and the timing of significant customer contracts.

      Foreign currency exchange rates negatively affected revenue by $8.4 million in 2002, primarily due to the weakening of the Japanese yen in relation to the U.S. dollar. Foreign currency exchange rates negatively affected revenue by $19.9 million in 2001, primarily due to the weakening of the Japanese yen. Foreign currency exchange rates negatively affected revenue by $3.8 million in 2000, primarily due to the weakening of the British pound and German mark in relation to the U.S. dollar, partially offset by the strengthening of the Japanese yen in relation to the U.S. dollar. Additional information about revenue and other financial information by geography can be found in Note 19 of Notes to Consolidated Financial Statements.

Cost of Revenue

							% Change
	2002		2001		2000		2002 vs. 2001			2001 vs. 2000
	(In millions)
Product	$	73.1	$	98.2	$	89.9		(26	)%		9	%
Services	$	112.7	$	191.4	$	215.6		(41	)%		(11	)%
Maintenance	$	64.2	$	65.3	$	63.3		(2	)%		3	%

Cost of Revenue as a Percent of Related Revenue

	2002		2001		2000
Product		9%		12%		14%
Services		75%		73%		64%
Maintenance		19%		19%		20%

      Cost of product revenue includes costs of employee salary and benefits, documentation and royalties. Manufacturing costs associated with CVA products also include materials, labor and overhead.

      A summary of Cost of product is as follows:

		2002		2001		2000
		(In millions)
Product related costs		$	61.6	$	79.3	$	89.9
Inventory write-off			9.3		18.9		—
Acquisition-related asset write-off			2.2		—		—
	Total Cost of product	$	73.1	$	98.2	$	89.9

      Cost of product revenue decreased $25.1 million in 2002 compared to 2001, primarily due to a decrease in sales of CVA products and lower amounts of inventory write-offs in 2002 compared to 2001. Cost of product revenue increased $8.3 million in 2001 compared to 2000. The increase was primarily due to increases in inventory write-offs, partially offset by decreases in manufacturing expenses associated with the decrease in sales of CVA products.

      In the year ended December 28, 2002, Cadence recorded a $9.3 million write-off for excess inventory in cost of product revenue, for excess inventory from decreased sales forecasts. In the year ended December 29,

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2001, Cadence recorded an $18.9 million write-off for excess inventory in cost of product revenue. Of the $18.9 million, $15.2 million of the write-off was related to excess inventory from decreased sales forecasts and $3.7 million related to two product lines that were discontinued as part of Cadence’s restructuring. The excess inventory charges of $9.3 million in 2002 and $15.2 million in 2001 were due to significant decreases in forecasted revenue for emulation products and were calculated in accordance with Cadence’s policy, which is based on inventory in excess of 12-month demand. Inventory purchases and commitments are based on future sales forecasts. Cadence typically buys and builds inventory levels for certain key components to mitigate component supply constraints. Based on Cadence’s current 12-month demand forecast, Cadence does not anticipate that the excess inventory will be used at a later date. Cadence has determined that inventory levels at December 28, 2002 were within forecasted usage for the succeeding 12-month period.

      Product gross margin increased slightly in 2002 when compared to 2001 primarily due to lower inventory write-offs in 2002. Product gross margin increased in 2001 compared to 2000, primarily due to an increase in volume of license renewals with major customers.

      Cost of services revenue primarily includes 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 $78.7 million in 2002 compared to 2001, primarily due to decreases in employee salary and benefit costs resulting from Cadence’s reduction of services professionals in connection with its restructuring actions initiated in 2001. Cost of services revenue decreased $24.2 million in 2001 compared to 2000, primarily due to decreases in employee salary and benefit costs resulting from Cadence’s reduction of services professionals in connection with its restructuring initiated in 2001.

      Services gross margin decreased in 2002 compared to 2001, primarily due to the downturn in the industries Cadence serves, particularly telecommunications, resulting in revenue declining faster than costs. Services gross margin decreased in 2001 compared to 2000, also primarily due to revenue declining faster than costs. Services gross margin has been, and may continue to be reduced by, Cadence’s inability to fully utilize its services resources.

      Cost of maintenance revenue includes the cost of customer services, such as hot-line and on-site support, production employees and documentation of maintenance updates. Cost of maintenance revenue decreased $1.1 million in 2002 compared to 2001, primarily due to a decrease in employee salary and benefit costs resulting from a decrease in employee headcount. Cost of maintenance revenue increased $2.0 million in 2001 compared to 2000, primarily due to an increase in employee salary and benefit costs resulting from an increase in employee headcount.

Operating Expenses

							% Change
	2002		2001		2000		2002 vs. 2001		2001 vs. 2000
	(In millions)
Marketing and sales	$	399.6	$	393.6	$	390.1		2%		1%
Research and development	$	326.4	$	297.3	$	263.9		10%		13%
General and administrative	$	115.8	$	119.4	$	101.3		(3)%		18%

Operating Expenses as a Percent of Total Revenue

	2002		2001		2000
Marketing and sales		31%		28%		30%
Research and development		25%		21%		21%
General and administrative		9%		8%		8%

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Marketing and Sales

      Marketing and sales expenses increased $6.0 million in 2002 compared to 2001, primarily due to an increase in employee salary and benefit costs resulting from an increase in employee headcount, primarily from acquisitions, partially offset by a decrease in marketing program expenses. Marketing and sales expenses increased $3.5 million in 2001 compared to 2000, primarily due to an increase in employee salary and benefit costs resulting from an increase in employee headcount, partially offset by a decrease in commissions expense. Cadence expects marketing and sales expenses to decrease in 2003 as a result of a decrease in employee headcount.

Research and Development

      The increase in research and development expense of $29.1 million for 2002 compared to 2001, was primarily due to an increase in employee salary and benefit costs resulting from an increase in employee headcount, primarily from acquisitions. The increase in research and development expense of $33.4 million for 2001 compared to 2000, was primarily due to an increase in employee salary and benefit costs resulting from an increase in employee headcount. Cadence expects research and development expenses to increase in 2003 compared to 2002.

General and Administrative

      General and administrative expense decreased $3.6 million in 2002 compared to 2001, primarily due to a decrease in bad debt expense, particularly related to the design services business, and a decrease in employee salary and benefit costs resulting from a decrease in employee headcount. The decrease was partially offset by $11.1 million of litigation expense. General and administrative expense increased $18.1 million in 2001 compared to 2000, primarily due to an increase of employee salary and benefit costs resulting from an increase in employee headcount, increases in bad debt expense related to Tality, and increased use of outside consulting services.

      Foreign currency exchange rates negatively affected operating expenses by $1.2 million in 2002, compared to 2001, primarily due to the strengthening of the euro and British pound in relation to the U.S. dollar. Foreign currency exchange rates positively affected operating expenses by $9.3 million in 2001, compared to 2000, primarily due to the weakening of the Japanese yen and British pound in relation to the U.S. dollar.

Amortization of Acquired Intangibles

	2002		2001		2000
	(In millions)
Amortization of acquired intangibles	$	81.8	$	92.3	$	80.5

Amortization of Acquired Intangibles as a Percent of Total Revenue

	2002			2001			2000
Amortization of acquired intangibles		6	%		6	%		6	%

      Amortization of acquired intangibles decreased $10.6 million in 2002 compared to 2001, primarily due to the effects of implementing SFAS, No. 142, “Goodwill and Other Intangible Assets” which requires that goodwill no longer be amortized. This reduction was partially offset by amortization of intangibles acquired from SPC and Simplex. Amortization of acquired intangibles increased $11.8 million in 2001 compared to 2000, primarily due to the 2001 acquisition of CadMOS, partially offset by a reduction attributable to the write-off of Diablo Research Company LLC, or Diablo, goodwill in the second quarter of 2001. See Note 6 of Notes to Consolidated Financial Statements.

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Amortization of Deferred Stock Compensation

	2002		2001		2000
	(In millions)
Amortization of deferred stock compensation	$	37.5	$	17.9	$	11.4

Amortization of Deferred Stock Compensation as a Percent of Total Revenue

	2002			2001			2000
Amortization of deferred stock compensation		3	%		1	%		1	%

      Cadence recorded deferred stock compensation resulting from stock options granted in 2001 and 2000, which were subsequently retired, to purchase Tality stock and sales of Tality restricted stock. Deferred stock compensation from Tality option grants and restricted stock sales represents the difference between the exercise price of stock option grants to Tality employees and directors, and the price paid for restricted stock by certain Cadence executives and employees, and the deemed fair market value of Tality’s common stock at the time of those grants and sales.

      In addition, Cadence recorded deferred stock compensation resulting from Cadence’s acquisition of CadMOS, Simplex, SPC and Plato Design Systems Incorporated. Deferred stock compensation resulting from these acquisitions represents the difference between the exercise price of unvested stock option grants to employees of the acquired companies and the fair market value of Cadence’s common stock at the time of such acquisitions.

      Deferred compensation expense of $9.7 million related to the SPC acquisition was recorded in 2002 because a portion of the additional shares issued upon attaining performance goals required continued employment with Cadence of certain SPC employees. The acquisition agreement provides for the issuance of additional shares of Cadence’s common stock as certain performance goals are achieved in fiscal 2003.

      Amortization of deferred stock compensation increased $19.6 million in 2002 compared to 2001, primarily due to the deferred stock compensation related to the Plato, Simplex and SPC acquisitions. Amortization of deferred stock compensation increased $6.5 million in 2001 compared to 2000, primarily due to the absence of similar costs in the first six months of 2000.

      For the years ended December 28, 2002 and December 29, 2001, Cadence recorded on its balance sheet a total of $37.7 million and $40.4 million of deferred stock compensation, respectively. Of the $37.7 million, $19.5 million is related to SPC’s achievement of certain predetermined goals, $9.9 million is related to the acquisition of Plato and $8.3 million is related to the acquisition of Simplex. Of the $40.4 million, $27.4 million is related to the acquisition of SPC, $10.0 million is related to the acquisition of CadMOS, and $3.0 million is related to Tality stock option grants. Cadence is amortizing deferred stock compensation to expense using the straight-line method over the period that the stock options and restricted stock vest. For the year ended December 28, 2002 and December 29, 2001, Cadence reversed deferred stock compensation of $10.9 million and $27.8 million, respectively, related to the cancellation of unvested options.

Avant! Restitution and Settlement

      On November 13, 2002, Cadence announced the settlement of civil litigation filed against Avant! seeking damages related to theft of Cadence intellectual property, including software code, as well as other trade secrets. The settlement with Avant!, its parent corporation Synopsys, Inc. and several individuals included an agreement to dismiss all pending claims and counterclaims in the litigation and required the payment to Cadence of $265.0 million, which was received in the fourth fiscal quarter of 2002. This amount, net of related costs, is recorded in Avant! restitution and settlement in Cadence’s Consolidated Income Statement.

      On July 25, 2001, Avant! was ordered to pay Cadence $195.4 million in criminal restitution after Avant! entered a plea of no contest and was found guilty by the Superior Court of the State of California of conspiracy to take and use Cadence’s trade secrets. This conspiracy included the theft by Avant! and certain individuals

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of Cadence intellectual property, including software code, as well as other trade secrets. As of December 29, 2001, approximately $196.0 million, consisting of all of the restitution award plus interest was received. This amount, net of related costs, is recorded in Avant! restitution and settlement in Cadence’s Consolidated Income Statement.

Restructuring and Other Charges

      In 2001, Cadence announced a plan of restructuring activities throughout the company targeted at eliminating redundancies and consolidating facilities and resources. The restructuring activities were initiated primarily due to the severe economic downturn in the electronics industry. The restructuring was primarily aimed at reducing excess personnel and capacity costs within Cadence’s Design Foundry business (formerly Tality) and certain other business/infrastructure groups.

      A summary of restructuring charges and asset impairment is as follows:

		2002		2001
		(In millions)
Severance and benefits		$	52.2	$	21.6
Excess facilities			46.9		21.9
Abandonment of assets			35.2		18.1
	Total restructuring and other charges	$	134.3	$	61.6

      For the year ended December 29, 2001, Cadence recorded $61.6 million of restructuring and other charges. Cadence’s restructuring costs and other charges consisted of $21.6 million for workforce reduction, $21.9 million to downsize and close excess facilities and $18.1 million of asset-related charges related to certain long-lived assets that were abandoned. Management estimates that the restructuring will result in annualized cost reductions of approximately $70.4 million in employee salary and benefit costs related to the 2001 workforce reduction.

      For the year ended December 28, 2002, Cadence recorded $134.3 million of restructuring and other charges. Cadence’s restructuring costs and other charges consisted of $52.2 million for workforce reduction, $46.9 million in changes in estimates for previously recorded accruals and to downsize and close excess facilities, and $35.2 million of asset-related charges related to certain long-lived assets that were abandoned. Management estimates that Cadence will realize annualized cost reductions of approximately $159 million in salary and benefit costs related to the 2002 workforce reduction and $16 million in facility costs related to facilities downsized or closed since the commencement of the restructuring activity in 2001, which amounts could vary based on changes in estimates.

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

      The 2002 restructuring activities will result in the termination of employment of approximately 1,370 employees. While such terminations of employment are across various business functions, operating units and geographic regions, the communications-related areas within the design services business are the most affected. Costs resulting from the restructuring included severance benefits, notice pay and outplacement services. All terminations and termination benefits were communicated to the affected employees prior to December 28, 2002. All severance benefits are expected to be paid by December 27, 2003.

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      For the year ended December 29, 2001, facilities consolidation charges of $21.9 million were incurred in connection with the downsizing and closing of 16 sites. As of December 29, 2001, six sites had been vacated and eight sites had been downsized.

      For the year ended December 28, 2002, facilities consolidation charges of $46.9 million were incurred in connection with the further downsizing of four previously downsized sites, the downsizing and closing of 16 additional sites, and changes in lease loss estimates for three sites. Of the $46.9 million, $17.3 million related to changes in lease loss estimates. The low end of the lease loss range related to all worldwide restructuring activities initiated in 2001 is $25.6 million, which will be adjusted in the future upon triggering events, such as changes in estimates of time to sublease and actual sublease rates. Cadence has estimated that the high end of the lease loss could be as much as $55.0 million if facilities operating lease rental rates continue to decrease in applicable markets or if it takes longer than expected to find a suitable tenant to sublease the facilities. Since June 2001, 33 sites have been selected for downsizing or closure. As of December 28, 2002, 16 sites had been vacated, nine sites had been downsized, and actions related to the eight remaining sites are scheduled to occur by the end of 2003.

      Closure and downsizing costs included payments required under lease contracts, less any applicable estimated sublease income after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements and costs to maintain facilities during the period after abandonment. To determine the lease loss, which is the loss after Cadence’s cost recovery efforts from subleasing a building, certain assumptions were made related to the: (1) time period over which the relevant building would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. The lease loss is an estimate and represents the low end of the range.

      For the year ended December 29, 2001, Cadence incurred asset-related and other restructuring charges of $18.1 million, consisting primarily of $14.4 million of leasehold improvements for facilities and other fixed assets that were either abandoned or for which the resulting estimated future reduced cash flows were insufficient to cover the associated expenses. Cadence also recorded $2.2 million of asset-related charges for abandoned software.

      For the year ended December 28, 2002, asset-related and other restructuring charges of $35.2 million were incurred in connection with leasehold improvements for facilities, other fixed assets and software license agreements that were abandoned and contract termination costs.

Write-off of Acquired in-Process Technology

      Upon consummation of the acquisition of IBM’s TDA business in September 2002, Cadence immediately charged to expense $6.6 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The purchase price allocated to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that reflects the uncertainty surrounding successful development of the acquired in-process technology. The in-process technology is expected to be commercially viable in September 2003. As of December 28, 2002, expenditures to complete the in-process technology totaled $2.5 million and expenditures to complete the remaining in-process technology are expected to total approximately $8.8 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require additional research and development after they have reached a state of technological and commercial feasibility.

      At the time of its acquisition by Cadence, the IBM TDA business’ in-process research and development projects were related to the development of TestBench Tools. The nature of the efforts to complete these projects related, in varying degrees, to the completion of all planning, designing, prototyping, verification and testing activities necessary to establish that the proposed technologies meet their design specifications including functional, technical and economic performance requirements.

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

      Estimated total revenue from the acquired in-process technology is expected to peak primarily in 2006 and decline rapidly thereafter as other new products are expected to enter the market. In addition, a portion of the anticipated revenue had been attributed to enhancements of the base technology under development, and has been excluded from net cash flow calculations. Existing technology was valued at $12.2 million. The net cash flows generated from the acquired in-process technology were expected to reflect earnings before interest, taxes and depreciation of approximately 65% of the revenue generated from in-process technology. However, there can be no assurance that these estimates will prove accurate, or that Cadence will realize the anticipated benefit of the acquisition.

      The rate used to discount the net cash flows from purchased in-process technology was approximately 24%. The discount rate is sometimes higher than Cadence’s weighted average cost of capital, or WACC, due to the inherent uncertainties in the estimates, including the uncertainty surrounding the successful development of the acquired in-process technology, the useful life of such technology, the profitability levels of such technology, if any, and the uncertainty of technological advances, all of which were unknown at that time.

      Upon consummation of the Simplex acquisition in June 2002, Cadence immediately charged to expense $27.4 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The purchase price allocated to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that reflects the uncertainty surrounding successful development of the acquired in-process technology. The in-process technology is expected to be commercially viable in March 2003. As of December 28, 2002, expenditures to complete the in-process technology totaled $3.8 million, and expenditures to complete the remaining in-process technology are expected to total approximately $0.4 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require additional research and development after they have reached a state of technological and commercial feasibility.

      At the time of its acquisition by Cadence, Simplex’s in-process research and development projects were related to the development of extraction and power analysis technologies. The nature of the efforts to complete these projects related, in varying degrees, to the completion of all planning, designing, prototyping, verification and testing activities necessary to establish that the proposed technologies meet their design specifications including functional, technical and economic performance requirements.

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

      Estimated total revenue from the acquired in-process technology is expected to primarily peak in 2004 and decline rapidly thereafter as other new products are expected to enter the market. In addition, a portion of the anticipated revenue had been attributed to enhancements of the base technology under development, and has been excluded from net cash flow calculations. Existing technology was valued at $13.9 million. The net cash flows generated from the acquired in-process technology were expected to reflect earnings before interest, taxes, and depreciation of approximately 53% of the revenue generated from in-process technology. However, there can be no assurance that these estimates will prove accurate, or that Cadence will realize the anticipated benefit of the acquisition.

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      The rate used to discount the net cash flows from purchased in-process technology was approximately 30%. The discount rate is sometimes higher than Cadence’s WACC, due to the inherent uncertainties in the estimates, including the uncertainty surrounding the successful development of the acquired in-process technology, the useful life of such technology, the profitability levels of such technology, if any, and the uncertainty of technological advances, all of which were unknown at that time.

      Upon completion of the SPC acquisition, Cadence immediately charged to expense $8.6 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The purchase price allocated to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. The in-process technology was completed in March 2002. Expenditures to complete the in-process technology totaled $1.5 million.

      At the time of its acquisition by Cadence, SPC’s in-process research and development projects were related to the development of an enhanced version of its routing-estimation technology and the development of a signal integrity analysis and optimization tool. These capabilities are important for IC design at and below 130 nanometer geometries. The nature of the efforts to complete these projects related, in varying degrees, to the completion of all planning, designing, prototyping, verification and testing activities necessary to establish that the proposed technologies meet their design specifications, including functional, technical and economic performance requirements.

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

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

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

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

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      Upon consummation of the CadMOS acquisition, Cadence immediately charged to expense $12.1 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The amount of purchase price allocated to acquired in-process technology was determined, in part, by a third party appraiser through valuation techniques. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that reflected the uncertainty surrounding the successful development of the acquired in-process technology. The in-process technology was completed as of September 28, 2002. Expenditures to complete the in-process technology totaled $1.9 million.

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

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

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

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

Impairment of Goodwill

      Prior to the adoption of SFAS No. 142, discussed in Note 2 of Notes to Consolidated Financial Statements, Cadence evaluated goodwill for impairment whenever events or circumstances indicated that the carrying amount of goodwill may not be recoverable. Cadence recorded a charge of $25.8 million in 2001 related to the impairment of goodwill and acquired intangibles associated with the acquisition of Diablo. This impairment was due to the decline in business conditions generally and the wireless communications industry in particular. Key factors in determining this impairment were significant downsizing or reassignment of personnel directly related to these assets and abandonment of most of Diablo’s line of business. The impairment was calculated as the difference between the carrying value of the intangible assets associated with Diablo’s acquisition and the fair value of those assets.

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Other Income (loss), net

      Other income (loss), net for 2002, 2001 and 2000 are as follows:

		2002			2001			2000
		(In millions)
Interest income		$	4.6		$	6.5		$	4.6
Minority interest income			—			1.9			0.6
Equity income from investments, net			—			0.2			1.1
Gain (loss) on foreign exchange			(0.3	)		0.6			5.1
Other expense, net			(18.3	)		(4.9	)		(4.4	)
	Total other income (loss), net	$	(14.0	)	$	4.3		$	7.0

      Total other income (loss), net, decreased $18.3 million in 2002, when compared to 2001, primarily due to $10.0 million of investment write-downs from two venture capital funds, Telos Venture Partners, L.P., and Telos Venture Partners II, L.P., collectively referred to as Telos, in which Cadence holds a limited partnership interest, included in Other expense, net, and $9.4 million of investment write-downs in Cadence’s long-term investments, included in Other expense, net. Total other income (loss), net, decreased $2.7 million in 2001, when compared to 2000, primarily due to a decrease in foreign exchange gains, partially offset by an increase in interest income.

Provision for Income Taxes

      The provision for income taxes and the effective tax rates for 2002, 2001 and 2000 are as follows:

	2002		2001		2000
	(Dollars in millions)
Provision for income taxes	$	86.0	$	100.9	$	18.0
Effective tax rate		54.5%		41.7%		26.5%

      As of December 28, 2002, Cadence had total net deferred tax assets of approximately $105.3 million. Realization of the deferred tax assets will depend on generating sufficient taxable income prior to the expiration of certain net operating loss and tax credit carryforwards. Although realization is not assured, management believes that it is more likely than not that the net deferred tax assets will be realized. The amount of the net deferred tax assets, however, could be reduced or increased in the near term if actual facts, including the estimate of future taxable income, differ from those estimated.

      The 2002 effective tax rate includes Avant! civil settlement proceeds of $265.0 million, the write-off of acquired in-process technology of approximately $34.0 million and stock compensation of approximately $44.4 million. The 2002 effective tax rate, excluding the Avant! civil settlement proceeds, the write-off of acquired in-process technology and stock compensation was 26.0%. The 2001 effective tax rate includes Avant! criminal restitution proceeds of approximately $196.0 million, the write-off of acquired in-process technology of approximately $21.7 million and stock compensation amortization of approximately $17.9 million. The 2001 effective tax rate, excluding the Avant! criminal restitution proceeds, the write-off of acquired in-process technology and stock compensation was 26.5%.

Disclosures About Market Risk

Interest Rate Risk

      Cadence’s exposure to market risk for changes in interest rates relates primarily to its short-term investment portfolio. While Cadence is exposed to interest rate fluctuations in many of the world’s leading industrialized countries, Cadence’s interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on Cadence’s

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cash and cash equivalents, short-term and long-term investments and interest paid on its long-term debt obligations as well as costs associated with foreign currency hedges.

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

      On September 27, 2002, Cadence entered into two syndicated, senior unsecured credit facilities, or the 2002 Facilities, that allow Cadence to borrow up to $375.0 million. One of the 2002 Facilities is a $187.5 million three-year revolving credit facility, or the Three-Year Facility, which terminates on September 27, 2005. The other 2002 Facility consists of a $187.5 million, 364-day revolving credit facility convertible into a term loan, or the 364-Day Facility. The 364-Day Facility will terminate on September 26, 2003; provided, that at the request of Cadence and with the consent of members of the bank group that wish to do so, the date of termination may be extended for one additional 364-day period with respect to the portion of the amounts outstanding under the 364-Day Credit Agreement that a consenting bank holds. Upon the scheduled and/or extended termination, amounts outstanding under the 364-Day Facility may be converted to a one-year term loan.

      For both of the 2002 Facilities, Cadence has the option to pay interest based on LIBOR plus a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial covenant, or the higher of the Federal Funds Rate plus 0.50% or the prime rate. In addition, commitment fees are payable on the unused portion of the Three-Year Facility at rates between 0.25% and 0.335% based on a pricing grid tied to a financial covenant and on the unused portion of the 364-Day Facility at a fixed rate of 0.225%. A utilization fee of 0.25% is payable on amounts borrowed under the 2002 Facilities whenever combined borrowings under the 2002 Facilities exceed $123.8 million. Cadence may not borrow under the 364-Day Facility at any time that any portion of the Three-Year Facility remains unused.

      The 2002 Facilities contain certain financial and other covenants, which must be maintained. The financial covenants specify that Cadence must maintain a minimum Earnings Before Interest Taxes Depreciation and Amortization, or EBITDA, of not less than $200.0 million. Additionally, Cadence must maintain a minimum fixed charge coverage ratio (the ratio of EBITDA to the sum of (i) interest expense plus (ii) 20% of funded debt plus (iii) taxes paid in cash plus (iv) capital lease payments) of not less than 1.5 to 1.0. Other covenants require Cadence to maintain a minimum one-to-one ratio of current assets to current liabilities and a maximum two-to-one funded debt to EBITDA ratio, and to directly own not less than 51% of its consolidated total assets. From time to time, Cadence borrows amounts under the 2002 Facilities. At December 28, 2002, Cadence was in compliance with the covenants in the 2002 Facilities and had outstanding borrowings of $52.0 million under the Three-Year Facility.

      The 2002 Facilities replaced two previously existing credit facilities, which terminated on September 27, 2002. In connection with the termination of the previously existing credit facilities, Cadence paid in full all interest, principal, fees, and other amounts owing thereunder.

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      The table below presents the carrying value and related weighted average interest rates for Cadence’s interest bearing instruments. All highly liquid investments with an original maturity of three months or less at the date of purchase are considered to be cash equivalents; investments with original maturities between three and 12 months are considered to be short-term investments. Investments with original maturities greater than 12 months are considered long-term investments. The carrying value approximated fair value at December 28, 2002.

			Carrying		Average
			Value		Interest Rate
			(In millions)
Interest Bearing Instruments:
	Cash equivalents — variable rate		$	210.8		1.45	%
	Commercial paper — fixed rate			105.5		1.59	%
	Cash — variable rate			34.1		1.71	%
		Total interest bearing instruments	$	350.4		1.52	%

Foreign Currency Risk

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

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

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

      The table below provides information as of December 28, 2002 about Cadence’s forward foreign currency contracts. The information is provided in U.S. dollar equivalent amounts. The table presents the notional

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amounts, at contract exchange rates, and the weighted average contractual foreign currency exchange rates. These forward contracts mature prior to March 14, 2003.

				Weighted
				Average
		Notional		Contract
		Principal		Rate
		(In millions)
Forward Contracts:
	Euro	$	55.0		1.01
	Japanese yen		43.4		122.16
	British pound sterling		14.1		1.57
	Swedish krona		4.6		9.04
	Canadian dollars		4.1		1.56
	Hong Kong dollars		3.9		7.80
	Singapore dollars		3.1		1.76
		$	128.2
	Estimated fair value	$	2.2

      While Cadence actively manages its foreign currency risks on an ongoing basis, there can be no assurance that Cadence’s foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on its results of operations, cash flows and financial position. On a net basis, foreign currency fluctuations did not materially impact Cadence’s results of operations and financial position during the year ended December 28, 2002. The realized gain (loss) on the forward contracts as they matured was not material to the consolidated operations of Cadence.

Equity Price Risk

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

• Cadence may purchase shares of its common stock on the open market at the prevailing market prices.

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

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

• Depending on the exercise price of the put warrants and the market price of Cadence common stock at the time of exercise, “net share settlement” of the put warrants with Cadence common

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

      As of December 28, 2002, there were no put warrants or call options outstanding.

Liquidity and Capital Resources

      At December 28, 2002, Cadence’s principal sources of liquidity consisted of $395.6 million of cash and cash equivalents and short-term investments, compared to $274.8 million at December 29, 2001, and two syndicated senior unsecured credit facilities totaling $375.0 million. As of December 28, 2002, Cadence had a total of $52.0 million outstanding under these credit facilities.

      Cash provided by operating activities decreased $60.6 million, to $350.2 million at December 28, 2002 when compared to the year ended December 29, 2001, primarily due to lower net income of $69.3 million, a decrease in the proceeds from the sale of receivables of $53.8 million, an increase in receivables of $66.3 million, partially offset by an increase in non-cash restructuring and other charges of $6.9 million and a decrease in installment contract receivables of $37.9 million.

      Cadence has entered into agreements whereby it 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 fiscal years ended December 28, 2002 and December 29, 2001, Cadence transferred accounts receivable totaling $182.0 million and $235.8 million, respectively, which approximated fair value, to financing institutions on a non-recourse basis. For the years ended December 29, 2001 and December 30, 2000, Cadence has restated its Statements of Cash Flows to include proceeds from the sale of receivables as a component of cash flows from operating activities rather than as a component of cash flows from financing activities, which is consistent with the guidance of SFAS No. 95, “Statement of Cash Flows.”

      At December 28, 2002, Cadence had net working capital of $246.8 million, as compared with $162.5 million at December 29, 2001. The working capital increase was driven primarily by increases in cash and cash equivalents of $165.0 million, increases in net receivables of $55.6 million, partially offset by decreases in short-term investments of $44.2 million, decreases in prepaid expenses and other of $44.1 million, and increases in accounts payable and accrued liabilities of $38.4 million.

      In addition to its short-term investments, Cadence’s primary investing activities in 2002 consisted of business combinations, purchases of property, plant and equipment and venture capital partnership investments, which combined represented $178.0 million and $169.6 million of cash used for investing activities for the years ended December 28, 2002 and December 29, 2001, respectively.

      Cadence provides for U.S. income taxes on the earnings of its foreign subsidiaries unless they are considered permanently invested outside of the United States. At December 28, 2002, the cumulative amount of earnings upon which U.S. income taxes have not been provided are approximately $550 million. At December 28, 2002, the unrecognized deferred tax liability for these earnings was approximately $114 million.

      Cadence has previously sold put warrants and purchased call options through private placements. See Note 11 of Notes to Consolidated Financial Statements. At December 28, 2002, there were no put warrants or call options outstanding.

      Cadence also purchased $181.8 million of its stock with cash and reissued $77.2 million of stock through its employee option and stock purchase programs during the year ended December 28, 2002.

      As part of its overall investment strategy, Cadence is a limited partner in Telos. As of December 28, 2002, Cadence has committed $77.3 million to Telos and is contractually committed to contribute up to an

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additional $53.7 million. Cadence’s investments in Telos are recorded in Other assets in the accompanying Consolidated Balance Sheets.

      As compared to the prior year, Other long-term liabilities increased $79.6 million to $214.4 million for the year ended December 28, 2002. The increase was primarily attributable to an increase in income taxes payable and long-term lease obligations of the restructuring activities. The primary components of Other long-term liabilities are income taxes payable of $145.5 million, deferred compensation of $34.9 million, and lease obligations related to restructuring activities of $33.6 million.

      On September 27, 2002, Cadence entered into two syndicated, senior unsecured credit facilities, or the 2002 Facilities, that allow Cadence to borrow up to $375.0 million. One of the 2002 Facilities is a $187.5 million three-year revolving credit facility, or the Three-Year Facility, which terminates on September 27, 2005. The other 2002 Facility consists of a $187.5 million, 364-day revolving credit facility convertible into a term loan, or the 364-Day Facility. The 364-Day Facility will terminate on September 26, 2003; provided, that at the request of Cadence and with the consent of members of the bank group that wish to do so, the date of termination may be extended for one additional 364-day period with respect to the portion of the amounts outstanding under the 364-Day Credit Agreement that a consenting bank holds. Upon the scheduled and/or extended termination, amounts outstanding under the 364-Day Facility may be converted to a one-year term loan.

      For both of the 2002 Facilities, Cadence has the option to pay interest based on LIBOR plus a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial covenant, or the higher of the Federal Funds Rate plus 0.50% or the prime rate. In addition, commitment fees are payable on the unused portion of the Three-Year Facility at rates between 0.25% and 0.335% based on a pricing grid tied to a financial covenant and on the unused portion of the 364-Day Facility at a fixed rate of 0.225%. A utilization fee of 0.25% is payable on amounts borrowed under the 2002 Facilities whenever combined borrowings under the 2002 Facilities exceed $123.8 million. Cadence may not borrow under the 364-Day Facility at any time that any portion of the Three-Year Facility remains unused.

      The 2002 Facilities contain certain financial and other covenants, which must be maintained. The financial covenants specify that Cadence must maintain a minimum Earnings Before Interest Taxes Depreciation and Amortization, or EBITDA, of not less than $200.0 million. Additionally, Cadence must maintain a minimum fixed charge coverage ratio (the ratio of EBITDA to the sum of (i) interest expense plus (ii) 20% of funded debt plus (iii) taxes paid in cash plus (iv) capital lease payments) of not less than 1.5 to 1.0. Other covenants require Cadence to maintain a minimum one-to-one ratio of current assets to current liabilities and a maximum two-to-one funded debt to EBITDA ratio, and to directly own not less than 51% of its consolidated total assets. From time to time, Cadence borrows amounts under the 2002 Facilities. At December 28, 2002, Cadence was in compliance with the covenants in the 2002 Facilities and had outstanding borrowings of $52.0 million under the Three-Year Facility.

      The 2002 Facilities replaced two previously existing credit facilities, which terminated on September 27, 2002. In connection with the termination of the previously existing credit facilities, Cadence paid in full all interest, principal, fees, and other amounts owing thereunder.

      Management estimates that the restructuring actions for 2002 will result in annualized cost reductions of approximately $159 million in salary and benefits. All severance benefits are expected to be paid by December 27, 2003. Cadence expects to pay approximately $15 million in rental and operating expenses in 2003, related to facilities downsized or closed since the commencement of the restructuring activity in 2001.

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      A summary of contractual obligations follows:

		Payments Due by Period
		Total		Less than 1 Year		1-3 Years		Thereafter
		(In millions)
Capital lease obligations		$	2.3	$	1.6	$	0.7	$	—
Long-term debt			52.0		—		52.0		—
	Total contractual obligations	$	54.3	$	1.6	$	52.7	$	—

      Cadence anticipates that current cash and short-term investment balances and cash flow from operations will be sufficient to meet its working capital and other capital requirements for at least the next 12 months.

New Accounting Standards

      In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51.” FIN 46 requires companies to include in their consolidated financial statements the assets, liabilities and results of activities of variable interest entities if the company holds a majority of the variable interests. The consolidation requirements of FIN 46 are effective for variable interest entities created after January 31, 2003 or for entities in which an interest is acquired after January 31, 2003. The consolidation requirements of FIN 46 are effective June 15, 2003 for all variable interest entities acquired before February 1, 2003. FIN 46 also requires companies that expect to consolidate a variable interest entity they acquired before February 1, 2003 to disclose the entity’s nature, size, activities, and the company’s maximum exposure to loss in financial statements issued after January 31, 2003. Cadence has determined FIN 46 will not have a material effect on its consolidated financial position, results of operations or cash flows.

      In December 2002, the FASB, issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123 “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The annual and interim disclosure provisions are effective for financial reports containing financial statements for annual and interim periods ending after December 15, 2002. Cadence has adopted the disclosure provisions for these annual financial statements and will adopt the interim disclosure provisions for its interim financial statements beginning with the period ending March 28, 2003. Cadence has determined that the adoption of SFAS No. 148 will not have a material impact on its consolidated financial position, results of operations or cash flows.

      In November 2002, the FASB issued FASB Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. See Note 9 of Notes to Consolidated Financial Statements for disclosures required by FIN 45. The adoption of FIN 45 did not have a material effect on Cadence’s consolidated financial position, results of operations or cash flows.

      In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 eliminates EITF Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructur-

44

ing).” Under SFAS No. 146, liabilities for costs associated with an exit or disposal activity are recognized when the liabilities are incurred, as opposed to being recognized at the date of entity’s commitment to an exit plan under EITF No. 94-3. Furthermore, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liabilities. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. Cadence has determined SFAS No. 146 will not have a material effect on its consolidated financial position, results of operations or cash flows. However, SFAS No. 146 will impact the timing of accruals for future restructurings, if any.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Item 8. Financial Statements and Supplementary Data

      The financial statements required by Item 8 are submitted as a separate section of this Annual Report on Form 10-K. See Item 15.

Summary Quarterly Data — Unaudited

	2002									2001
	4th		3rd		2nd			1st		4th		3rd		2nd			1st
	(In thousands, except per share amounts)
Revenue	$	276,297	$	327,236	$	344,820		$	344,714	$	378,200	$	360,008	$	347,575		$	344,657
Cost of revenue		48,090		58,715		75,946			67,294		71,546		97,530		93,447			92,337
Net income (loss)*		88,694		8,231		(46,321	)		21,345		38,929		127,425		(28,889	)		3,822
Net income (loss) per share — basic*		0.33		0.03		(0.18	)		0.09		0.16		0.52		(0.12	)		0.02
Net income (loss) per share — diluted*		0.33		0.03		(0.18	)		0.08		0.15		0.50		(0.12	)		0.01

      * Beginning Cadence’s fiscal year 2002 SFAS, No. 142, “Goodwill and Other Intangible Assets” was adopted and, as a result, Cadence has ceased to amortize approximately $178.8 million of goodwill, net of amortization, including workforce intangibles that were subsumed into goodwill upon adoption of SFAS No. 142. The Summary Quarterly Data for 2001 includes amortization of goodwill and workforce intangibles totaling $50.8 million.

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

      On March 27, 2002, Cadence filed a Current Report on Form 8-K reporting that on March 22, 2002, Cadence’s Board of Directors determined not to renew the engagement of Arthur Andersen LLP and retained KPMG LLP as Cadence’s independent auditors with respect to the audit of Cadence’s Consolidated Financial Statements for its fiscal year ending December 28, 2002.

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PART III.

Item 10. Directors and Executive Officers of the Registrant

      The information required by Item 10 as to directors is incorporated by reference from the sections entitled “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in Cadence’s definitive Proxy Statement for its 2003 annual stockholders’ meeting.

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

Item 11. Executive Compensation

      The information required by Item 11 is incorporated by reference from the sections entitled “Compensation of Directors” and “Compensation of Executive Officers” in Cadence’s definitive Proxy Statement for its 2003 annual stockholders’ meeting.

Item 12. Security Ownership of Certain Beneficial Owners and Management

      The information required by Item 12 is incorporated by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in Cadence’s definitive Proxy Statement for its 2003 annual stockholders’ meeting.

Item 13. Certain Relationships and Related Transactions

      The information required by Item 13 is incorporated by reference from the section entitled “Certain Transactions” in Cadence’s definitive Proxy Statement for its 2003 annual stockholders’ meeting.

Item 14. Controls and Procedures

      Within 90 days prior to the filing date of this Annual Report on Form 10-K, Cadence carried out an evaluation, under the supervision and with the participation of the company’s management, including its Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design and operation of Cadence’s “disclosure controls and procedures” and “internal controls” as specified in Item 307 of Regulation S-K.

      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 Securities and Exchange Commission’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 that the company’s (A) transactions are properly authorized; (B) assets are safeguarded against unauthorized or improper use; and (C) transactions are properly recorded and reported; all to permit the preparation of the company’s financial statements in conformity with generally accepted accounting principles.

      The evaluation of Cadence’s disclosure controls and procedures and internal controls included a review of their objectives and processes, implementation by the company and effect on the information generated for use in this Annual Report on Form 10-K. In the course of this evaluation, Cadence sought to identify any significant deficiencies or material weaknesses in Cadence’s controls, whether the company had identified any acts of fraud involving personnel who have a significant role in the company’s internal controls, and to confirm that any necessary corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning the effectiveness of these controls can be reported in the company’s Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. The company’s internal controls are also evaluated on an ongoing basis by Cadence’s internal auditors and by other personnel in Cadence’s Finance organization. The overall goals of these evaluation activities are to monitor the company’s disclosure and internal controls and to make modifications as

46

necessary. The company intends to maintain these controls as processes that may be appropriately modified as circumstances warrant.

      Based on the evaluation described above and subject to the discussion below, the Chief Executive Officer and Chief Financial Officer concluded that Cadence’s controls and procedures are effective in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be included in this Annual Report on Form 10-K. There have been no significant changes in the company’s internal controls or in other factors that could significantly affect those controls since the date of their last evaluation. However, 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. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. 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, within the company 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 cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART IV.

Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K

		Page
(a)	1. Financial Statements:
	•     Independent Auditors’ Report		55
	•     Report of Independent Public Accountants		56
	•     Consolidated Balance Sheets at December 28, 2002 and December 29, 2001		57
	•     Consolidated Income Statements for the three fiscal years ended December 28, 2002		58
	•     Consolidated Statements of Stockholders’ Equity for the three fiscal years ended December 28, 2002		59
	•     Consolidated Statements of Cash Flows for the three fiscal years ended December 28, 2002		60
	•     Notes to Consolidated Financial Statements		61
(a)	2. Financial Statement Schedules:
	II.  Valuation and Qualifying Accounts and Reserves		96
	All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
(a)	3. Exhibits:
	The following exhibits are filed with this Annual Report on Form 10-K:

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Exhibit
Number		Exhibit Title
	2.02	Master Separation Agreement, dated as of July 14, 2000 by and among the Registrant, Cadence Holdings, Inc. and Tality Corporation (Incorporated by reference to Exhibit 2.01 to the Registrant’s Form 10-Q for the quarter ended July 1, 2000 (the “2000 Second Quarter Form 10-Q”)).
	2.03	Amended and Restated Agreement of Limited Partnership of Tality, LP, dated as of October 4, 2000 between Tality Corporation and Cadence Holdings, Inc. (Incorporated by reference to Exhibit 2.01 to the Registrant’s Form 10-Q for the quarter ended September 30, 2000 (the “2000 Third Quarter Form 10-Q”)).
	2.04	Amended and Restated Master Separation Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.02 to the 2000 Third Quarter Form 10-Q).
	2.05	General Assignment and Assumption Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.03 to the 2000 Third Quarter Form 10-Q).
	2.06	Master Intellectual Property Ownership and License Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.04 to the 2000 Third Quarter Form 10-Q).
	2.07	Employee Matters Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.05 to the 2000 Third Quarter Form 10-Q).
	2.08	Master Corporate Services Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.06 to the 2000 Third Quarter Form 10-Q).
	2.09	Real Estate Matters Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.07 to the 2000 Third Quarter Form 10-Q).
	2.10	Master Confidentiality Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.08 to the 2000 Third Quarter Form 10-Q).
	2.11	Indemnification and Insurance Matters Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.09 to the 2000 Third Quarter Form 10-Q).
	2.12	Asset Purchase Agreement, dated as of October 4, 2000 by and among the Registrant, Cadence Design System (Canada) Limited and Tality Canada Corporation (Incorporated by reference to Exhibit 2.10 to the 2000 Third Quarter Form 10-Q).
	2.13	Asset Purchase Agreement, dated as of October 3, 2000 by and among Symbionics Limited, the Registrant and Cadence Design Systems Limited (Incorporated by reference to Exhibit 2.11 to the 2000 Third Quarter Form 10-Q).
	2.14	Fixed Term License Agreement, dated as of October 4, 2000 between the Registrant and Tality, LP (Incorporated by reference to Exhibit 2.12 to the 2000 Third Quarter Form 10-Q).
	2.15	Joint Technology Development and Support Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.13 to the 2000 Third Quarter Form 10-Q).

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Exhibit
Number		Exhibit Title
	2.16	Joint Sales Agreement, dated as of October 4, 2000 by and among Tality Corporation, the Registrant, Cadence Holdings, Inc. and Tality, LP (Incorporated by reference to Exhibit 2.14 to the 2000 Third Quarter Form 10-Q).
	2.17	General Assignment and Assumption Agreement, dated as of June 2, 2001 between Tality Corporation and Tality, LP (Incorporated by reference to Exhibit 2.17 to the Registrant’s Form 10-Q for the quarter ended June 30, 2001 (the “2001 Second Quarter Form 10-Q”)).
	2.18	Master Amendment and Consent, effective as of June 2, 2001 by and among the Registrant, Tality Corporation, Tality Transition Corporation, Tality, LP and Cadence Holdings, Inc. (Incorporated by reference to Exhibit 2.18 to the 2001 Second Quarter Form 10-Q).
	2.19	Form of offer to exchange outstanding Tality options for Cadence options, together with Form of Letter to Option Holders including summary of terms and election form, dated as of November 26, 2001 (Incorporated by reference to Exhibit 2.19 to the Registrant’s Form 10-K for the fiscal year ended December 29, 2001 (the “2001 Form 10-K”)).
	3.01	(a) The Registrant’s Certificate of Ownership and Merger as filed with the Secretary of State of the State of Delaware on June 1, 1988 (Incorporated by reference to Exhibit 3.02(c) to the Registrant’s Form S-1 Registration Statement (No. 33-23107) filed on July 18, 1988).
		(b) The Registrant’s Certificate of Designation of Series A Junior Participating Preferred Stock, as amended on February 1, 2000, as filed with the Secretary of State of the State of Delaware on June 8, 1989 (Incorporated by reference to Exhibit 3A to the Registrant’s Current Report on Form 8-K (No. 0-15867) filed on June 12, 1989 and amended by Exhibit 4.02 to the Registrant’s Form 10-K for the fiscal year ended January 1, 2000 (the “1999 Form 10-K”)).
		(c) The Registrant’s Certificate of Designation of Series A Convertible Preferred Stock as filed with the Secretary of State of the State of Delaware on December 30, 1991 (Incorporated by reference to Exhibit 3.01(f) to the Registrant’s Form 10-K for the fiscal year ended December 31, 1991).
		(d) The Registrant’s Certificate of Amendment of Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on May 13, 1998 (Incorporated by reference to Exhibit 3.01(i) to the Registrant’s Form 10-Q for the quarter ended July 4, 1998 (the “1998 Second Quarter Form 10-Q”)).
		(e) The Registrant’s Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on May 13, 1998 (Incorporated by reference to Exhibit 3.01(j) to the 1998 Second Quarter Form 10-Q).
	3.02	The Registrant’s Amended and Restated Bylaws, as currently in effect (Incorporated by reference to Exhibit 3.01 to the Registrant’s Form 10-Q for the quarter ended April 3, 1999).
	4.01	Specimen Certificate of the Registrant’s Common Stock (Incorporated by reference to Exhibit 4.01 to the Registrant’s Form S-4 Registration Statement (No. 33-43400) filed on October 17, 1991).
	4.02	Amended and Restated Rights Agreement, dated as of February 1, 2000 between the Registrant and ChaseMellon Shareholder Services, L.L.C., which includes as exhibits thereto the Certificate of Designations for the Series A Junior Participating Preferred Stock, the form of Right Certificate and the Summary of Rights to Purchase Shares of Preferred Stock (Incorporated by reference to Exhibit 4.02 to the 1999 Form 10-K).
	*10.01	The Registrant’s 1987 Stock Option Plan, as amended, (Incorporated by reference to the Registrant’s Definitive Proxy Statement filed on March 31, 1998).

50

Exhibit
Number		Exhibit Title
	*10.02	Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under the Registrant’s 1987 Stock Option Plan, as amended (Incorporated by reference to Exhibit 4.01 to the Registrant’s Form S-8 Registration Statement (No. 33-22652) filed on June 20, 1988).
	10.03	JTA Research Inc. 1998 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-85080) filed on March 28, 2002).
	*10.04	The Registrant’s 1993 Directors Stock Option Plan (Incorporated by reference to Exhibit 4.04 to the Registrant’s Form S-8 Registration Statement (No. 033-53913) filed on May 31, 1994).
	*10.05	The Registrant’s 1995 Directors Stock Option Plan, as amended, (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-103657) filed on March 7, 2003).
	*10.06	The Registrant’s Amended and Restated Employee Stock Purchase Plan (formerly referred to as the 1990 Employee Stock Purchase Plan).
	*10.07	The Registrant’s Senior Executive Bonus Plan (previously the Chief Executive Officer Bonus Plan for 1996), as amended and restated, effective January 1, 2001 (Incorporated by reference to the Registrant’s Definitive Proxy Statement filed on April 12, 2001).
	*10.08	The Registrant’s 1994 Deferred Compensation Plan, as amended and restated effective November 1, 2002.
	*10.09	The Registrant’s 1996 Deferred Compensation Venture Investment Plan, as amended and restated effective January 1, 2001 (Incorporated by reference to Exhibit 10.09 to the 2001 Form 10-K).
	10.10	The Registrant’s 1993 Non-Statutory Stock Option Plan (Incorporated by reference to Exhibit 10.10 to the 2001 Form 10-K).
	*10.11	The Registrant’s 401(k) Plan, as amended and restated effective July 1, 1995 (Incorporated by reference to Exhibit 10.29 to the Registrant’s Form 10-Q for the quarter ended March 30, 1996).
	*10.12	Offer Letter, dated as of December 15, 2000 and Promissory Note, dated as of February 6, 2001 between the Registrant and Lavi A. Lev.
	10.13	Plato Design Systems Incorporated 2002 Supplemental Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-87674) filed on May 7, 2002).
	10.14	Distribution Agreement, dated as of April 28, 1997 by and among Cadence Design Systems (Ireland) Ltd., Cadence Design Systems K.K. and Cadence Design Systems (Japan) B.V. (Incorporated by reference to Exhibit 10.48 to the Registrant’s Form 10-Q for the quarter ended June 28, 1997).
	10.15	CCT 1993 Equity Incentive Plan, as amended and restated effective August 16, 1995 (Incorporated by reference to Exhibit 10.49 to the Registrant’s Form S-4 Registration Statement (No. 333-16779) filed on November 26, 1996).
	*10.16	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.
	*10.18	Form of Executive Severance Agreement (Incorporated by reference to Exhibit 10.43 to the Registrant’s Form 10-K for the fiscal year ended January 3, 1998).

51

Exhibit
Number		Exhibit Title
	*10.22	Consulting Agreement, dated as of February 23, 1999 between the Registrant and George M. Scalise (Incorporated by reference to Exhibit 10.36 to the 1999 Form 10-K).
	*10.26	Employment Agreement, dated as of April 26, 1999 between the Registrant and H. Raymond Bingham (Incorporated by reference to Exhibit 10.51 to the Registrant’s Form 10-Q for the quarter ended October 2, 1999 (the “1999 Third Quarter Form 10-Q”)).
	*10.27	Consulting Agreement, dated as of July 1999 between the Registrant and Alberto Sangiovanni-Vincentelli (Incorporated by reference to Exhibit 10.52 to the 1999 Third Quarter Form 10-Q).
	10.28	Design Acceleration, Inc. 1994 Stock Plan (Incorporated by reference to Exhibit 99 to the Registrant’s Form S-8 Registration Statement (No. 333-71717) filed on February 3, 1999).
	10.29	Quickturn Design Systems, Inc. 1988 Stock Option Plan, as amended (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-69589) filed on June 7, 1999 (the “June 1999 Form S-8”)).
	10.32	Quickturn Design Systems, Inc. 1993 Employee Qualified Stock Purchase Plan, as amended (Incorporated by reference to Exhibit 99.4 to the June 1999 Form S-8).
	10.34	Quickturn Design Systems, Inc. 1996 Supplemental Stock Plan (Incorporated by reference to Exhibit 99.5 to the June 1999 Form S-8).
	10.35	Quickturn Design Systems, Inc. 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.6 to the June 1999 Form S-8).
	10.36	SpeedSim, Inc. 1995 Incentive and Nonqualified Stock Option Plan (Incorporated by reference to Exhibit 99.8 to the June 1999 Form S-8).
	10.37	OrCAD, Inc. 1991 Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-85591) filed on August 19, 1999 (the “August 1999 Form S-8”)).
	10.38	OrCAD, Inc. 1995 Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the August 1999 Form S-8).
	10.39	OrCAD, Inc. Amended 1995 Stock Incentive Plan (Incorporated by reference to Exhibit 99.3 to the August 1999 Form S-8).
	*10.40	Form of Executive Retention Agreement between the Registrant and Key Executives of the Registrant (Incorporated by reference to Exhibit 10.57 to the 1999 Form 10-K).
	10.41	Diablo Research Company LLC 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-93609) filed on December 27, 1999 (the “December 1999 Form S-8”)).
	10.42	Diablo Research Company LLC 1999 Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the December 1999 Form S-8).
	10.43	The Registrant’s 2000 Non-Statutory Equity Incentive Plan, as amended (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-101693) filed on December 6, 2002).
	*10.44	Form of Indemnity Agreement between the Registrant and its directors and executive officers (Incorporated by reference to Exhibit 10.01 to the 2000 Second Quarter Form 10-Q).

52

Exhibit
Number		Exhibit Title
	10.45	Multi-Year Credit Agreement, dated as of September 27, 2002 between Cadence Design Systems, Inc., the lenders from time to time as parties thereto and Fleet National Bank as administrative agent (Incorporated by reference to Exhibit 10.45 to the Registrant’s Form 10-Q for the quarter ended September 28, 2002 (the “2002 Third Quarter Form 10-Q”)).
	10.46	364-Day Credit Agreement, dated as of September 27, 2002 between Cadence Design Systems, Inc., the lenders from time to time as parties thereto and Fleet National Bank as administrative agent (Incorporated by reference to Exhibit 10.46 to the 2002 Third Quarter Form 10-Q).
	10.47	The Registrant’s 1997 Nonstatutory Stock Option Plan, as amended and restated effective November 1, 2000 (Incorporated by reference to Exhibit 10.03 to the 2000 Third Quarter Form 10-Q).
	10.48	Simplex Solutions, Inc. 1995 Stock Plan, as amended (Incorporated by reference to Exhibit 99.1 to the Registrant’s Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement (No. 333-88390) filed on July 3, 2002 (the “July 2002 Form S-8”)).
	10.49	Simplex Solutions, Inc. 2001 Incentive Stock Plan (Incorporated by reference to Exhibit 99.2 to the July 2002 Form S-8).
	10.50	Simplex Solutions, Inc. 2002 Nonstatutory Stock Option Plan (Incorporated by reference to Exhibit 99.3 to the July 2002 Form S-8).
	10.51	Altius Solutions, Inc. 1999 Stock Plan (Incorporated by reference to Exhibit 99.4 to the July 2002 Form S-8).
	*10.53	Description of the Registrant’s Stock Purchase Program (Incorporated by reference to Exhibit 10.53 to the Registrant’s Form 10-K for the fiscal year ended December 30, 2000).
	10.56	Form of Letter Agreement between the Registrant and certain holders of Tality Corporation Class A Common Stock and regarding the repurchase of Tality stock (Incorporated by reference to Exhibit 10.56 to the 2001 Second Quarter Form 10-Q).
	10.58	The Registrant’s 2001 Non-Qualified Employee Stock Purchase Plan, effective July 13, 2001 (Incorporated by reference to Exhibit 10.58 to the 2001 Second Quarter Form 10-Q).
	*10.59	Executive Separation, Release and Consulting Agreement, dated as of August 31, 2001 between the Registrant, Tality Corporation and Robert P. Wiederhold (Incorporated by reference to Exhibit 10.59 to the Registrant’s Form 10-Q for the quarter ended September 29, 2001).
	10.61	CadMOS Design Technology, Inc. 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-56898) filed on March 12, 2001 (the “March 2001 Form S-8”)).
	10.62	CadMOS Design Technology, Inc. Supplemental 2001 Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the March 2001 Form S-8).
	10.63	DSM Technologies, Inc. 2000 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-82044) filed on February 4, 2002).
	10.64	Silicon Perspective Corporation 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-75874) filed on December 21, 2001).
	10.65	The Registrant’s SPC Plan, effective December 20, 2001 (Incorporated by reference to Exhibit 10.65 to the 2001 Form 10-K).

53

Exhibit
Number		Exhibit Title
	*10.66	Executive Separation, Release and Consulting Agreement, dated as of December 3, 2001 between the Registrant and Ronald R. Barris (Incorporated by reference to Exhibit 10.66 to the 2001 Form 10-K).
	*10.67	Amendment to Executive Separation, Release and Consulting Agreement, dated as of August 23, 2002 between the Registrant and Ronald R. Barris.
	10.68	BTA Technology, Inc. 1995 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (No. 333-102648) filed on January 22, 2003 (the “January 2003 Form S-8”)).
	10.69	BTA-Ultima, Inc. 1995 Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the January 2003 Form S-8).
	10.70	BTA Technology, Inc. 1999 Stock Option Plan (Incorporated by reference to Exhibit 99.3 to the January 2003 Form S-8).
	10.71	Celestry Design Technologies, Inc. 2001 Stock Option Plan (Incorporated by reference to Exhibit 99.4 to the January 2003 Form S-8).
	10.72	Celestry Design Technologies, Inc. 2001 Executive Stock Plan (Incorporated by reference to Exhibit 99.5 to the January 2003 Form S-8).
	21.01	Subsidiaries of the Registrant.
	23.01	Consent of KPMG LLP.
	23.02	Information Regarding Consent of Arthur Andersen LLP.

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

(b) Reports on Form 8-K:

      On November 12, 2002, a current report on Form 8-K was furnished to the SEC to report that:

      Cadence’s Chief Executive Officer, H. Raymond Bingham, and its Chief Financial Officer, William Porter, each delivered sworn statements to the Securities and Exchange Commission in accordance with Commission Order No. 4-460 (June 27, 2002) and the published Statement of the Commission Staff (July 29, 2002), and each of the Chief Executive Officer, H. Raymond Bingham, and the Chief Financial Officer, William Porter, made certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, accompanying Cadence’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2002.

(c) Exhibits:

      Cadence hereby files as part of this Form 10-K the Exhibits listed in Item 15. (a) 3 above.

(d) Financial Statement Schedule:

      See Item 15.(a)2 of this Form 10-K.

54

INDEPENDENT AUDITORS’ REPORT

The Stockholders and Board of Directors

Cadence Design Systems, Inc.:

      We have audited the accompanying consolidated balance sheet of Cadence Design Systems, Inc. and subsidiaries as of December 28, 2002 and the related consolidated income statement, and consolidated statements of stockholders’ equity and cash flows for the year then ended (collectively, the 2002 consolidated financial statements). In connection with our audit of the 2002 consolidated financial statements, we also have audited the 2002 financial statement schedule listed in Item 15.(a)2. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. The accompanying 2001 and 2000 consolidated financial statements and financial statement schedules of Cadence Design Systems, Inc. were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements and financial statement schedules, before the revisions described in Note 2 to the consolidated financial statements, in their report dated March 11, 2002.

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

      In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cadence Design Systems, Inc. and subsidiaries as of December 28, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related 2002 financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

      As discussed above, the 2001 and 2000 consolidated financial statements of Cadence Design Systems, Inc. were audited by other auditors who have ceased operations. As described in Note 2, the consolidated statements of cash flows have been restated to include proceeds from the sale of receivables as a component of cash flows from operating activities rather than as a component of cash flows from financing activities. We audited the adjustments described in Note 2 that were applied to restate the 2001 and 2000 consolidated statements of cash flows. In our opinion, such adjustments are appropriate and have been properly applied. As also described in Note 2, the consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), which was adopted by the Company as of December 30, 2001 (the beginning of the Company’s fiscal year 2002). In our opinion, the disclosures for 2001 and 2000 related to the adoption of SFAS No. 142 in Note 2 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 consolidated financial statements of Cadence Design Systems, Inc. other than with respect to such adjustments and disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 consolidated financial statements taken as a whole.

/s/ KPMG LLP

Mountain View, California

January 21, 2003, except as to Note 20,

  which is as of February 5, 2003

55

      The following is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Cadence Design Systems, Inc.’s filing on Form 10-K for the fiscal year ended December 29, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. For further discussion, see Exhibit 23.02. The financial statements to which this report relate have been revised as discussed in Note 2. These revisions are not covered by the copy of the report of Arthur Andersen LLP and were audited by KPMG LLP as described in their report.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

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

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

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

San Jose, California

March 11, 2002

56

CADENCE DESIGN SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

December 28, 2002 and December 29, 2001

(In thousands, except per share amounts)

ASSETS

				2002			2001
Current Assets:
	Cash and cash equivalents			$	371,327		$	206,311
	Short-term investments				24,286			68,483
	Receivables, net				313,968			258,402
	Inventories				9,614			18,151
	Prepaid expenses and other				39,448			83,575
		Total current assets			758,643			634,922
Property, plant and equipment, net					434,491			417,189
Acquired intangibles, net					883,339			413,641
Installment contract receivables, net					113,185			58,918
Other assets					248,603			205,360
Total Assets				$	2,438,261		$	1,730,030
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Current portion of capital lease obligations			$	1,609		$	1,397
	Accounts payable and accrued liabilities				297,399			259,029
	Deferred revenue				212,882			211,965
		Total current liabilities			511,890			472,391
Long-Term Liabilities:
	Long-term debt and capital lease obligations				52,659			1,476
	Other long-term liabilities				214,407			134,816
		Total long-term liabilities			267,066			136,292
Stockholders’ Equity:
	Preferred stock — $0.01 par value; authorized 400 shares, none issued or outstanding				—			—
	Common stock — $0.01 par value; authorized 600,000 shares; issued and outstanding shares: 269,688, excluding 693 shares held in treasury at December 28, 2002; 249,904, excluding 5,377 shares held in treasury at December 29, 2001.				1,100,380			628,697
	Deferred stock compensation				(44,426	)		(56,241	)
	Retained earnings				607,460			535,511
	Accumulated other comprehensive income				(4,109	)		13,380
			Total stockholders’ equity		1,659,305			1,121,347
Total Liabilities and Stockholders’ Equity				$	2,438,261		$	1,730,030

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

57

CADENCE DESIGN SYSTEMS, INC.

CONSOLIDATED INCOME STATEMENTS

For the three fiscal years ended December 28, 2002

(In thousands, except per share amounts)

			2002			2001			2000
Revenue:
	Product		$	811,910		$	830,490		$	627,429
	Services			149,810			263,355			335,967
	Maintenance			331,347			336,595			316,154
		Total revenue		1,293,067			1,430,440			1,279,550
Costs and Expenses:
	Cost of product			73,137			98,177			89,937
	Cost of services			112,687			191,384			215,605
	Cost of maintenance			64,221			65,299			63,315
	Marketing and sales			399,601			393,614			390,139
	Research and development			326,414			297,329			263,947
	General and administrative			115,767			119,350			101,299
	Amortization of acquired intangibles			81,775			92,330			80,503
	Amortization of deferred stock compensation (A)			37,504			17,911			11,390
	Avant! restitution and settlement			(261,090	)		(194,558	)		—
	Restructuring and other charges			134,296			61,619			—
	Write-off of acquired in-process technology			34,000			21,700			—
	Impairment of goodwill			—			25,834			—
		Total costs and expenses		1,118,312			1,189,989			1,216,135
Income from operations				174,755			240,451			63,415
	Interest expense			(2,803	)		(2,632	)		(2,398	)
	Other income (loss), net			(13,986	)		4,329			6,979
Income before provision for income taxes				157,966			242,148			67,996
	Provision for income taxes			86,017			100,861			18,019
Net income			$	71,949		$	141,287		$	49,977
Basic Net Income Per Share			$	0.28		$	0.57		$	0.20
Diluted Net Income Per Share			$	0.27		$	0.55		$	0.19
Weighted average common shares outstanding				259,870			245,839			244,565
Weighted average common and potential common shares outstanding — assuming dilution				267,500			257,660			262,696
(A) Amortization of deferred stock compensation would be further     classified as follows:
Cost of services			$	4,862		$	4,037		$	3,445
Marketing and sales				11,511			4,049			2,131
Research and development				12,659			2,845			498
General and administrative				8,472			6,980			5,316
			$	37,504		$	17,911		$	11,390

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

58

CADENCE DESIGN SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three fiscal years ended December 28, 2002

(In thousands)

					Stock
								Par Value								Accumulated
								And Capital			Deferred					Other			Total
		Comprehensive			Outstanding			in Excess			Stock			Retained		Comprehensive			Stockholders’
		Income			Shares			of Par			Compensation			Earnings		Income (Loss)			Equity
BALANCE, JANUARY 1, 2000						243,328		$	617,441		$	(229	)	$	344,247	$	24,690		$	986,149
	Purchase of stock					(11,737	)		(234,418	)		—			—		—			(234,418	)
	Issuance of stock					12,071			191,013			—			—		—			191,013
	Tax benefits from employee stock transactions					—			11,470			—			—		—			11,470
	Stock issued in connection with acquisitions					—			5,333			—			—		—			5,333
	Deferred stock compensation, net of forfeitures					—			—			(72,369	)		—		—			(72,369	)
	Amortization of deferred stock compensation					—			—			11,620			—		—			11,620
	Net income	$	49,977			—			—			—			49,977		—			49,977
	Unrealized holding (gain) loss on marketable securities, net		(34,567	)		—			—			—			—		(34,567	)		(34,567	)
	Foreign currency translation loss		(4,743	)		—			—			—			—		(4,743	)		(4,743	)
		$	10,667
BALANCE, DECEMBER 30, 2000						243,662			590,839			(60,978	)		394,224		(14,620	)		909,465
	Purchase of stock					(12,846	)		(299,036	)		—			—		—			(299,036	)
	Issuance of stock					8,976			99,874			—			—		—			99,874
	Tax benefits from employee stock transactions					—			2,009			—			—		—			2,009
	Stock issued in connection with acquisitions					10,112			259,222			—			—		—			259,222
	Deferred stock compensation, net of forfeitures					—			(24,820	)		(12,566	)		—		—			(37,386	)
	Amortization of deferred stock compensation					—			609			17,303			—		—			17,912
	Net income	$	141,287			—			—			—			141,287		—			141,287
	Unrealized holding (gain) loss on marketable securities, net		28,943			—			—			—			—		28,943			28,943
	Foreign currency translation loss		(943	)		—			—			—			—		(943	)		(943	)
		$	169,287
BALANCE, DECEMBER 29, 2001						249,904			628,697			(56,241	)		535,511		13,380			1,121,347
	Purchase of stock					(12,756	)		(185,171	)		—			—		—			(185,171	)
	Issuance of stock					6,710			77,228			—			—		—			77,228
	Tax benefits from employee stock transactions					—			31,815			—			—		—			31,815
	Stock issued in connection with acquisitions					25,830			522,124			—			—		—			522,124
	Deferred stock compensation, net of forfeitures					—			26,784			(26,822	)		—		—			(38	)
	Amortization of deferred stock compensation								(1,097	)		38,637			—		—			37,540
	Net income	$	71,949			—			—			—			71,949		—			71,949
	Unrealized holding (gain) loss on marketable securities, net		(24,629	)		—			—			—			—		(24,629	)		(24,629	)
	Foreign currency translation gain		7,140			—			—			—			—		7,140			7,140
		$	54,460
BALANCE, DECEMBER 28, 2002						269,688		$	1,100,380		$	(44,426	)	$	607,460	$	(4,109	)	$	1,659,305

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

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CADENCE DESIGN SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three fiscal years ended December 28, 2002

(In thousands)

					2002			2001			2000
Cash and Cash Equivalents at Beginning of Year					$	206,311		$	85,220		$	111,401
Cash Flows From Operating Activities:
	Net income					71,949			141,287			49,977
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				203,906			213,131			195,190
		Amortization of deferred stock compensation				38,637			17,303			11,620
		Net investment gain on sale, equity (income) loss and write-down				(23,959	)		(13,015	)		(13,904	)
		Write-off of long-term investment securities				22,781			2,549			1,500
		Write-off of acquired in-process technology				34,000			21,700			—
		Impairment of goodwill				—			25,834			—
		Write-off of inventory				9,338			18,915			—
		Non-cash restructuring and other charges				24,776			17,887			—
		Tax benefits from employee stock transactions				31,816			2,009			11,470
		Deferred income taxes				(23,871	)		(13,187	)		(28,744	)
		Provisions for losses on trade accounts receivable				13,577			45,809			18,313
		Other non-cash items				1,325			(1,350	)		1,032
		Changes in operating assets and liabilities, net of effect of acquired and disposed businesses:
			Receivables			(34,871	)		31,453			(82,158	)
			Proceeds from the sale of receivables			182,049			235,806			201,164
			Inventories			(801	)		(16,516	)		(5,739	)
			Prepaid expenses and other			29,580			10,337			(16,308	)
			Installment contract receivables			(261,350	)		(299,275	)		(111,901	)
			Other assets			(40,916	)		(75,946	)		(66,013	)
			Accounts payable and accrued liabilities			1,425			(17,358	)		15,285
			Deferred revenue			(10,663	)		(10,044	)		63,652
			Other long-term liabilities			81,472			73,444			34,485
				Net cash provided by operating activities		350,200			410,773			278,921
Cash Flows From Investing Activities:
	Maturities of short-term investments — held-to-maturity					—			—			999
	Proceeds from sale and maturities of short-term investments — available-for-sale					49,370			124,737			25,589
	Purchases of short-term investments — available-for-sale					(10,051	)		(40,478	)		(49,636	)
	Purchases of property, plant and equipment					(127,706	)		(154,311	)		(119,471	)
	Investment in venture capital partnership and equity investment					(6,818	)		(20,492	)		(12,960	)
	Net cash (paid) acquired in business combinations					(43,432	)		5,165			(4,503	)
	Proceeds from the sale of put warrants					—			14,934			42,440
	Purchase of call options					—			(14,934	)		(42,440	)
				Net cash used for investing activities		(138,637	)		(85,379	)		(159,982	)
Cash Flows From Financing Activities:
	Proceeds from credit facility					232,300			222,900			60,000
	Principal payments on credit facility and capital leases					(181,831	)		(225,203	)		(83,704	)
	Proceeds from minority interest					—			—			1,375
	Proceeds from repayment of notes receivable					—			10,523			—
	Repurchase of minority interest					—			(11,958	)		—
	Proceeds from issuance of common stock					77,228			99,874			115,659
	Purchases of stock					(181,797	)		(299,036	)		(232,958	)
				Net cash used for financing activities		(54,100	)		(202,900	)		(139,628	)
Effect of exchange rate changes on cash						7,553			(1,403	)		(5,492	)
Increase (Decrease) in cash and cash equivalents						165,016			121,091			(26,181	)
Cash and Cash Equivalents at End of Year					$	371,327		$	206,311		$	85,220

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

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CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 28, 2002

NOTE 1. CADENCE

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Principles of Consolidation and Basis of Presentation

      Cadence’s fiscal year end is the Saturday closest to December 31.

      The consolidated financial statements include the accounts of Cadence and its subsidiaries after elimination of intercompany accounts and transactions. Investments in companies in which voting interests range from 20% to 50%, and for which Cadence has significant influence, are accounted for using the equity method of accounting.

      In the second quarter of 2002, Simplex Solutions, Inc.’s System-on-a-Chip, or SoC, Design Foundry was combined with Cadence’s Tality group to operate as Cadence Design Foundry. Cadence Design Foundry focuses on high-end digital, analog and mixed-signal IC design in close conjunction with Cadence technology development groups. As a result, Cadence no longer has a separate design services group named Tality.

      Restated Consolidated Statements of Cash Flows and Other Reclassifications

      For the years ended December 29, 2001 and December 30, 2000, Cadence has restated its Statements of Cash Flows to include proceeds from the sale of receivables as a component of cash flows from operating activities rather than as a component of cash flows from financing activities, which is consistent with the guidance of Statement of Financial Accounting Standards, or SFAS, No. 95, “Statement of Cash Flows.” Certain other prior year consolidated financial statement balances have been reclassified to conform to the 2002 presentation. Such reclassifications are not considered significant.

      Use of Estimates

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

      Cash, Cash Equivalents and Short-Term Investments

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

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CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 28, 2002

      Management considers all of its investments in marketable securities as available-for-sale in accordance with SFAS No. 115. Securities classified as available-for-sale are stated at fair value, with the unrealized gains and losses reported as a component of stockholders’ equity until realized. The cost of securities sold is determined using the specific identification method when computing realized gains and losses.

       Foreign Currency Translation

      Cadence transacts business in various foreign currencies. In general, the functional currency of a foreign operation is the local country’s currency. Consequently, assets and liabilities of operations outside the United States are translated into U.S. dollars using year-end exchange rates. Revenue and expenses are translated at the exchange rates in effect at the end of each month during the year. The effects of foreign currency translation adjustments are included in Stockholders’ Equity as a component of Accumulated other comprehensive income in the accompanying Consolidated Balance Sheets.

       Derivative Financial Instruments

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

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

       Allowance for Doubtful Accounts

      Cadence makes judgments as to its ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages, Cadence analyzes its historical collection experience and current economic trends. If the historical data Cadence uses to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.

       Inventories

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

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December 28, 2002

       Property, Plant and Equipment

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

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

      Cadence capitalizes the costs of software developed for internal use in compliance with Statement of Position, or SOP, 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” and with Emerging Issues Task Force, or EITF, Issue 00-2 “Accounting for Web Site Development Costs.” Capitalization of software developed for internal use and web site development costs begins at the application development phase of the project. In 2002 and 2001 Cadence capitalized $48.1 million and $68.0 million, respectively, of costs relating to the implementation, and consulting services from third parties for software that is used internally. Amortization of software developed for internal use and web site development costs begins when the products are placed in productive use, and is computed on a straight-line basis over the estimated useful life of the product.

      Cadence recorded depreciation expense of property, plant and equipment for the fiscal years 2002, 2001, and 2000 in the amount of $100.1 million, $83.2 million and $76.7 million, respectively.

       Software Development Costs

      In accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”, development costs incurred in the research and development of new software products to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated capitalizable software development costs have not been material.

       Acquired Intangibles

      Acquired intangibles, which include goodwill, purchased technology, and other intangible assets, are stated at cost less accumulated depreciation and are reviewed periodically for impairment. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” which was adopted on December 30, 2001 (the beginning of Cadence’s fiscal year 2002), goodwill and purchased intangibles with indefinite useful lives are no longer amortized but are reviewed periodically for impairment. Accordingly, Cadence has ceased to amortize approximately $178.8 million of goodwill, net of amortization, including workforce intangibles that were subsumed into goodwill upon adoption of SFAS No. 142. Acquired intangibles with definite lives are amortized on a straight-line basis over the remaining estimated economic life of the underlying products and technologies (original lives assigned are one to seven years).

      During the third quarter of 2002, Cadence completed its annual impairment analysis of acquired technology, goodwill and intangibles. Based on the results of the impairment review, Cadence has determined that no indicators of impairment existed for any of its reporting units, and therefore no impairment charge has been recognized for the fiscal year ended December 28, 2002.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 28, 2002

      The pro forma effects of the adoption of SFAS No. 142 are as follows:

	Years Ended
	December 28,		December 29,		December 30,
	2002		2001		2000
	(In thousands, except per share amounts)
Reported net income	$	71,949	$	141,287	$	49,977
Goodwill/ Workforce amortization		—		37,326		26,806
Adjusted net income	$	71,949	$	178,613	$	76,783
Basic earnings per share:
Reported net income	$	0.28	$	0.57	$	0.20
Goodwill/ Workforce amortization		—		0.16		0.11
Adjusted net income	$	0.28	$	0.73	$	0.31
Diluted earnings per share:
Reported net income	$	0.27	$	0.55	$	0.19
Goodwill/ Workforce amortization		—		0.14		0.10
Adjusted net income	$	0.27	$	0.69	$	0.29

       Long-lived Assets

      Cadence’s long-lived assets consist of property, plant and equipment and other acquired intangibles, excluding goodwill. Cadence periodically reviews its long-lived assets for impairment in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” For assets to be held and used, Cadence initiates its review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows (without interest charges) that the asset is expected to generate. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value.

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

       Deferred Revenue

      Deferred revenue arises when customers are billed for products and/or services in advance of delivery and completion of the earnings process. Cadence’s deferred revenue consists primarily of unearned revenue on maintenance and product licenses for which revenue is recognized in installments over the duration of the license, or ratable product licenses. Maintenance on perpetual licenses is generally renewed annually, billed in full in advance, and earned ratably over the ensuing 12 month maintenance period. Ratable product licenses and maintenance on term licenses are generally billed quarterly in advance and earned ratably over the ensuing license period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 28, 2002

         Stock-Based Compensation

        At December 28, 2002, Cadence has six stock-based employee compensation plans, which are described more fully in Note 10. 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 the Company’s common stock. The compensation, if any, is amortized to expense over the vesting period.

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

		2002			2001			2000
		(In thousands, except per share amounts)
Net income (loss):
	As reported	$	71,949		$	141,287		$	49,977
	Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		17,064			10,442			8,372
	Deduct: Stock-based employee compensation expense determined under fair-value method for all awards, net of related tax effects		(122,007	)		(140,973	)		(123,645	)
	Pro forma	$	(32,994	)	$	10,756		$	(65,296	)
Basic net income (loss) per share:
	As reported	$	0.28		$	0.57		$	0.20
	Pro forma	$	(0.13	)	$	0.04		$	(0.27	)
Diluted net income (loss) per share:
	As reported	$	0.27		$	0.55		$	0.19
	Pro forma	$	(0.13	)	$	0.04		$	(0.27	)

        Comprehensive Income

        Other comprehensive income includes foreign currency translation gains and losses and unrealized gains and losses on marketable securities that are available-for-sale that have been excluded from net income and reflected instead in stockholders’ equity. Cadence has reported the components of comprehensive income on its Consolidated Statements of Stockholders’ Equity.

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

	2002								2001									2000
	Pre-Tax			Tax		Net-of-Tax			Pre-Tax			Tax			Net-of-Tax			Pre-Tax			Tax		Net-of-Tax
	Amount			Benefit		Amount			Amount			Expense			Amount			Amount			Expense		Amount
	(In thousands)
Unrealized holding gains (losses) on marketable securities	$	(41,048	)	$	16,419	$	(24,629	)	$	49,442		$	(20,499	)	$	28,943		$	(34,567	)	$	—	$	(34,567	)
Foreign currency translation gain (loss)		7,140			—		7,140			(943	)		—			(943	)		(4,743	)		—		(4,743	)
	$	(33,908	)	$	16,419	$	(17,489	)	$	48,499		$	(20,499	)	$	28,000		$	(39,310	)	$	—	$	(39,310	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 28, 2002

      Revenue Recognition

      Cadence derives revenue from three sources:

• product revenue, which includes software licensing, hardware sales and hardware leases;

• maintenance revenue from software and hardware; and

• services revenue.

      As described below, significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period.

      Cadence applies the provisions of SOP 97-2, “Software Revenue Recognition,” as amended by SOP 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. Cadence also applies the provisions of SFAS No. 13, “Accounting for Leases”, to all hardware lease transactions.

      Cadence recognizes product 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 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.

      Cadence’s VSOE for certain product elements of an arrangement is based upon the pricing for comparable transactions when the element is sold separately. Cadence’s VSOE for maintenance is based upon the customer’s annual renewal rates. VSOE for services is based on the price charged when the services are sold separately. The timing of revenue recognition for both delivered and undelivered elements is in accordance with the relevant provisions of SOP 97-2.

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

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

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

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

      For subscription and term licenses and hardware leases, Cadence uses the license agreement and a 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 its Japanese distributor are evidenced by a master agreement governing the relationship, together with binding purchase orders from the distributor on a transaction-by-transaction basis.

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

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December 28, 2002

      Cadence assesses whether a fee is fixed or determinable primarily based on the payment terms associated with the transaction. Cadence uses installment contracts for subscription and term licenses and has established a history of collecting under the original contract without providing concessions on payments, products or services. The time periods of installment contracts are equal to or less than the time period of the licenses and payments are generally collected quarterly. If different conditions were to prevail, and Cadence no longer had a history of collecting under the original contract without providing concessions on term licenses, revenue from term licenses would be recognized as payments under the installment contract become due and payable. This change could have a material impact on Cadence’s results of operations.

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

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

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

• Term licenses and Perpetual licenses — all revenue associated with licensed software is recognized upon the effective date of the license and delivery of the licensed product.

      Maintenance revenue consists of fees for providing technical support and software updates on a when-and-if available basis. Cadence recognizes all maintenance revenue ratably over the maintenance period under each software license agreement. For term and perpetual licenses, customers renew maintenance agreements annually. For subscription licenses, a portion of the revenue is allocated to maintenance revenue.

      Services revenue consists primarily of revenue received for performing methodology and design services. Revenue from service contracts is recognized either on a time and materials basis as work is performed or using the percentage-of-completion method. Cadence estimates the percentage-of-completion on contracts with fixed or not-to-exceed fees on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. Cadence has a history of accurately estimating project status and the cost to complete projects. 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 all revenue and costs would be deferred until the project was completed. This change could have a material impact on Cadence’s results of operations. For small fixed-price projects, such as training classes and small, standard methodology service engagements of approximately $10,000 or less, revenue is recognized when the work is completed.

      In September 2002, Cadence acquired International Business Machine Corporation’s, or IBM’s, Test Design Automation, or TDA, business. Concurrent with the acquisition, Cadence licensed software to IBM and entered into an agreement to provide services.

      For concurrent transactions, Cadence considers SFAS No. 141, “Business Combinations”, and EITF Issue No. 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business”, to determine whether the acquisition of the TDA business qualified for accounting as a purchase business combination. In addition, Cadence considered APB Opinion No. 29, “Accounting for Nonmonetary Transactions” and EITF Issue No. 01-02, “Interpretation of APB Opinion No. 29,” to determine whether the concurrent transactions were appropriately recorded at their respective fair values. Monetary transactions and nonmonetary transactions that represent the culmination of an earnings process are recorded at the fair values of the products delivered or products or services received, whichever is more readily

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December 28, 2002

determinable, if the fair values are reasonably determinable. In concluding that the fair values were reasonably determinable, Cadence considered its recent history of cash sales for similar products or services in similar sized transactions with similar terms. Approximately 3% of revenue recognized in 2002 resulted from this concurrent transaction.

          Accounting for Income Taxes

          Cadence uses the asset and liability method to account for income taxes. Cadence is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Cadence then assesses the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent it believes that recovery is not likely, Cadence must establish a valuation allowance. To the extent Cadence establishes a valuation allowance for deferred tax assets or increases this allowance in a period, Cadence may need to include an expense within the tax provision in its Consolidated Income Statements.

          Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. The valuation allowance is based on estimates of taxable income for each jurisdiction in which Cadence operates and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or Cadence adjusts these estimates in future periods, Cadence may need to establish an additional valuation allowance, which could materially affect its financial position and results of operations.

          Concentrations of Credit Risk

          Financial instruments, including derivative financial instruments, that may potentially subject Cadence to concentrations of credit risk, consist principally of cash, cash equivalents, short-term investments, long-term investments, accounts receivable, forward contracts and call options purchased in conjunction with Cadence’s stock repurchase programs. Cadence’s investment policy limits investments to short-term, low-risk instruments. Concentration of credit risk related to accounts receivable is limited, due to the varied customers comprising Cadence’s customer base and their dispersion across geographies. Credit exposure related to the forward contracts and the call options is limited to the realized and unrealized gains on these contracts. All financial instruments are executed with financial institutions with strong credit ratings, which minimizes risk of loss due to nonpayment.

          Fair Value of Financial Instruments

          The fair value of Cadence’s cash and cash equivalents, short term and long term investments, receivables, accounts payable, accrued liabilities, and deferred revenue approximate their carrying value due to the short-term nature of these instruments. The fair market values of Cadence’s debt and capital lease obligations and installment contract receivables approximate their carrying values based upon current market rates of interest.

          Advertising

          Cadence expenses the production costs of advertising as incurred. Advertising expense was approximately $13.4 million, $19.3 million and $22.9 million for the fiscal years ended 2002, 2001 and 2000, respectively, and is included in marketing and sales in the accompanying Consolidated Income Statements.

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December 28, 2002

       New Accounting Standards

      In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51.” FIN 46 requires companies to include in their consolidated financial statements the assets, liabilities and results of activities of variable interest entities if the company holds a majority of the variable interests. The consolidation requirements of FIN 46 are effective for variable interest entities created after January 31, 2003 or for entities in which an interest is acquired after January 31, 2003. The consolidation requirements of FIN 46 are effective June 15, 2003 for all variable interest entities acquired before February 1, 2003. FIN 46 also requires companies that expect to consolidate a variable interest entity they acquired before February 1, 2003 to disclose the entity’s nature, size, activities, and the company’s maximum exposure to loss in financial statements issued after January 31, 2003. Cadence has determined FIN 46 will not have a material effect on its consolidated financial position, results of operations or cash flows.

      In December 2002, the FASB, issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123 “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The annual and interim disclosure provisions are effective for financial reports containing financial statements for annual and interim periods ending after December 15, 2002. Cadence has adopted the disclosure provisions for these annual financial statements and will adopt the interim disclosure provisions for its interim financial statements beginning with the period ending March 28, 2003. Cadence has determined that the adoption of SFAS No. 148 will not have a material impact on its consolidated financial position, results of operations or cash flows.

      In November 2002, the FASB issued FASB Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. See Note 9 for disclosures required by FIN 45. The adoption of FIN 45 did not have a material effect on Cadence’s consolidated financial position, results of operations or cash flows.

      In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 eliminates EITF Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” Under SFAS No. 146, liabilities for costs associated with an exit or disposal activity are recognized when the liabilities are incurred, as opposed to being recognized at the date of entity’s commitment to an exit plan under EITF No. 94-3. Furthermore, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liabilities. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. Cadence has determined SFAS No. 146 will not have a material effect on its consolidated financial position, results of operations or cash flows. However, SFAS No. 146 will impact the timing of accruals for future restructurings, if any.

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December 28, 2002

NOTE 3. BALANCE SHEET COMPONENTS

      A summary of balance sheet components as of December 28, 2002 and December 29, 2001 follows:

				2002			2001
				(In thousands)
Receivables:
	Accounts receivable			$	168,547		$	211,843
	Installment contract receivables — current				162,857			90,119
		Total Receivables			331,404			301,962
	Less: Allowances				(17,436	)		(43,560	)
		Receivables, net		$	313,968		$	258,402
Prepaid Expenses and Other:
	Prepaid expenses and other			$	25,009		$	47,727
	Deferred income taxes				14,439			35,848
		Prepaid expenses and other		$	39,448		$	83,575
Property, Plant and Equipment:
	Computer equipment and related software			$	432,669		$	366,094
	Buildings				111,580			97,530
	Land				74,677			71,877
	Leasehold and building improvements				72,653			72,449
	Furniture and fixtures				49,835			54,104
	Equipment				45,075			38,087
	Construction in progress and internally developed software				84,518			95,578
			Total cost		871,007			795,719
	Less: Accumulated depreciation and amortization				(436,516	)		(378,530	)
		Property, plant and equipment, net		$	434,491		$	417,189
Acquired Intangibles:
	Goodwill and other intangibles			$	1,191,733		$	634,497
	Purchased software technology				42,716			63,620
	Less: Accumulated amortization				(351,110	)		(284,476	)
		Acquired intangibles, net		$	883,339		$	413,641
Accounts Payable and Accrued Liabilities:
	Payroll and payroll-related accruals			$	145,385		$	149,919
	Income taxes payable — current				26,519			3,938
	Other accrued liabilities				98,097			83,919
	Accounts payable				27,398			21,253
			Accounts payable and accrued liabilities	$	297,399		$	259,029
Other Long-term Liabilities:
	Long-term debt and capital lease obligations			$	52,659		$	1,476
	Income taxes payable — long-term				145,536			97,900
	Other long-term liabilities				68,871			36,916
			Other long-term liabilities	$	267,066		$	136,292

NOTE 4. ACQUISITIONS

      For each of the acquisitions described below, the results of operations and the estimated fair value of the assets acquired and liabilities assumed have been included in Cadence’s Consolidated Financial Statements from the date of the acquisition.

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December 28, 2002

       IBM TDA

      In September 2002, Cadence acquired IBM’s TDA business and paid a total cash purchase price of approximately $70.0 million. Concurrent with the acquisition, Cadence licensed software to IBM under subscription and term licenses, and entered into an agreement to provide services. Payments for these arrangements are to be paid over the duration of the respective contracts under Cadence’s standard payment terms. Cash expected to be paid by IBM will be significantly in excess of the cash paid by Cadence for the TDA business. The software licenses and services transactions were determined to have fair value based upon pricing for comparable transactions. Cadence purchased IBM’s TDA business to acquire key technology and personnel.

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

				(In thousands)
Property, plant and equipment, net				$	448
Acquired intangibles:
	In-process technology				6,600
	Existing technology (five-year weighted-average useful life)				12,200
	Patents (five-year weighted-average useful life)				2,100
	Service agreements (five-year weighted-average useful life)				3,500
Goodwill					38,851
Other non-current assets					7,480
		Total assets acquired			71,179
Current liabilities assumed					1,184
			Net assets acquired	$	69,995

      The $6.6 million of purchase price allocated to acquired in-process technology was determined, in part, by a third party appraiser 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 in-process technology write-off is a component of operating expenses in the Consolidated Income Statements. The weighted-average useful lives of the acquired intangibles, excluding in-process technology, is approximately five years.

      The $38.9 million of goodwill was assigned to the Product segment. For tax purposes, $19.9 million of the goodwill is expected to be deductible.

        Simplex Solutions, Inc.

      In June 2002, Cadence acquired 100% of the outstanding common stock of Simplex Solutions, Inc., a publicly-traded company that provides software and services for the design and verification of ICs. The aggregate purchase price was $329.7 million which included the issuance of approximately 14.6 million shares of Cadence common stock, valued at $267.3 million, 4.5 million shares of Cadence common stock issuable on the exercise of assumed options, with a fair value of $46.4 million, and acquisition costs of $16.0 million. The value of the common stock issued was determined based on the average market price of Cadence’s common stock for the five day period including two days before and after the acquisition was announced. Cadence purchased Simplex to acquire key personnel and technology.

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December 28, 2002

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

				(In thousands)
Current assets				$	57,589
Property, plant and equipment, net					5,645
Acquired intangibles:
	In-process technology				27,400
	Existing technology (four-year weighted-average useful life)				13,900
	Employee agreements (three-year weighted-average useful life)				7,500
	Patents (four-year weighted-average useful life)				4,700
	Maintenance agreements (four-year weighted-average useful life)				4,700
	Order backlog, trademarks and other assets (one-year weighted-average useful life)				5,273
Goodwill					225,214
Other non-current assets					3,074
		Total assets acquired			354,995
Current liabilities					11,155
Other non-current liabilities					14,162
		Total liabilities assumed			25,317
			Net assets acquired	$	329,678

      The $27.4 million of purchase price allocated to acquired in-process technology was determined, in part, by a third party appraiser 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 in-process technology write-off is included as a component of operating expenses in the Consolidated Income Statements. The weighted-average useful lives of the acquired intangibles, excluding in-process technology, is approximately four years.

      The $225.2 million of goodwill was assigned to the Product and Services segments in the amounts of $115.1 million and $110.1 million, respectively. None of the goodwill is expected to be deductible for tax purposes.

        Other 2002 Acquisitions

      For the year ended December 28, 2002, Cadence also acquired: four companies; substantially all of the assets of one company; and the assets of one division of another company. The initial aggregate purchase price for these acquisitions was $67.0 million, of which $33.5 million was cash and the remainder related to the issuance of shares of Cadence common stock with a fair value of $33.5 million. Certain of these acquisitions also include contingent consideration for which the amounts have not yet been determined.

      Goodwill recognized in these transactions was $44.7 million, all of which was assigned to the Product segment. Of the total goodwill, $8.5 million is expected to be deductible for tax purposes.

      Comparative pro forma financial information for all 2002 acquisitions has not been presented because the results of operations were not material to Cadence’s Consolidated Financial Statements.

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December 28, 2002

      Silicon Perspective Corporation

      In December 2001, Cadence acquired Silicon Perspective Corporation, or SPC, a privately-held design technology firm, for approximately 6.2 million shares of Cadence common stock, valued at $129.4 million, 0.8 million shares of stock issuable upon the exercise of assumed options with a fair value of $2.0 million, and acquisition costs of $3.3 million, for a total initial purchase price of $134.7 million. The purchase price will increase as certain predetermined bookings and product development goals, referred to as earnouts, are achieved in fiscal 2002 and 2003. SPC provides electronic design tools that bridge the gap between front-end logic designers and the back-end physical design process. Earnouts totaling 12.2 million shares valued at $190.9 million were earned for the fiscal year ending December 28, 2002, and were issued in February 2003. Cadence recorded approximately 89% of the value associated with the 12.2 million shares as goodwill and the remaining 11% of the value as deferred stock-based compensation. In connection with the acquisition, Cadence initially allocated $108.8 million of the purchase price to goodwill, which has been adjusted to $280.2 million as a result of the earnouts. The goodwill, deferred stock compensation and shares issued as consideration will increase upon the achievement of earnouts in fiscal 2003. The goodwill is not expected to be deductible for tax purposes. The technology and other acquired intangibles are being amortized over one to five years. Compensation expense in connection with the earnouts for the year ended December 28, 2002 was $9.7 million.

      Upon consummation of the SPC acquisition, Cadence immediately charged to expense $8.6 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The amount of purchase price allocated to acquired in-process technology was determined, in part by a third party appraiser through established valuation techniques. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. The in-process technology was completed as of March 2002. Expenditures to complete the in-process technology totaled $1.5 million.

      CadMOS Design Technology, Inc.

      In February 2001, Cadence acquired CadMOS Design Technology, Inc., a privately-held design tools firm, for approximately 3.6 million shares of Cadence common stock and assumed options, valued at $92.7 million. The acquisition was accounted for as a purchase. CadMOS provides solutions to the signal integrity problems experienced in nanometer processes. In the first quarter of 2002, Cadence issued an additional 0.2 million shares, valued at $3.6 million, due to CadMOS’ achievement of certain predetermined performance goals. In addition, the purchase price will increase by up to an additional 0.3 million Cadence shares if certain predetermined performance goals are achieved during the second and third years following the acquisition. These goals are related to bookings, product development and continued employment of certain CadMOS employees. In connection with the acquisition, Cadence allocated the purchase price primarily to goodwill of $50.2 million, which has been adjusted to $53.8 million as a result of the achievement of performance goals. The goodwill is not expected to be deductible for tax purposes. Technology and other acquired intangibles of $12.9 million were also recorded and are being amortized over three to five years.

      Upon consummation of the CadMOS acquisition, Cadence immediately charged to expense $12.1 million, representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The amount of purchase price allocated to acquired in-process technology was determined, in part, by a third party appraiser through established valuation techniques. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate included a factor that reflected the uncertainty surrounding successful

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December 28, 2002

development of the acquired in-process technology. The in-process technology was completed as of September 28, 2002. Expenditures to complete the in-process technology totaled $1.9 million.

      Other 2001 Acquisitions

      During 2001, Cadence acquired substantially all of the assets of two companies for an initial aggregate price of $10.5 million, of which $4.4 million was cash and $6.1 million was shares of Cadence stock. Each acquisition was accounted for as a purchase. Upon consummation of the acquisitions, Cadence charged to expense, immediately after the respective acquisition, an aggregate of $1.0 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use.

      Comparative pro forma financial information for all 2001 acquisitions has not been presented because the results of operations were not material to Cadence’s Consolidated Financial Statements.

NOTE 5. FINANCIAL INSTRUMENTS

      Investments

      The following tables summarize Cadence’s investment activities as of December 28, 2002 and December 29, 2001:

				Gross		Gross
				Unrealized		Unrealized
		Cost		Gains		Losses		Fair Value
December 28, 2002
		(In thousands)
Time Deposits		$	238	$	—	$	—	$	238
Marketable Securities — available-for-sale			13,848		11,577		1,377		24,048
Non-Marketable Securities			46,794		—		—		46,794
	Total:	$	60,880	$	11,577	$	1,377	$	71,080
Reported as:
Short-term investments								$	24,286
Long-term investments in Other assets									46,794
	Total:							$	71,080

				Gross		Gross
				Unrealized		Unrealized
		Cost		Gains		Losses		Fair Value
December 29, 2001
		(In thousands)
Time Deposits		$	960	$	—	$	—	$	960
Corporate Debt Securities			2,420		—		—		2,420
Marketable Securities — available-for-sale			16,276		51,985		738		67,523
Non-Marketable Securities			75,695		—		—		75,695
	Total:	$	95,351	$	51,985	$	738	$	146,598
Reported as:
Short-term investments								$	68,483
Long-term investments in Other assets									78,115
	Total:							$	146,598

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December 28, 2002

      Cadence’s marketable securities are classified as available-for-sale and are carried at fair value. Unrealized gains, net of taxes, are included in other comprehensive income. If Cadence determines that an investment has an other-than-temporary decline in fair value, generally defined as when the cost basis exceeds the fair value for approximately six months, Cadence recognizes the investment loss in Other income (loss), net. Realized gains and losses are recognized based on the specific identification method and are recognized in Other income (loss). Net realized gains on marketable securities were $9.2 million, $17.7 million and $14.3 million for the years ended December 28, 2002, December 29, 2001, and December 30, 2000, respectively.

      As part of its overall investment strategy, Cadence is a limited partner in two venture capital funds, Telos Venture Partners, L.P., and Telos Venture Partners II, L.P., collectively referred to as Telos. As of December 28, 2002, Cadence has committed $77.3 million to Telos and is contractually committed to contribute up to an additional $53.7 million. Undistributed investments in Telos are included in non-marketable securities.

      Telos and Cadence’s other non-marketable securities are carried at cost and are included in Other assets in the Consolidated Balance Sheets. If Cadence determines that an other-than-temporary decline exists in 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 Consolidated Income Statements.

        Sale of Receivables

      Cadence has entered into agreements whereby it 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 fiscal years ended December 28, 2002 and December 29, 2001, Cadence transferred accounts receivable totaling $182.0 million and $235.8 million, respectively, which approximated fair value, to financing institutions on a non-recourse basis. For the years ended December 29, 2001 and December 30, 2000, Cadence has restated its Statements of Cash Flows to include proceeds from the sale of receivables as a component of cash flows from operating activities rather than as a component of cash flows from financing activities, which is consistent with the guidance of SFAS No. 95, “Statement of Cash Flows.”

        Derivative Financial Instruments

      The following table shows the notional principal and fair value of Cadence’s derivative financial instruments as of December 28, 2002 and December 29, 2001:

	2002				2001
	Notional		Fair		Notional		Fair
	Principal		Value		Principal		Value
	(In thousands)
Forward contracts	$	128,182	$	2,201	$	127,539	$	1,465

      The estimates of fair value are based on financial market information as of December 28, 2002 and December 29, 2001. As of December 28, 2002 and December 29, 2001, the credit risk associated with the forward contracts was negligible. Although the table above reflects the notional principal and fair value amounts of Cadence’s foreign exchange instruments, it does not reflect the gains or losses associated with the underlying exposures and underlying transactions. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

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December 28, 2002

NOTE 6. ACQUIRED INTANGIBLES

      Described below is goodwill, other acquired intangibles and purchased software as of December 28, 2002 and December 29, 2001:

	2002		2001
	(In thousands)
Goodwill	$	663,197	$	178,760
Other acquired intangibles, net		219,203		217,412
Purchased software, net		939		17,469
Total	$	883,339	$	413,641

        Goodwill

      The changes in the carrying amount of goodwill for the year ended December 28, 2002 are as follows:

	Product		Services
	Segment		Segment		Total
	(In thousands)
Balance as of December 29, 2001.	$	166,933	$	11,827	$	178,760
Goodwill resulting from acquisitions during the year		194,764		110,355		305,119
Additions due to contingent consideration		171,719		6,855		178,574
Adjustments		446		298		744
Balance as of December 28, 2002.	$	533,862	$	129,335	$	663,197

        Other Acquired Intangibles

      Other acquired intangibles with finite lives are classified as of December 28, 2002 and December 29, 2001 as follows:

	As of December 28, 2002							As of December 29, 2001
						Weighted							Weighted
						Average							Average
	Gross					Remaining		Gross					Remaining
	Carrying		Accumulated			Useful		Carrying		Accumulated			Useful
	Amount		Amortization			Life		Amount		Amortization			Life
	(In thousands)							(In thousands)
Existing technology	$	453,261	$	(258,185	)		2.9 Years	$	392,578	$	(184,117	)		3.3 Years
Agreements and relationships		23,500		(4,170	)		3.2 Years		6,200		—			3.4 Years
Tradenames/trademarks/patents		3,300		(547	)		3.3 Years		500		—			5.0 Years
Other		6,869		(4,825	)		1.5 Years		4,769		(2,518	)		2.6 Years
Total other acquired intangibles	$	486,930	$	(267,727	)			$	404,047	$	(186,635	)

Aggregate amortization expense for the fiscal years:
	2002	$	81,092
	2001		54,797
Estimated amortization expense for the fiscal years:
	2003	$	87,208
	2004		68,286
	2005		42,805
	2006		15,253
	2007		5,520
	Thereafter		131
Total estimated amortization expense		$	219,203

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December 28, 2002

NOTE 7. CREDIT FACILITIES

      On September 27, 2002, Cadence entered into two syndicated, senior unsecured credit facilities, or the 2002 Facilities, that allow Cadence to borrow up to $375.0 million. One of the 2002 Facilities is a $187.5 million three-year revolving credit facility, or the Three-Year Facility, which terminates on September 27, 2005. The other 2002 Facility consists of a $187.5 million, 364-day revolving credit facility convertible into a term loan, or the 364-Day Facility. The 364-Day Facility will terminate on September 26, 2003; provided, that at the request of Cadence and with the consent of members of the bank group that wish to do so, the date of termination may be extended for one additional 364-day period with respect to the portion of the amounts outstanding under the 364-Day Credit Agreement that a consenting bank holds. Upon the scheduled and/or extended termination, amounts outstanding under the 364-Day Facility may be converted to a one-year term loan.

      For both of the 2002 Facilities, Cadence has the option to pay interest based on LIBOR plus a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial covenant, or the higher of the Federal Funds Rate plus 0.50% or the prime rate. In addition, commitment fees are payable on the unused portion of the Three-Year Facility at rates between 0.25% and 0.335% based on a pricing grid tied to a financial covenant and on the unused portion of the 364-Day Facility at a fixed rate of 0.225%. A utilization fee of 0.25% is payable on amounts borrowed under the 2002 Facilities whenever combined borrowings under the 2002 Facilities exceed $123.8 million. Cadence may not borrow under the 364-Day Facility at any time that any portion of the Three-Year Facility remains unused.

      The 2002 Facilities contain certain financial and other covenants, which must be maintained. The financial covenants specify that Cadence must maintain a minimum Earnings Before Interest Taxes Depreciation and Amortization, or EBITDA, of not less than $200.0 million. Additionally, Cadence must maintain a minimum fixed charge coverage ratio (the ratio of EBITDA to the sum of (i) interest expense plus (ii) 20% of funded debt plus (iii) taxes paid in cash plus (iv) capital lease payments) of not less than 1.5 to 1.0. Other covenants require Cadence to maintain a minimum one-to-one ratio of current assets to current liabilities and a maximum two-to-one funded debt to EBITDA ratio, and to directly own not less than 51% of its consolidated total assets. From time to time, Cadence borrows amounts under the 2002 Facilities. At December 28, 2002, Cadence was in compliance with the covenants in the 2002 Facilities and had outstanding borrowings of $52.0 million under the Three-Year Facility.

      The 2002 Facilities replaced two previously existing credit facilities, which terminated on September 27, 2002. In connection with the termination of the previously existing credit facilities, Cadence paid in full all interest, principal, fees, and other amounts owing thereunder.

NOTE 8. LEASE COMMITMENTS

      Equipment and facilities are leased under various capital and operating leases expiring at various dates through the year 2025. Certain of these leases contain renewal options. Rental expense was $23.3 million for 2002, $25.6 million for 2001 and $22.2 million for 2000.

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December 28, 2002

      At December 28, 2002, future minimum lease payments under capital and operating leases and the present value of the capital lease payments were as follows:

									Net
			Capital		Operating		Sub-lease		Operating
			Leases		Leases		Income		Leases
			(In thousands)
For the fiscal years:
	2003		$	1,678	$	30,197	$	1,691	$	28,506
	2004			588		24,062		905		23,157
	2005			90		15,529		733		14,796
	2006			—		12,258		556		11,702
	2007			—		10,395		556		9,839
	2008 and after			—		42,481		1,183		41,298
		Total lease payments		2,356	$	134,922	$	5,624	$	129,298
Less: Amount representing interest (average interest rate of 3.58%)				88
		Present value of lease payments		2,268
Less: Current portion				1,609
		Long-term portion	$	659

      The cost of equipment under capital leases included in the Consolidated Balance Sheets as property, plant and equipment at December 28, 2002 and December 29, 2001 was approximately $6.3 million and $6.0 million, respectively. Accumulated amortization of the leased equipment at December 28, 2002 and December 29, 2001 was approximately $4.7 million and $3.2 million, respectively.

NOTE 9. 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, we accrue a liability for the estimated loss. 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 our pending claims and litigation and may revise our estimates.

      On January 7, 1999, in a suit captioned Mentor Graphics Corporation, et al. v. Lobo, et al., Delaware Chancery Court, New Castle County, Civ. Action No. 16843-NC (“Mentor II”), Mentor filed and served an amended complaint asserting claims against Cadence, Quickturn and the Quickturn Board of Directors for declaratory and injunctive relief for various alleged breaches of fiduciary duty purportedly owed by Quickturn and its Board of Directors to Quickturn’s shareholders in connection with the merger between Quickturn and Cadence. Mentor further alleged that Cadence aided and abetted Quickturn and its Board of Directors in those purported breaches. Mentor acknowledged that the suit became moot upon consummation of the Cadence acquisition of Quickturn, and on February 13, 2002, the Court dismissed the case on that basis. However, Mentor sought an award of attorney’s fees in the case, as well as in a prior related case in which

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Cadence was not a party. In May 2000, Mentor advised the Delaware Chancery Court of its objection to the settlement of a companion action brought on behalf of certain Quickturn shareholders, a settlement which is conditioned upon approval of the settlement by the Chancery Court and upon Mentor’s not being awarded attorneys’ fees in either Mentor II or the related case. In an order dated August 17, 2001, the Chancery Court denied Mentor’s fee application. Mentor filed a notice of appeal with the Delaware Supreme Court of the denial of the fee application. On July 25, 2002, the Chancery Court approved the settlement of the companion action. Mentor filed a notice of appeal from that order. The appeals were subsequently consolidated, and the Delaware Supreme Court heard argument on March 4, 2003. Cadence is vigorously defending this matter, but the ultimate outcome is currently unknown. Management believes that the ultimate resolution of this litigation will not have a material adverse effect on Cadence’s business, operating results or financial condition.

      On July 21, 1999, Mentor filed suit against Quickturn in the U.S. District Court for the District of Delaware, alleging that Quickturn’s Mercury^TM hardware emulation system infringed U.S. Patent Nos. 5,777,489 and 5,790,832, allegedly assigned to Mentor. Upon motion of Quickturn, the action was transferred to the U.S. District Court for the Northern District of California, Civil Action No. C 00-5464 SI. At Quickturn’s request, Cadence was added as a defendant. In response, Cadence and Quickturn filed counterclaims for declaratory judgment of non-infringement and invalidity of these patents. After filing the suit, Mentor additionally alleged that Quickturn’s Mercury Plus^TM product infringed these patents. Mentor subsequently filed Civil Action No. C 02-1426 SI, realleging that Quickturn’s Mercury^TM hardware emulation systems infringed U.S. Patent No. 5,777,489. This action was consolidated with Civil Action No. C 99-5464 SI. Cadence intends to vigorously defend this matter, but the ultimate outcome is currently unknown. Management believes that the ultimate resolution of this litigation will not have a material adverse effect on Cadence’s business, operating results or financial condition.

      On March 24, 2000, Mentor and Meta and several founders of Meta filed suit against Quickturn and Cadence and a former Quickturn employee in the U.S. District Court for the Northern District of California, Civil Action No. C-00-01030 SI. The suit alleged infringement of U.S. Patent No. 5,754,827 allegedly assigned to Mentor, misappropriation of trade secrets, common law misappropriation and breach of confidence, and sought unspecified damages, injunctive relief and the assignment to Mentor of a patent previously issued to Quickturn (U.S. Patent No. 5,943,490). Quickturn and Cadence filed counterclaims for declaratory judgment of non-infringement, unenforceability and invalidity of U.S. Patent No. 5,754,827. Quickturn and Cadence also counterclaimed for declaratory judgment of non-infringement, unenforceability and invalidity of two additional patents allegedly assigned to Mentor, U.S. Patent Nos. 5,999,725 and 6,057,706 which Mentor previously threatened to assert against Quickturn. Mentor’s response to Quickturn’s counterclaims affirmatively alleged infringement of both of these patents. This action was consolidated with the actions described in the preceding paragraph. Cadence intends to vigorously defend this matter, but the ultimate outcome is currently unknown. Management believes that the ultimate resolution of this litigation will not have a material adverse effect on Cadence’s business, operating results or financial condition.

      On September 11, 2000, Mentor filed a complaint against Quickturn and Cadence in the U.S. District Court for the Northern District of California, Civil Action No. C-00-03291 SI, accusing Quickturn and Cadence of infringing U.S. Patent No. 5,574,388, purportedly owned by Mentor, and seeking unspecified damages and injunctive relief. Cadence and Quickturn filed counterclaims for declaratory judgment of invalidity, unenforceability and non-infringement of this patent. The parties agreed to consolidate this action with Civil Action Nos. C 99-5464 SI, C 00-01030 SI and C 02-1426 SI, described above. Prior to trial, the Court ruled that the claims of the U.S. Patent Nos. 5,777,489, 6,057,706 and 5,574,388 at issue were invalid and, accordingly, dismissed from the case all allegations concerning those patents. On January 24, 2003, the Court dismissed Mentor’s breach of confidence claim with prejudice. Trial on the remaining allegations in all four lawsuits (Civil Action Nos. C 99-5464 SI, C 00-1030 SI, C-00-3291 SI and C 02-1426-SI) began on January 6, 2003. On February 19, 2003, the jury found in favor of Quickturn and Cadence on all remaining

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claims before them. Mentor has indicated that it intends to appeal the jury’s verdict. Cadence intends to vigorously defend this matter, but the ultimate outcome is currently unknown. Management believes that the ultimate resolution of this litigation will not have a material adverse effect on Cadence’s business, operating results or financial condition.

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

      On July 29, 2002, IKOS Systems, Inc., a subsidiary of Mentor, filed a complaint against Cadence and Quickturn in the U.S. District Court, District of Delaware, Civil Action No. 02-1335, accusing Quickturn’s Palladium^TM product of infringing IKOS’ U.S. Patent No. 5,847,578, and seeking unspecified damages and injunctive relief. On October 22, 2002, upon motion by Cadence and Quickturn, the court ordered the action to be transferred to the U.S. District Court, Northern District of California. Cadence believes the claim is without merit and is vigorously defending this matter, but the ultimate outcome is currently unknown. Management believes that the ultimate resolution of this litigation will not have a material adverse effect on Cadence’s business, operating results or financial condition.

      On December 30, 2002, Cadence filed a complaint against IKOS and Mentor in the U.S. District Court for the Northern District of California, Civil Action No. C 02-5343 JF, alleging that IKOS’ products infringe U.S. Patent No. 5,036,473 and seeking unspecified damages and injunctive relief. On January 6, 2003, Quickturn filed a motion to amend its Answer and Counterclaims in this suit to add a counterclaim alleging that IKOS’ products infringe U.S. Patent No. 5,036,473. On February 24, 2003, the Court granted this motion and agreed to consolidate this action with Civil Action No. 02-1335, described in the preceding paragraph.

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

       Other Contingencies

      Cadence provides its customers a warranty on sales of hardware products for a 90-day period. Such warranties are accounted for in accordance with SFAS No. 5, “Accounting for Contingencies”. To date Cadence has not incurred any 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 limited to the amount paid by the customer. To date, claims under such indemnification provisions have not been significant.

      From time to time, Cadence may 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.

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December 28, 2002

NOTE 10. STOCKHOLDERS’ EQUITY

       Net Income per Share

      Basic net income per share is computed by dividing net income (numerator) by the weighted average number of shares of common stock outstanding (denominator) during the period. Diluted net income per share gives effect to stock options considered to be potential common shares, if dilutive, computed using the treasury stock method.

      The following table presents the calculation for the number of shares used in the basic and diluted net income per share computations for the fiscal years 2002, 2001 and 2000:

		2002		2001		2000
		(In thousands)
Weighted average common shares used to calculate basic net income per share			259,870		245,839		244,565
	Options		6,446		11,001		17,053
	Puts		132		576		400
	Warrants and other potential common shares		1,052		244		678
Weighted average common and potential common shares used to calculate diluted net income per share			267,500		257,660		262,696

      Options to purchase 34,724,386 shares of common stock were outstanding at December 28, 2002, but were not included in the computation of diluted net income per share because their effect would be antidilutive. These options expire at various dates through 2012. Put warrants to purchase 463,723 shares of common stock were not included in the computation of diluted net income per share because their effect would be antidilutive. The put warrants expired at various dates through May 2002.

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

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

       Stock Compensation Plans

       Stock Option Plans

      Cadence’s 2000 Non-Statutory Equity Incentive Plan, referred to as the 2000 Plan, provides for the issuance of non-qualified options, stock bonuses and rights to acquire restricted stock to its employees and consultants who are not executive officers, directors or beneficial owners of 10% or more of Cadence common stock. The number of shares available for issuance under the 2000 Plan is 50,000,000 shares. Options granted under the 2000 Plan have an exercise price not less than the fair market value of the stock on the date of grant and become exercisable over period of up to four years, generally with one-fourth of the shares vesting one

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December 28, 2002

year from the vesting commencement date with respect to the initial grants, and the remaining shares vesting in 36 equal monthly installments thereafter. Options under the 2000 Plan generally expire ten years from the date of grant.

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

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

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

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

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

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December 28, 2002

      A summary of the status of all of Cadence’s stock option plans as of and during the years ended December 28, 2002, December 29, 2001, and December 30, 2000 follows:

		2002					2001					2000
					Weighted					Weighted					Weighted
					Average					Average					Average
					Exercise					Exercise					Exercise
		Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year			56,134,826		$	16.79		50,000,159		$	15.53		56,181,714		$	14.29
	Assumption of acquired companies options		4,794,969		$	11.18		1,250,896		$	1.10		—			—
	Granted		17,176,268		$	14.80		14,831,575		$	20.33		15,536,900		$	19.65
	Exercised		(4,161,398	)	$	10.19		(5,949,943	)	$	11.48		(8,655,150	)	$	9.87
	Forfeited		(6,775,516	)	$	18.89		(3,997,861	)	$	19.86		(13,063,305	)	$	18.26
Outstanding at end of year			67,169,149		$	16.15		56,134,826		$	16.79		50,000,159		$	15.53
Options exercisable at year end			34,396,212					25,189,585					19,881,259
Options available for future grant			43,044,932					27,833,386					38,544,937
Weighted average fair value of options granted during the year		$	8.07				$	11.49				$	10.84

      A summary of the status of all of Cadence’s stock option plans at December 28, 2002 follows:

		Options Outstanding						Options Exercisable
				Weighted
				Average
Range of		Number		Remaining		Weighted		Number		Weighted
Exercise		Outstanding		Contractual		Average		Exercisable		Average
Prices		At 12/28/2002		Life		Exercise Price		At 12/28/2002		Exercise Price
$ 0.02 - $ 5.00			1,369,744		4.82	$	1.51		969,618	$	1.58
$ 5.01 - $10.00			5,886,972		5.28	$	6.86		4,336,776	$	6.24
$10.01 - $15.00			25,166,292		7.56	$	13.06		11,028,673	$	13.34
$15.01 - $20.00			16,088,450		7.47	$	17.79		8,463,625	$	18.00
$20.01 - $25.00			15,682,473		7.91	$	22.19		7,615,456	$	22.35
$25.01 - $30.00			2,715,752		7.10	$	25.84		1,758,073	$	25.89
$30.01 - $35.00			229,466		5.85	$	33.65		195,991	$	33.68
$35.01 - $35.06			30,000		5.28	$	35.06		28,000	$	35.06
	Total		67,169,149		7.34	$	16.15		34,396,212	$	16.03

Stock Repurchase Plan

      On August 1, 2001, Cadence authorized a share repurchase program under which repurchased shares with a value of up to $500.0 million are used for general corporate purposes, including the share issuance requirements of Cadence’s employee stock option and purchase plans and acquisitions. Under this program, Cadence spent $69.1 million to repurchase 5.3 million shares during the year ended December 28, 2002. As of December 28, 2002, the remaining repurchase authorization under this program totaled $430.9 million.

      Cadence had previously authorized three stock repurchase programs under which it repurchased common stock to satisfy estimated requirements for shares to be issued under its employee stock option and purchase plans. During the year ended December 28, 2002, Cadence repurchased 7.5 million shares under these programs at a total cost of $116.1 million. As of December 28, 2002, there was no remaining repurchase authorization under these three programs.

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December 28, 2002

      As part of its authorized stock repurchase program, Cadence previously sold put warrants and purchased call options through private placements to manage equity price risk and dilution. On December 28, 2002, there were no put warrants or call options outstanding.

Employee Stock Purchase Plans

      On July 1, 2001, Cadence adopted two employee stock purchase plans to allow Tality employees to participate in Cadence’s employee stock purchase program. The two plans are the 2001 Employee Stock Purchase Plan which is a qualified employee stock purchase plan under the Internal Revenue Code, and the 2001 Non-Qualified Employee Stock Purchase Plan, which is an employee stock purchase plan not qualified under the Internal Revenue Code and will be primarily used for Tality employees located outside the United States. Other than the qualified nature of the 2001 Employee Stock Purchase Plan, the provisions of the two plans are generally the same. Under the 2001 Employee Stock Purchase Plan and 2001 Non-Qualified Employee Stock Purchase Plan, Cadence is authorized to issue up to 1,750,000 and 750,000 shares of common stock, respectively, to its employees. The plans are administered by Cadence’s board of directors or by a committee appointed by the board. Tality, now Cadence Design Foundry, employees, including officers and employee directors of Tality, but excluding 5% or greater stockholders, are eligible to participate if they are regular employees who work 20 hours or more per week.

      In November 1998, the Board of Directors adopted, and the stockholders subsequently approved, Cadence’s Amended and Restated Employee Stock Purchase Plan, referred to as the Employee Plan. Subsequent amendments approved by the Board of Directors and stockholders increased the number of shares of common stock authorized for issuance under the Employee Plan to 23,500,000 shares. On October 30, 2002, the Board approved amendments to the Employee Plan to increase the number of shares of common stock authorized for issuance under the Employee Plan by 6,000,000 shares for a total of 29,500,000 shares and to enable Cadence to effect the reorganization of its Cadence Design Foundry Business.

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

      Under Cadence’s employee stock purchase plans, Cadence issued 2,548,500 shares to employees in 2002, 3,025,646 shares in 2001 and 3,168,839 shares in 2000. The weighted average purchase price of shares issued in 2002, 2001 and 2000 were $13.68, $10.64 and $9.36, respectively. The weighted average fair value of shares issued in 2002, 2001 and 2000 were $16.57, $25.95 and $20.75, respectively.

Pro Forma Information

      The pro forma information included in Note 2 illustrating the financial results of operations as if Cadence had accounted for its grants of employee stock options under the fair value method of SFAS No. 123, “Accounting for Stock — Based Compensation” was estimated at the date of grant using the Black-Scholes option pricing model. Cadence determined the estimated fair values of its options granted and shares

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December 28, 2002

purchased under the ESPPs for the years ended December 28, 2002, December 29, 2001, and December 30, 2000 using the following weighted average assumptions assuming a dividend yield of zero for all periods:

	Stock Options
	2002		2001		2000
Risk-free interest rate		2.81%		4.53%		5.07%
Volatility factors of the expected market price of Cadence’s common stock		62%		62%		59%
Weighted average expected life of an option		5 Years		5 Years		5 Years

	Employee Stock Purchase Plan
	2002		2001		2000
Risk-free interest rate, based on weighted average		1.43%		5.60%		6.03%
Volatility factors of the expected market price of Cadence’s common stock		62%		62%		59%
Weighted average expected life of ESPP shares		0.5 Years		0.5 Years		0.5 Years

Warrants

      In connection with the purchase of the business and certain assets of Comdisco Systems, Inc., a subsidiary of Comdisco, Inc., in 1993, Cadence issued a warrant to purchase shares of Cadence’s stock at $3.23 per share. The warrant for the remaining 140,000 shares expires in June 2003 and can be exercised at any time in increments of not less than 50,000 shares.

Reserved for Future Issuance

      At December 28, 2002, Cadence had reserved the following shares of authorized but unissued common stock for future issuance:

		Shares
Employee stock option plans		102,469,554
ESPPs		8,419,242
Directors stock option plans		1,809,670
Warrants		140,000
	Total	112,838,466

Stockholder Rights Plan

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

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December 28, 2002

Deferred Stock Compensation

      Cadence recorded deferred stock compensation resulting from stock options granted, which were subsequently retired, to purchase Tality stock and sales of Tality restricted stock in 2001 and 2000. Deferred stock compensation from Tality option grants and restricted stock sales represents the difference between the exercise price of stock option grants to Tality employees and directors, and the price paid for restricted stock by certain Cadence executives and employees, and the deemed fair value of Tality’s common stock at the time of those grants and sales.

      In addition, Cadence recorded deferred stock compensation resulting from Cadence’s acquisition of CadMOS, Simplex, SPC and Plato Design Systems Incorporated. Deferred stock compensation resulting from these acquisitions represents the difference between the exercise price of unvested stock option grants to employees of the acquired companies and the fair value of Cadence’s common stock at the time of such acquisitions.

      Deferred compensation expense of $9.7 million related to the SPC acquisition was recorded in 2002 because a portion of the additional shares require continued employment with Cadence of certain SPC employees. The acquisition agreement provides for the issuance of additional shares of Cadence’s common stock as certain performance goals are achieved in fiscal 2002 and 2003. Deferred compensation was recorded because one of the performance goals requires continued employment with Cadence of certain employees.

      For the years ended December 28, 2002 and December 29, 2001, Cadence recorded a total of $37.7 million and $40.4 million of deferred stock compensation, respectively. Of the $37.7 million, $19.5 million is related to SPC’s achievement of certain predetermined goals, $9.9 million is related to the acquisition of Plato and $8.3 million is related to the acquisition of Simplex. Of the $40.4 million, $27.4 million is related to the acquisition of SPC, $10.0 million is related to the acquisition of CadMOS, and $3.0 million is related to Tality stock option grants. Cadence is amortizing deferred stock compensation to expense using the straight-line method over the period that the stock options and restricted stock vest. For the year ended December 28, 2002 and December 29, 2001, Cadence reversed deferred stock compensation of $10.9 million and $27.8 million, respectively, related to the cancellation of options for terminated employees. For the year ended December 28, 2002, December 29, 2001 and December 28, 2000 Cadence recorded deferred compensation expense of $37.5 million, $17.9 million and $11.4 million, respectively.

NOTE 11. INCOME TAXES

      The provision for income taxes consisted of the following components:

				2002			2001			2000
				(In thousands)
Current:
	Federal			$	53,788		$	73,799		$	39,678
	State				10,338			21,472			6,369
	Foreign				45,762			18,777			716
		Total current			109,888			114,048			46,763
Deferred:
	Federal				(37,400	)		(2,614	)		(24,009	)
	State				12,089			(1,472	)		(3,486	)
	Foreign				1,440			(9,101	)		(1,249	)
		Total deferred			(23,871	)		(13,187	)		(28,744	)
			Total provision for income taxes	$	86,017		$	100,861		$	18,019

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December 28, 2002

      Income before provision for income taxes included income from Cadence’s foreign subsidiaries of approximately $106.3 million for 2002, $139.2 million for 2001 and $43.2 million for 2000.

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

		2002			2001			2000
		(In thousands)
Provision computed at federal statutory rate		$	55,288		$	84,752		$	23,799
State income tax, net of federal tax effect			15,056			13,000			6,369
Separation costs			—			—			2,451
Amortization of acquired intangibles			—			3,455			1,489
Stock compensation			3,521			—			—
Write-off of in-process technology			9,590			7,595			—
Research and development tax credit			(2,837	)		—			—
Foreign income tax at a higher (lower) rate			13,254			(13,005	)		(1,609	)
Change in valuation allowance			(9,156	)		3,224			(15,173	)
Other			1,301			1,840			693
	Provision for income taxes	$	86,017		$	100,861		$	18,019
Effective tax rate			54.5	%		41.7	%		26.5	%

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

				2002			2001
				(In thousands)
Deferred Tax Assets:
	Intangibles			$	69,140		$	64,007
	Accruals and reserves				26,420			28,943
	Allowance for doubtful accounts				6,390			22,283
	Tax credits				7,392			39,503
	Accrued intercompany royalty				46,058			20,769
	Stock compensation				6,236			9,156
	Net operating losses				3,377			17,707
	Compensation expense				13,941			11,248
	Depreciation and amortization				15,757			5,024
	Other				4,891			6,628
		Total deferred tax assets			199,602			225,268
	Valuation allowance — provision for income taxes				—			(9,156	)
	Valuation allowance — equity and intangibles				(5,808	)		(39,043	)
		Net deferred tax assets			193,794			177,069
Deferred Tax Liabilities:
	Intangibles				(74,018	)		(70,981	)
	Unrealized gains on investments				(4,080	)		(20,499	)
	Other				(10,373	)		(19,195	)
		Total deferred tax liabilities			(88,471	)		(110,675	)
			Total net deferred tax assets	$	105,323		$	66,394

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CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 28, 2002

      Cadence provides for U.S. income taxes on the earnings of foreign subsidiaries unless the earnings are considered permanently invested outside of the United States. At December 28, 2002, the cumulative amount of earnings upon which U.S. income taxes have not been provided are approximately $550 million. At December 28, 2002, the unrecognized deferred tax liability for these earnings was approximately $114 million.

      The total valuation allowance decreased by $42.4 million in 2002. The valuation allowance for provision for income taxes decreased by $9.2 million primarily due to the cancellation or exercise of stock options originally issued in conjunction with the Tality separation. The valuation allowance for equity and intangibles decreased by $33.2 million in 2002 due to Cadence generating sufficient taxable income including the deduction of stock option deductions to utilize certain net operating losses and research and development tax credits. The valuation allowance for equity and intangibles is due to the uncertainty of domestic entities generating sufficient taxable income, including the deduction for stock options to realize certain domestic deferred tax assets. This portion of the valuation allowance, identified in the above table as “valuation allowance — equity and intangibles”, if realizable, may reduce other intangibles or increase equity and may not be available to offset future provision for income taxes.

      Cadence has net operating loss carryforwards totaling $8.7 million for 2002, $49.6 million for 2001 and $28.9 million for 2000, and tax credit carryforwards of $7.4 million for 2002 and $39.5 million for 2001. The remaining net operating loss carryforwards will expire at various dates from 2002 through 2021 and tax credit carryforwards will expire at various dates from 2002 through 2017.

      Income tax returns filed by Cadence are currently under examination by the Internal Revenue Service as well as certain state and foreign governments. Cadence regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.

NOTE 12. EMPLOYEE AND DIRECTOR BENEFIT PLANS

      Cadence maintains a 401(k) savings plan to provide retirement benefits through tax deferred salary deductions for all of its U.S. employees. Cadence may make discretionary contributions, as determined by the Board of Directors, which cannot exceed a specified percentage of the annual aggregate salaries of those employees eligible to participate. Cadence made total contributions to the plan of $10.4 million for 2002, $10.5 million for 2001 and $9.3 million for 2000.

      As part of its overall investment strategy, Cadence invests in Telos. Cadence and the Cadence 1996 Deferred Compensation Venture Investment Plan, or the 1996 Plan, are the sole limited partners of Telos. As of December 28, 2002, Cadence has committed $77.3 million to Telos and is contractually committed to contribute up to an additional $53.7 million. Cadence’s investments in Telos are recorded in Other assets in the accompanying Consolidated Balance Sheets. Under the 1996 Plan, Cadence directors can defer some or all of their compensation, and certain executives can defer payment of a portion of their compensation to be invested in Telos.

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December 28, 2002

NOTE 13. STATEMENT OF CASH FLOWS

      The supplemental cash-flow information for 2002, 2001 and 2000:

		2002		2001		2000
		(In thousands)
Cash Paid During the Year for:
	Interest	$	1,322	$	2,344	$	2,476
	Income taxes (including foreign withholding tax)	$	2,969	$	18,267	$	14,825
Non-Cash Investing and Financing Activities:
	Capital lease obligations incurred for equipment	$	—	$	179	$	1,015
	Common and treasury stock issued for acquisitions	$	522,124	$	259,222	$	5,333
	Repurchase of common stock	$	3,374	$	—	$	1,461
	Transfer on Non-Qualified Deferred Compensation investment to Cadence	$	—	$	3,908	$	—
	Notes receivables on employee investments in subsidiary	$	—	$	—	$	10,759
	Transfer of inventory to fixed assets	$	—	$	—	$	5,462
	Equity investment by transfer of equipment or software	$	—	$	—	$	8,140

NOTE 14. AVANT! RESTITUTION AND SETTLEMENT

Avant! Civil Settlement

      On November 13, 2002, Cadence announced the settlement of civil litigation filed against Avant! seeking damages related to theft of Cadence intellectual property, including software code, as well as other trade secrets. The settlement with Avant!, its parent corporation Synopsys, Inc. and several individuals included an agreement to dismiss all pending claims and counterclaims in the litigation and required the payment to Cadence of $265.0 million, which was received in the fourth quarter of 2002.

Avant! Criminal Restitution

      On July 25, 2001, Avant! was ordered to pay Cadence $195.4 million in criminal restitution after Avant! entered a plea of no contest and was found guilty by the Superior Court of the State of California of conspiracy to take and use Cadence’s trade secrets. This conspiracy included the theft by Avant! and certain individuals of Cadence intellectual property, including software code, as well as other trade secrets. As of December 29, 2001, approximately $196.0 million, consisting of all of the restitution award plus interest was received.

NOTE 15. RESTRUCTURING AND OTHER CHARGES

      In 2001, Cadence announced a plan of restructuring activities throughout the company targeted at eliminating redundancies and consolidating facilities and resources. The restructuring activities were initiated primarily due to the severe economic downturn in the electronics industry. The restructuring was primarily aimed at reducing excess personnel and capacity costs within Cadence’s Design Foundry business (formerly Tality) and certain other business/infrastructure groups. Cadence accounts for its restructuring charges and accruals in accordance with SEC Staff Accounting Bulletin No. 100 and EITF No. 94-3.

      For the year ended December 29, 2001, Cadence recorded $61.6 million of restructuring and other charges. Cadence’s restructuring costs and other charges consisted of $21.6 million for workforce reduction,

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December 28, 2002

$21.9 million to downsize and close excess facilities and $18.1 million of asset-related charges related to certain long-lived assets that were abandoned.

      For the year ended December 28, 2002, Cadence recorded $134.3 million of restructuring and other charges. Cadence’s restructuring costs and other charges consisted of $52.2 million for workforce reduction, $46.9 million in changes in estimates for previously recorded accruals and to downsize and close excess facilities, and $35.2 million of asset-related charges related to certain long-lived assets that were abandoned.

      The 2001 restructuring activities resulted in a reduction of 705 employees, which were predominately Tality employees. Severance costs resulting from the restructuring included severance benefits, notice pay and out-placement services. As the result of the separation of Tality from Cadence, approximately $5.3 million of the restructuring charges was paid to certain Tality employees who were participants in Cadence’s employee stock purchase plan prior to Tality’s separation from Cadence in October 2000. All terminations and termination benefits were communicated to the affected employees prior to December 29, 2001.

      The 2002 restructuring activities will result in the termination of employment of approximately 1,370 employees. Costs resulting from the restructuring included severance benefits, notice pay and outplacement services. All terminations and termination benefits were communicated to the affected employees prior to December 28, 2002.

      For the year ended December 29, 2001, facilities consolidation charges of $21.9 million were incurred in connection with the downsizing and closing of 16 sites. As of December 29, 2001, six sites had been vacated and eight sites had been downsized.

      For the year ended December 28, 2002, facilities consolidation charges of $46.9 million were incurred in connection with the further downsizing of four previously downsized sites, the downsizing and closing of 16 additional sites, and changes in lease loss estimates for three sites. Of the $46.9 million, $17.3 million related to changes in lease loss estimates. The low end of the lease loss range related to all worldwide restructuring activities initiated in 2001 is $25.6 million, which will be adjusted in the future upon triggering events, such as changes in estimates of time to sublease and actual sublease rates. Cadence has estimated that the high end of the lease loss could be as much as $55.0 million if facilities operating lease rental rates continue to decrease in applicable markets or if it takes longer than expected to find a suitable tenant to sublease the facilities.

      Closure and downsizing costs included payments required under lease contracts, less any applicable estimated sublease income after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements and costs to maintain facilities during the period after abandonment. To determine the lease loss, which is the loss after Cadence’s cost recovery efforts from subleasing a building, certain assumptions were made related to the: (1) time period over which the relevant building would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. The lease loss is an estimate and represents the low end of the range.

      For the year ended December 29, 2001, Cadence incurred asset-related and other restructuring charges of $18.1 million, consisting primarily of $14.4 million of leasehold improvements for facilities and other fixed assets that were either abandoned or for which the resulting estimated future reduced cash flows were insufficient to cover the associated expenses. Cadence also recorded $2.2 million of asset-related charges for abandoned software.

      For the year ended December 28, 2002, asset-related and other restructuring charges of $35.2 million were incurred in connection with leasehold improvements for facilities, other fixed assets and software license agreements that were abandoned and contract termination costs.

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December 28, 2002

      Liabilities for excess facilities and other restructuring charges are included in accrued and other long-term liabilities, while severance and benefits liabilities are included in payroll and payroll-related accruals. The following table summarizes Cadence’s restructuring activity during fiscal years 2002, 2001 and 2000:

		Severance
		And			Excess			Other			Asset-
		Benefits			Facilities			Restructuring			Related			Total
		(In thousands)
Balance, January 1, 2000.		$	8,013		$	6,464		$	426		$	5,861		$	20,764
	Reclassifications		—			(1,061	)		1,822			(761	)		—
	Non-cash utilization		(242	)		(73	)		(744	)		(4,716	)		(5,775	)
	Cash payments		(5,452	)		(392	)		(1,504	)		(104	)		(7,452	)
Balance, December 30, 2000.			2,319			4,938			—			280			7,537
	Reclassifications		—			525			—			—			525
	2001 restructuring charges		21,647			21,856			1,500			16,616			61,619
	Non-cash charges		(9	)		(2,587	)		—			(13,960	)		(16,556	)
	Cash charges		(19,774	)		(7,499	)		(1,500	)		(869	)		(29,642	)
Balance, December 29, 2001			4,183			17,233			—			2,067			23,483
	Reclassifications		439			7,552			—			(7,991	)		—
	2002 restructuring charges		52,152			46,893			1,084			34,167			134,296
	Non-cash charges		304			(1,167	)		—			(23,913	)		(24,776	)
	Cash charges		(33,276	)		(17,069	)		(1,084	)		(1,175	)		(52,604	)
Balance, December 28, 2002		$	23,802		$	53,442		$	—		$	3,155		$	80,399

NOTE 16. WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY

      Described below are the write-offs of acquired in-process technology charges in 2002 and 2001. There were no write-offs of acquired in-process technology in 2000.

		2002		2001
		(In thousands)
Simplex		$	27,400	$	—
IBM			6,600		—
CadMOS			—		12,100
SPC			—		8,600
Other			—		1,000
	Total in process technology	$	34,000	$	21,700

      During 2001, Cadence acquired substantially all of the assets of two companies for an initial aggregate price of $10.5 million, of which $4.4 million was cash and $6.1 million was shares of Cadence common stock. The acquisitions were accounted for as purchases. Upon consummation of the acquisitions, Cadence charged to expense, immediately after the respective acquisition, an aggregate of $1.0 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use.

      Acquired in-process technology charges represent in-process technology that had not reached technological feasibility and had no probable alternative future use. See Note 4.

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December 28, 2002

NOTE 17. IMPAIRMENT OF GOODWILL

      Prior to the adoption of SFAS No. 142, discussed in Note 2, Cadence evaluated goodwill for impairment whenever events or circumstances indicated that the carrying amount of goodwill may not be recoverable. During 2001, Cadence recorded a charge of $25.8 million in 2001 related to the impairment of goodwill and acquired intangibles associated with the acquisition of Diablo Research Company LLC, or Diablo. This impairment was due to the decline in business conditions generally and the wireless communications industry in particular. Cadence restructured certain of its businesses and realigned resources to focus on profit contribution, high-growth markets and core opportunities. Key factors in determining this impairment were significant downsizing or reassignment of personnel directly related to these assets and abandonment of most of Diablo’s line of business. The impairment was calculated as the difference between the carrying value of the intangible assets associated with Diablo’s acquisition and the fair value of those assets.

NOTE 18. OTHER INCOME (LOSS), NET

      Other income (loss), net components for 2002, 2001 and 2000 are as follows:

		2002			2001			2000
		(In thousands)
Interest income		$	4,627			6,517			4,559
Minority interest income			—			1,959			638
Equity income (loss) from investments			(12	)		187			1,128
Gain (loss) on foreign exchange			(282	)		555			5,069
Other expense, net			(18,319	)		(4,889	)		(4,415	)
	Total other income (loss), net	$	(13,986	)	$	4,329		$	6,979

      Other income (loss), net, for the year ended December 28, 2002 includes $10.0 million of investment write-downs from Telos, in which Cadence holds a limited partnership interest, included in other expense, net, and $9.4 million of investment write-downs in Cadence’s long-term investments, included in other expense, net.

NOTE 19. SEGMENT 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 to design and license to customers a variety of EDA products. The Services segment includes revenue and associated costs to offer methodology and design services either to assist companies in developing electronic designs or to assume responsibility for the design effort when customers wish to outsource this work. The Maintenance segment includes revenue and associated costs primarily for a technical support organization, and maintenance agreements are offered to customers either as part of Cadence’s product license agreements or separately.

      Segment income from operations is defined as gross margin under generally accepted accounting principles and excludes Amortization of acquired intangibles, operating expenses (Marketing and sales, Research and development and General and administrative), Amortization of deferred stock compensation, Avant! restitution and settlement, Restructuring and other charges, Write-off of acquired in-process technology, Impairment of goodwill, Interest expense and Other income (loss), net and Provision for income taxes. Profitability information about Cadence’s segments is available only to the extent of gross margin by segment, and operating expenses and other income and expense items are managed on a functional basis. There are no

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December 28, 2002

differences between the accounting policies used to measure profit and loss for segments and those used on a consolidated basis. Revenue is defined as revenue from external customers with no inter-segment revenue.

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

      The following tables present information about reported segments for the years ended December 28, 2002, December 29, 2001 and December 30, 2000:

												Consolidated
			Product		Services		Maintenance		Other			Total
			(In thousands)
2002:
	Revenue		$	811,910	$	149,810	$	331,347	$	—		$	1,293,067
	Cost of revenue			73,137		112,687		64,221		—			250,045
	Amortization of acquired intangibles			—		—		—		81,775			81,775
		Gross margin		738,773		37,123		267,126		(81,775	)		961,247
	Marketing and sales			—		—		—		(399,601	)		(399,601	)
	Research and development			—		—		—		(326,414	)		(326,414	)
	General and administrative			—		—		—		(115,767	)		(115,767	)
	Amortization of deferred stock compensation			—		—		—		(37,504	)		(37,504	)
	Avant! restitution and settlement, Restructuring and other charges, Write-off of acquired in-process technology and Impairment of goodwill			—		—		—		92,794			92,794
	Interest expense and Other income (loss), net			—		—		—		(16,789	)		(16,789	)
	Income (loss) before provision for income taxes		$	738,773	$	37,123	$	267,126	$	(885,056	)	$	157,966
	Depreciation and amortization		$	106,215	$	11,482	$	2,119	$	122,727		$	242,543
2001:
	Revenue		$	830,490	$	263,355	$	336,595	$	—		$	1,430,440
	Cost of revenue			98,177		191,384		65,299		—			354,860
	Amortization of acquired intangibles			—		—		—		92,330			92,330
		Gross margin		732,313		71,971		271,296		(92,330	)		983,250
	Marketing and sales			—		—		—		(393,614	)		(393,614	)
	Research and development			—		—		—		(297,329	)		(297,329	)
	General and administrative			—		—		—		(119,350	)		(119,350	)
	Amortization of deferred stock compensation			—		—		—		(17,911	)		(17,911	)
	Avant! restitution and settlement, Restructuring and other charges, Write-off of acquired in-process technology and Impairment of goodwill			—		—		—		85,405			85,405
	Interest expense and Other income (loss), net			—		—		—		1,697			1,697
	Income (loss) before provision for income taxes		$	732,313	$	71,971	$	271,296	$	(833,432	)	$	242,148
	Depreciation and amortization		$	114,448	$	26,252	$	2,524	$	87,211		$	230,435

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 28, 2002

												Consolidated
			Product		Services		Maintenance		Other			Total
			(In thousands)
2000:
	Revenue		$	627,429	$	335,967	$	316,154	$	—		$	1,279,550
	Cost of revenue			89,937		215,605		63,315		—			368,857
	Amortization of acquired intangibles			— 537,492		— 120,362		— 252,839		80,503 (80,503	)		80,503 830,190
		Gross margin		—		—		—		(390,139	)		(390,139	)
	Marketing and sales			—		—		—		(263,947	)		(263,947	)
	Research and development			—		—		—		(101,299	)		(101,299	)
	General and administrative
	Amortization of deferred stock compensation			—		—		—		(11,390	)		(11,390	)
	Interest Expense and Other income (loss), net			—		—		—		4,581			4,581
	Income (loss) before provision for income taxes		$	537,492	$	120,362	$	252,839	$	(842,697	)	$	67,996
Depreciation and amortization			$	99,203	$	30,062	$	2,463	$	75,082		$	206,810

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

      Revenue is attributed to geography based on the country in which the customer is domiciled. In 2002, 2001 and 2000, no one customer accounted for more than 10% of total revenue. Long-lived assets are attributed to geography based on the country where the assets are located.

      The following table presents a summary of revenue by geography for years ended December 28, 2002, December 29, 2001 and December 30, 2000:

				2002		2001		2000
				(In thousands)
North America:
	United States			$	715,208	$	785,386	$	720,802
	Other				29,237		35,624		33,878
		Total North America		$	744,445	$	821,010	$	754,680
Europe:
	United Kingdom			$	59,200	$	79,862	$	99,154
	Germany				60,377		76,525		55,092
	Other				138,277		177,234		112,421
		Total Europe		$	257,854	$	333,621	$	266,667
Japan and Asia:
	Japan			$	188,736	$	181,263	$	195,793
	Asia				102,032		94,546		62,410
		Total Japan and Asia			290,768		275,809		258,203
			Total	$	1,293,067	$	1,430,440	$	1,279,550

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December 28, 2002

      The following table presents a summary of long-lived assets by geography for years ended December 28, 2002, December 29, 2001 and December 30, 2000:

				2002		2001		2000
				(In thousands)
North America:
	United States			$	382,648	$	365,742	$	316,091
	Other				903		2,291		3,344
		Total North America		$	383,551	$	368,033	$	319,435
Europe:
	United Kingdom			$	32,245	$	33,991	$	35,729
	Germany				1,402		1,261		925
	Other				3,883		4,357		2,847
		Total Europe		$	37,530	$	39,609	$	39,501
Japan and Asia:
	Japan			$	2,542	$	3,001	$	4,702
	Asia				10,868		6,546		5,241
		Total Japan and Asia			13,410		9,547		9,943
			Total	$	434,491	$	417,189	$	368,879

NOTE 20. SUBSEQUENT EVENTS

       2001 Employee Stock Purchase Plan

      In connection with the reorganization of the Cadence Design Foundry business, the 2001 Employee Stock Purchase Plan was terminated effective January 31, 2003.

       1995 Directors’ Stock Option Plan

      On February 5, 2003, the 1995 Directors’ Stock Option Plan was amended to increase the number of shares authorized for issuance under the plan by an additional 600,000 shares of common stock.

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CADENCE DESIGN SYSTEMS, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(In thousands)

Schedule II

				Addition
		Balance at		Charged to		Charged					Balance at
		Beginning		Costs and		to Other					End of
Description		of Period		Expenses		Accounts(1)		Deductions(2)			Period
Deducted from asset accounts:
Provisions for losses on trade accounts receivable and sales returns:
	Year Ended December 28, 2002	$	46,922	$	4,199	$	9,378	$	(43,063	)	$	17,436
	Year Ended December 29, 2001	$	52,677	$	13,809	$	32,000	$	(51,564	)	$	46,922	*
	Year Ended December 30, 2000	$	58,490	$	2,306	$	16,007	$	(24,126	)	$	52,677

(1)	Sales returns offset against revenue.
(2)	Uncollectible accounts written-off, net of recoveries and sales returns.

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

96

SIGNATURES

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

CADENCE DESIGN SYSTEMS, INC.

/s/ H. RAYMOND BINGHAM

H. Raymond Bingham

President and Chief Executive Officer

Dated: March 12, 2003

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

NAME/TITLE	DATE
/s/ H. RAYMOND BINGHAM H. Raymond Bingham President, Chief Executive Officer and Director (Principal Executive Officer)	March 12, 2003
/s/ WILLIAM PORTER William Porter Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	March 12, 2003

97

POWER OF ATTORNEY

      KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints H. Raymond Bingham, William Porter and R. L. Smith McKeithen, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

ADDITIONAL DIRECTORS
/s/ DONALD L. LUCAS Donald L. Lucas	March 12, 2003
/s/ SUSAN L. BOSTROM Susan L. Bostrom	March 12, 2003
/s/ DR. LEONARD Y. W. LIU Dr. Leonard Y. W. Liu	March 12, 2003
/s/ SEAN M. MALONEY Sean M. Maloney	March 12, 2003
/s/ DR. ALBERTO SANGIOVANNI-VINCENTELLI Dr. Alberto Sangiovanni-Vincentelli	March 12, 2003
/s/ GEORGE M. SCALISE George M. Scalise	March 12, 2003
/s/ DR. JOHN B. SHOVEN Dr. John B. Shoven	March 12, 2003
/s/ ROGER SIBONI Roger Siboni	March 12, 2003

98

CERTIFICATIONS

      I, H. Raymond Bingham, certify that:

      1. I have reviewed this annual report on Form 10-K of Cadence Design Systems, Inc.;

      2. Based on my knowledge, this annual 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 annual report;

      3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

      4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

      a) Designed such disclosure controls and procedures 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 annual report is being prepared;

      b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

      c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

      5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

      a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

      b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

      6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 12, 2003

By:  /s/ H. RAYMOND BINGHAM

H. Raymond Bingham

President, Chief Executive Officer, and Director

99

CERTIFICATIONS

      I, William Porter, certify that:

      1. I have reviewed this annual report on Form 10-K of Cadence Design Systems, Inc.;

      2. Based on my knowledge, this annual 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 annual report;

      3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

      4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

      a) Designed such disclosure controls and procedures 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 annual report is being prepared;

      b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

      c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

      5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

      a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

      b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

      6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 12, 2003

By:  /s/ WILLIAM PORTER

William Porter

Senior Vice President and Chief Financial Officer

100

List of Exhibits

Exhibit Number	Exhibit
10.06	Amended and Restated Employee Stock Purchase Plan.
10.08	1994 Deferred Compensation Plan, as amended and restated effective November 1, 2002.
10.12	Offer Letter, dated as of December 15, 2000 and Promissory Note, dated as of February 6, 2001 between the Registrant and Lavi A. Lev.
10.16	Residential Lease and Option to Purchase, dated as of March 1, 2003, between 849 College Avenue, Inc. and Kevin Bushby.
10.67	Amendment to Executive Separation, Release and Consulting Agreement, dated as of August 23, 2002 between the Registrant and Ronald R. Barris.
21.01	Subsidiaries of the Registrant
23.01	Consent of KPMG LLP
23.02	Information Regarding Consent of Arthur Andersen LLP.

EX-10.06

                                                                   EXHIBIT 10.06

                          CADENCE DESIGN SYSTEMS, INC.
                              AMENDED AND RESTATED
                          EMPLOYEE STOCK PURCHASE PLAN

                 ADOPTED BY BOARD OF DIRECTORS NOVEMBER 9, 1998
                        STOCKHOLDER APPROVAL NOT REQUIRED
                             TERMINATION DATE: NONE

1.       PURPOSE.

         (A) The Plan initially was established effective as of January 30, 1990
(the "Initial Plan") and has been amended subsequently from time to time. The
Initial Plan hereby is amended and restated in its entirety as the Amended and
Restated Employee Stock Purchase Plan effective as of the date of its adoption.
The terms of the Initial Plan shall remain in effect and apply to all Rights
granted pursuant to the Initial Plan.

         (B) The purpose of the Plan is to provide a means by which Employees of
the Company and certain designated Affiliates may be given an opportunity to
purchase Shares of the Company.

         (C) The Company, by means of the Plan, seeks to retain the services of
such Employees, to secure and retain the services of new Employees and to
provide incentives for such persons to exert maximum efforts for the success of
the Company and its Affiliates.

         (D) The Company intends that the Rights to purchase Shares granted
under the Plan be considered options issued under an "employee stock purchase
plan," as that term is defined in Section 423(b) of the Code.

2.       DEFINITIONS.

         (A)      "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.

         (B)      "BOARD" means the Board of Directors of the Company.

         (C)      "CODE" means the United States Internal Revenue Code of 1986,
as amended.

         (D)      "COMMITTEE" means a committee of the Board appointed by the
Board in accordance with subsection 3(c) of the Plan.

         (E)      "COMPANY" means Cadence Design Systems, Inc., a Delaware
corporation.

         (F)      "DIRECTOR" means a member of the Board.

         (G)      "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in the Offering Memorandum for eligibility to participate
in the Offering.

         (H)      "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or an Affiliate of the Company. Neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
"employment" by the Company or the Affiliate.

         (I)      "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants rights
intended to be options issued under an "employee stock purchase plan," as that
term is defined in Section 423(b) of the Code.

         (J)      "EXCHANGE ACT" means the United States Securities Exchange Act
of 1934, as amended.

         (K)      "FAIR MARKET VALUE" means the value of a security, as
determined in good faith by the Board. If the security is listed on the New York
Stock Exchange or any other established stock exchange or traded on the Nasdaq
National Market or the Nasdaq SmallCap Market, the Fair Market Value of the
security shall be the closing sales price (rounded up where necessary to the
nearest whole cent) for such security (or the closing bid, if no sales were
reported) as quoted on such exchange or market (or, in the event that the
security is traded on more than one such exchange or market, the exchange or
market with the greatest volume of trading in the relevant security of the
Company) on the trading day occurring on or closest to the relevant
determination date, as reported in The Wall Street Journal or such other source
as the Board deems reliable, and on the date as determined more precisely in the
Offering Memorandum.

         (L)      "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not
a current Employee or Officer of the Company or its parent or subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or subsidiary for services rendered as a consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.

         (M)      "OFFERING" means the grant of Rights to purchase Shares under
the Plan to Eligible Employees.

         (N)      "OFFERING DATE" means a date selected by the Board for an
Offering to commence.

         (O)      "OFFERING MEMORANDUM" means a memorandum describing the terms
of the then current or otherwise relevant Offering.

         (P)      "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the
meaning of the Treasury regulations


                                       3

promulgated under Section 162(m) of the Code), is not a former employee of the
Company or an "affiliated corporation" receiving compensation for prior services
(other than benefits under a tax qualified pension plan), was not an officer of
the Company or an "affiliated corporation" at any time, and is not currently
receiving direct or indirect remuneration from the Company or an "affiliated
corporation" for services in any capacity other than as a Director, or (ii) is
otherwise considered an "outside director" for purposes of Section 162(m) of the
Code.

         (Q)      "PARTICIPANT" means an Eligible Employee who holds an
outstanding Right granted pursuant to the Plan or, if applicable, such other
person who holds an outstanding Right granted under the Plan.

         (R)      "PLAN" means this Amended and Restated Employee Stock Purchase
Plan.

         (S)      "PURCHASE DATE" means one or more dates established by the
Board during an Offering on which Rights granted under the Plan shall be
exercised and purchases of Shares carried out in accordance with such Offering.

         (T)      "RIGHT" means an option to purchase Shares granted pursuant to
the Plan.

         (U)      "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3 as in effect with respect to the Company at the time
discretion is being exercised regarding the Plan.

         (V)      "SECURITIES ACT" means the United States Securities Act of
1933, as amended.

         (W)      "SHARE" means a share of the common stock of the Company.

3.       ADMINISTRATION.

         (A)      The Board shall administer the Plan unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c). Whether
or not the Board has delegated administration, the Board shall have the final
power to determine all questions of policy and expediency that may arise in the
administration of the Plan.

         (B)      The Board (or the Committee) shall have the power, subject to,
and within the limitations of, the express provisions of the Plan:

                  (I)      To determine when and how Rights to purchase Shares
shall be granted and the provisions of each Offering of such Rights (which need
not be identical).

                  (II)     To designate from time to time which Affiliates of
the Company shall be eligible to participate in the Plan.

                  (III)    To construe and interpret the Plan and Rights granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.


                                       4

                  (IV)     To amend the Plan as provided in Section 14.

                  (V)      Generally, to exercise such powers and to perform
such acts as it deems necessary or expedient to promote the best interests of
the Company and its Affiliates and to carry out the intent that the Plan be
treated as an Employee Stock Purchase Plan.

         (C)      The Board may delegate administration of the Plan to a
Committee of the Board composed of two (2) or more members, all of the members
of which Committee may be, in the discretion of the Board, Non-Employee
Directors and/or Outside Directors. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee of two (2) or more Outside Directors any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such a
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.

4.       SHARES SUBJECT TO THE PLAN.

         (A)      Subject to the provisions of Section 13 relating to
adjustments upon changes in securities, the Shares that may be sold pursuant to
Rights granted under the Plan shall not exceed in the aggregate Twenty Nine
Million Five Hundred Thousand (29,500,000) Shares. If any Right granted under
the Plan shall for any reason terminate without having been exercised, the
Shares not purchased under such Right shall again become available for the Plan.

         (B)      The Shares subject to the Plan may be unissued Shares or
Shares that have been bought on the open market at prevailing market prices or
otherwise.

5.       GRANT OF RIGHTS; OFFERING.

         (A)      The Board may from time to time grant or provide for the grant
of Rights to purchase Shares of the Company under the Plan to Eligible Employees
in an Offering on one or more Offering Dates selected by the Board. Each
Offering shall be in such form and shall contain such terms and conditions as
the Board shall deem appropriate, which shall comply with the requirements of
Section 423(b)(5) of the Code that all Employees granted Rights to purchase
Shares under the Plan shall have the same rights and privileges. The terms and
conditions of an Offering shall be incorporated by reference into the Plan and
treated as part of the Plan. The provisions of separate Offerings need not be
identical, but each Offering shall include (through incorporation of the
provisions of this Plan by reference in the Offering Memorandum or otherwise)
the period during which the Offering shall be effective, which period shall not
exceed twenty-seven (27) months beginning with the Offering Date, and the
substance of the provisions contained in Sections 6 through 9, inclusive.

         (B)      If a Participant has more than one Right outstanding under the
Plan, unless he or she otherwise indicates in agreements or notices delivered
hereunder: (i) each agreement or notice delivered by that Participant will be
deemed to apply to all of his or her Rights under the Plan, and (ii) an
earlier-granted Right (or a Right with a lower exercise price, if two Rights
have


                                       5

identical grant dates) will be exercised to the fullest possible extent before a
later-granted Right (or a Right with a higher exercise price if two Rights have
identical grant dates) will be exercised.

6.       ELIGIBILITY.

         (A)      Rights may be granted only to Employees of the Company or, as
the Board may designate as provided in subsection 3(b), to Employees of an
Affiliate. Except as provided in subsection 6(b), an Employee shall not be
eligible to be granted Rights under the Plan unless, on the Offering Date, such
Employee has been in the employ of the Company or the Affiliate, as the case may
be, for such continuous period preceding such grant as the Board may require,
but in no event shall the required period of continuous employment be equal to
or greater than two (2) years.

         (B)      The Board may provide that each person who, during the course
of an Offering, first becomes an Eligible Employee will, on a date or dates
specified in the Offering which coincides with the day on which such person
becomes an Eligible Employee or which occurs thereafter, receive a Right under
that Offering, which Right shall thereafter be deemed to be a part of that
Offering. Such Right shall have the same characteristics as any Rights
originally granted under that Offering, as described herein, except that:

                  (I)      the date on which such Right is granted shall be the
"Offering Date" of such Right for all purposes, including determination of the
exercise price of such Right;

                  (II)     the period of the Offering with respect to such Right
shall begin on its Offering Date and end coincident with the end of such
Offering; and

                  (III)    the Board may provide that if such person first
becomes an Eligible Employee within a specified period of time before the end of
the Offering, he or she will not receive any Right under that Offering.

         (C)      No Employee shall be eligible for the grant of any Rights
under the Plan if, immediately after any such Rights are granted, such Employee
owns stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company or of any Affiliate. For
purposes of this subsection 6(c), the rules of Section 424(d) of the Code shall
apply in determining the stock ownership of any Employee, and stock which such
Employee may purchase under all outstanding rights and options shall be treated
as stock owned by such Employee.

         (D)      An Eligible Employee may be granted Rights under the Plan only
if such Rights, together with any other Rights granted under all Employee Stock
Purchase Plans of the Company and any Affiliates, as specified by Section
423(b)(8) of the Code, do not permit such Eligible Employee's rights to purchase
Shares of the Company or any Affiliate to accrue at a rate which exceeds twenty
five thousand dollars ($25,000) of the fair market value of such Shares
(determined at the time such Rights are granted) for each calendar year in which
such Rights are outstanding at any time.


                                       6

         (E)      The Board may provide in an Offering that Employees who are
highly compensated employees within the meaning of Section 423(b)(4)(D) of the
Code shall not be eligible to participate.

7.       RIGHTS; PURCHASE PRICE.

         (A)      On each Offering Date, each Eligible Employee, pursuant to an
Offering made under the Plan, shall be granted the Right to purchase up to the
number of Shares purchasable either:

                  (I)      with a percentage designated by the Board not
exceeding fifteen percent (15%) of such Employee's Earnings (as defined by the
Board in each Offering) during the period which begins on the Offering Date (or
such later date as the Board determines for a particular Offering) and ends on
the date stated in the Offering, which date shall be no later than the end of
the Offering; or

                  (II)     with a maximum dollar amount designated by the Board
that, as the Board determines for a particular Offering, (1) shall be withheld,
in whole or in part, from such Employee's Earnings (as defined by the Board in
each Offering) during the period which begins on the Offering Date (or such
later date as the Board determines for a particular Offering) and ends on the
date stated in the Offering, which date shall be no later than the end of the
Offering and/or (2) shall be contributed, in whole or in part, by such Employee
during such period.

         (B)      The Board shall establish one or more Purchase Dates during an
Offering on which Rights granted under the Plan shall be exercised and purchases
of Shares carried out in accordance with such Offering.

         (C)      In connection with each Offering made under the Plan, the
Board may specify a maximum amount of Shares that may be purchased by any
Participant as well as a maximum aggregate amount of Shares that may be
purchased by all Participants pursuant to such Offering. In addition, in
connection with each Offering that contains more than one Purchase Date, the
Board may specify a maximum aggregate amount of Shares which may be purchased by
all Participants on any given Purchase Date under the Offering. If the aggregate
purchase of Shares upon exercise of Rights granted under the Offering would
exceed any such maximum aggregate amount, the Board shall make a pro rata
allocation of the Shares available in as nearly a uniform manner as shall be
practicable and as it shall deem to be equitable.

         (D)      The purchase price of Shares acquired pursuant to Rights
granted under the Plan shall be not less than the lesser of:

                  (I)      an amount equal to eighty-five percent (85%) of the
fair market value of the Shares on the Offering Date; or

                  (II)     an amount equal to eighty-five percent (85%) of the
fair market value of the Shares on the Purchase Date.


                                       7

8.       PARTICIPATION; WITHDRAWAL; TERMINATION.

         (A)      An Eligible Employee may become a Participant in the Plan
pursuant to an Offering by delivering a participation agreement to the Company
within the time specified in the Offering Memorandum, in such form as the
Company provides. Each such agreement shall authorize payroll deductions of up
to the maximum percentage specified by the Board of such Employee's Earnings
during the Offering (as defined in each Offering). The payroll deductions made
for each Participant shall be credited to a bookkeeping account for such
Participant under the Plan and either may be deposited with the general funds of
the Company or may be deposited in a separate account in the name of, and for
the benefit of, such Participant with a financial institution designated by the
Company. To the extent provided in the Offering, a Participant may reduce
(including to zero) or increase such payroll deductions. To the extent provided
in the Offering, a Participant may begin such payroll deductions after the
beginning of the Offering. A Participant may make additional payments into his
or her account only if specifically provided for in the Offering and only if the
Participant has not already had the maximum permitted amount withheld during the
Offering.

         (B)      At any time during an Offering, a Participant may terminate
his or her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board in the Offering. Upon such withdrawal
from the Offering by a Participant, the Company shall distribute to such
Participant all of his or her accumulated payroll deductions (reduced to the
extent, if any, such deductions have been used to acquire Shares for the
Participant) under the Offering, without interest unless otherwise specified in
the Offering, and such Participant's interest in that Offering shall be
automatically terminated. A Participant's withdrawal from an Offering will have
no effect upon such Participant's eligibility to participate in any other
Offerings under the Plan but such Participant will be required to deliver a new
participation agreement in order to participate in subsequent Offerings under
the Plan.

         (C)      Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating Employee's employment
with the Company and its designated Affiliates for any reason (subject to any
post-employment participation period required by law) or other lack of
eligibility. The Company shall distribute to such terminated Employee all of his
or her accumulated payroll deductions (reduced to the extent, if any, such
deductions have been used to acquire Shares for the terminated Employee) under
the Offering, without interest unless otherwise specified in the Offering. If
the accumulated payroll deductions have been deposited with the Company's
general funds, then the distribution shall be made from the general funds of the
Company, without interest. If the accumulated payroll deductions have been
deposited in a separate account with a financial institution as provided in
subsection 8(a), then the distribution shall be made from the separate account,
without interest unless otherwise specified in the Offering.

         (D)      Rights granted under the Plan shall not be transferable by a
Participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in Section 15 and, otherwise during his
or her lifetime, shall be exercisable only by the person to whom such Rights are
granted.


                                       8

9.       EXERCISE.

         (A)      On each Purchase Date specified therefor in the relevant
Offering, each Participant's accumulated payroll deductions and other additional
payments specifically provided for in the Offering (without any increase for
interest) will be applied to the purchase of Shares up to the maximum amount of
Shares permitted pursuant to the terms of the Plan and the applicable Offering,
at the purchase price specified in the Offering. No fractional Shares shall be
issued upon the exercise of Rights granted under the Plan unless specifically
provided for in the Offering and permitted by law.

         (B)      Unless otherwise specifically provided in the Offering, the
amount, if any, of accumulated payroll deductions remaining in any Participant's
account after the purchase of Shares that is equal to the amount required to
purchase one or more whole Shares on the final Purchase Date of the Offering
shall be distributed in full to the Participant at the end of the Offering,
without interest. If the accumulated payroll deductions have been deposited with
the Company's general funds, then the distribution shall be made from the
general funds of the Company, without interest. If the accumulated payroll
deductions have been deposited in a separate account with a financial
institution as provided in subsection 8(a), then the distribution shall be made
from the separate account, without interest unless otherwise specified in the
Offering.

         (C)      The amount, if any, of accumulated payroll deductions
remaining in any Participant's account after the purchase of Shares that is less
than the amount required to purchase one whole Share on the final Purchase Date
of the Offering shall be carried forward, without interest, into the next
Offering.

         (D)      No Rights granted under the Plan may be exercised to any
extent unless the Shares to be issued upon such exercise under the Plan
(including Rights granted thereunder) are covered by an effective registration
statement pursuant to the Securities Act and the Plan is in material compliance
with all applicable state, foreign and other securities and other laws
applicable to the Plan. If on a Purchase Date in any Offering hereunder the Plan
is not so registered or in such compliance, no Rights granted under the Plan or
any Offering shall be exercised on such Purchase Date, and the Purchase Date
shall be delayed until the Plan is subject to such an effective registration
statement and such compliance, except that the Purchase Date shall not be
delayed more than twelve (12) months and the Purchase Date shall in no event be
more than twenty-seven (27) months from the Offering Date. If, on the Purchase
Date of any Offering hereunder, as delayed to the maximum extent permissible,
the Plan is not registered and in such compliance, no Rights granted under the
Plan or any Offering shall be exercised and all payroll deductions accumulated
during the Offering (reduced to the extent, if any, such deductions have been
used to acquire Shares) shall be distributed to the Participants, without
interest unless otherwise specified in the Offering. If the accumulated payroll
deductions have been deposited with the Company's general funds, then the
distribution shall be made from the general funds of the Company, without
interest. If the accumulated payroll deductions have been deposited in a
separate account with a financial institution as provided in subsection 8(a),
then the distribution shall be made from the separate account, without interest
unless otherwise specified in the Offering.


                                       9

10.      COVENANTS OF THE COMPANY.

         (A)      During the terms of the Rights granted under the Plan, the
Company shall ensure that the amount of Shares required to satisfy such Rights
are available.

         (B)      The Company shall seek to obtain from each federal, state,
foreign or other regulatory commission or agency having jurisdiction over the
Plan such authority as may be required to issue and sell Shares upon exercise of
the Rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of Shares under the Plan, the Company shall be relieved from any liability for
failure to issue and sell Shares upon exercise of such Rights unless and until
such authority is obtained.

11.      USE OF PROCEEDS FROM SHARES.

         Proceeds from the sale of Shares pursuant to Rights granted under the
Plan shall constitute general funds of the Company.

12.      RIGHTS AS A STOCKHOLDER AND EMPLOYEE.

         (A)      A Participant shall not be deemed to be the holder of, or to
have any of the rights of a holder with respect to, Shares subject to Rights
granted under the Plan unless and until the Participant's Shares acquired upon
exercise of Rights under the Plan are recorded in the books of the Company.

         (B)      Neither the Plan nor the grant of any Right thereunder shall
confer any right on any Employee to remain in the employ of the Company or any
Affiliate or restrict the right of the Company or any Affiliate to terminate
such Employee's employment.

13.      ADJUSTMENTS UPON CHANGES IN SECURITIES.

         (A)      Subject to any required action by the stockholders of the
Company, the number of Shares covered by each Right under the Plan that has not
yet been exercised and the number of Shares that have been authorized for
issuance under the Plan but have not yet been placed under a Right
(collectively, the "Reserves"), as well as the price per Share covered by each
Right under the Plan that has not yet been exercised, shall be proportionately
adjusted for any increase or decrease in the number of issued Shares resulting
from a stock split or the payment of stock dividend (but only on the Common
Stock) or any other increase or decrease in the number of Shares 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 adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issue 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 subject to a Right.

         (B)      In the event of the proposed dissolution or liquidation of the
Company, any and all Offerings shall terminate immediately prior to the
consummation of such proposed action,


                                       10

unless otherwise provided by the Board. The Board may, in the exercise of its
sole discretion in such instances, declare that the Rights under the Plan shall
terminate as of a date fixed by the Board and give each Participant the right to
exercise his or her Right. 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 or a parent or subsidiary of such successor
corporation when the Company is not the surviving corporation, any and all
Offerings shall 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, and in lieu of assumption or
substitution of the Rights, provide that each Participant shall have the right
to exercise his or her Right. If the Board makes a Right exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the Board
shall notify the Participant that the Right shall be fully exercisable for a
period of twenty (20) days from the date of such notice (or such other period of
time as the Board shall determine), and the Right shall terminate upon the
expiration of such period.

         (C)      The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per Share covered by each outstanding Right, in the event that the Company
effects one or more reorganizations, recapitalizations, rights offering, or
other increases or reductions of outstanding Shares, and in the event of the
Company being consolidated with or merged into any other corporation.

14.      AMENDMENT OF THE PLAN.

         (A)      The Board at any time, and from time to time, may amend the
Plan. However, except as provided in Section 13 relating to adjustments upon
changes in securities and except as to minor amendments to benefit the
administration of the Plan, to take account of a change in legislation or to
obtain or maintain favorable tax, exchange control or regulatory treatment for
Participants or the Company or any Affiliate, 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 423 of
the Code, Rule 16b-3 under the Exchange Act or any Nasdaq or other securities
exchange listing requirements. Currently under the Code, stockholder approval
within twelve (12) months before or after the adoption of the amendment is
required where the amendment will:

                  (I)      Increase the amount of Shares reserved for Rights
under the Plan;

                  (II)     Modify the provisions as to eligibility for
participation in the Plan to the extent such modification requires stockholder
approval in order for the Plan to obtain employee stock purchase plan treatment
under Section 423 of the Code; or

                  (III)    Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to obtain employee stock
purchase plan treatment under Section 423 of the Code.

         (B)      It is expressly contemplated that the Board may amend the Plan
in any respect the Board deems necessary or advisable to provide Employees with
the maximum benefits provided or to be provided under the provisions of the Code
and the regulations promulgated thereunder


                                       11

relating to Employee Stock Purchase Plans and/or to bring the Plan and/or Rights
granted under it into compliance therewith.

         (C)      Rights and obligations under any Rights granted before
amendment of the Plan shall not be impaired by any amendment of the Plan without
the consent of the person to whom such Rights were granted, or except as
necessary to comply with any laws or governmental regulations, or except as
necessary to ensure that the Plan and/or Rights granted under the Plan comply
with the requirements of Section 423 of the Code.

15.      DESIGNATION OF BENEFICIARY.

         (A)      A Participant may file a written designation of a beneficiary
who is to receive any Shares and/or cash, if any, from the Participant's account
under the Plan in the event of such Participant's death subsequent to the end of
an Offering but prior to delivery to the Participant of such Shares and cash. In
addition, a Participant may file a written designation of a beneficiary who is
to receive any cash from the Participant's account under the Plan in the event
of such Participant's death during an Offering.

         (B)      The Participant may change such designation of beneficiary at
any time by written notice. In the event of the death of a Participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such Participant's death, the Company shall deliver such Shares
and/or cash to the executor or administrator of the estate of the Participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its sole discretion, may deliver such Shares
and/or cash to the spouse or to any one or more dependents or relatives of the
Participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.

16.      TERMINATION OR SUSPENSION OF THE PLAN.

         (A)      The Board in its discretion may suspend or terminate the Plan
at any time. Unless sooner terminated, the Plan shall terminate at the time that
all of the Shares subject to the Plan's reserve, as increased and/or adjusted
from time to time, have been issued under the terms of the Plan. No Rights may
be granted under the Plan while the Plan is suspended or after it is terminated.

         (B)      Rights and obligations under any Rights granted while the Plan
is in effect shall not be impaired by suspension or termination of the Plan,
except as expressly provided in the Plan or with the consent of the person to
whom such Rights were granted, or except as necessary to comply with any laws or
governmental regulation, or except as necessary to ensure that the Plan and/or
Rights granted under the Plan comply with the requirements of Section 423 of the
Code.

17.      EFFECTIVE DATE OF PLAN.

         The Plan shall become effective upon adoption by the Board.


                                       12

18.      REORGANIZATION OF CADENCE DESIGN FOUNDRY BUSINESS.

Nothing in this Plan shall be construed to restrict the ability of the Company
to effect the transactions, amendments and termination described in Section A.2.
of that certain Plan of Reorganization for Cadence Design Foundry Business,
adopted by the Board on October 30, 2002, and the Plan shall hereby deemed to be
amended in accordance therewith; provided that such transactions shall be
effected in a manner consistent with applicable law.


                                       13

EX-10.08

                                                                   EXHIBIT 10.08

                          CADENCE DESIGN SYSTEMS, INC.
                         1994 DEFERRED COMPENSATION PLAN
                              AMENDED AND RESTATED
                           EFFECTIVE NOVEMBER 1, 2002

         Cadence Design Systems, Inc., a Delaware Corporation (referred to
hereafter as the "Employer") established effective October 1, 1994, and amended
and restated effective October 1, 1996, and January 1, 2001, this Cadence Design
Systems, Inc. 1994 Deferred Compensation Plan (the "Plan"), an unfunded plan for
the purpose of providing deferred compensation for a select group of management,
highly compensated executives, and directors. The Employer hereby amends and
restates the Plan in its entirety effective November 1, 2002, to reflect prior
and new amendments to the Plan.

                                    RECITALS

         WHEREAS, those employees or directors identified by the Compensation
Committee of the Board of Directors of the Employer or any other committee
designated by the Board of Directors of the Employer to administer this Plan in
accordance with Section 8 hereof (hereinafter referred to as the "Committee") as
eligible to participate in this Plan (each of whom are referred to hereafter as
the "Employee" or collectively as the "Employees") are employed by Employer:

         WHEREAS, Employer previously adopted an unfunded deferred compensation
plan and the Employees desire the Employer to continue to pay certain deferred
compensation and/or related benefits to or for the benefit of Employees, or a
designated Beneficiary or both; and

         WHEREAS, Employer believes it is in the best interest of Plan
participants and beneficiaries to amend and restate the Plan:

         NOW, THEREFORE, the Employer hereby amends and restates the Plan
effective as of November 1, 2002.

                                    SECTION 1

                                   DEFINITIONS

         1.1      "Account" shall mean the separate account(s) established under
this Plan and the Trust for each participating Employee. Each Account shall
include, as applicable, any Stock Option Subaccount of a participating Employee.
Employer shall furnish each participant with a statement of his or her Account
balance at least annually.

         1.2      "Beneficiary" shall mean the Beneficiary designated by the
Employee to receive Employee deterred compensation benefits in the event of his
or her death.

         1.3      "Change in Control" shall have the meaning set forth in
Section 5.1 of the Plan.

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

         1.5      "Committee" shall mean the Compensation Committee of the Board
of Directors of the Employer or any other committee designated by the Board of
Directors of the Employer to administer this Plan in accordance with Section 8
hereof.

         1.6      "Compensation" shall, for the period on or before April 1,
1998, mean the base salary and cash bonuses described in Section 3.1. On or
after April 1, 1998, "Compensation" shall mean the base salary, cash bonuses,
and director fees described in Section 3.1.

         1.7      "Effective Date" of the Plan shall mean October 1, 1994,
unless otherwise specified by the Employer in a corporate resolution approving
and adopting this Plan. The effective date of this amendment and restatement
shall be November 1, 2002.

         1.8      "Eligible Compensation" shall mean, for the period prior to
April 1, 1998, projected annual compensation from the Employer, determined on an
annual basis by the Employer at or before the beginning of the Plan Year, which
may consist of salary, bonus, and/or incentive payments, determined before any
deductions under any qualified plan of the Employer (including a Section 401(k)
plan or a Section 125 plan) and excluding any special or nonrecurring
compensatory payments such as moving or relocation bonuses or automobile
allowances. Effective on and after April 1, 1998, the term shall mean projected
annual compensation from the Employer determined on an annual basis by the
Employer at or before the beginning of the Plan, which may consist of salary,
bonus, and, and/or incentive payments, determined before any deductions under
any qualified plan of the Employer (including a Section 401(k) plan or a Section
125 plan) and excluding any special or non-recurring compensatory payments such
as moving or relocation bonuses or automobile allowances.

         1.9      "Eligible Stock Option" shall mean one or more non-qualified
stock options selected by the Committee in its sole discretion.

         1.10     "Employee" shall, for the period before April 1, 1998, mean,
each employee of Employer. Effective on or after April 1, 1998, the term shall
also include each Non-Employee Director. The term also shall include reference
to an Employee's Beneficiary where the context so requires.

         1.11     "Employer" shall mean Cadence Design Systems, Inc., a Delaware
corporation, and any successor organization thereto, and any Subsidiaries, as
defined in Section 7.3 of the Company.

         1.12     "Employer Contributions" shall mean the Employer's
discretionary contribution, if any, pursuant to Section 3.1(b) of the Plan.

         1.13     "Hardship" shall have the meaning set forth in Section 3.7 of
the Plan.

         1.14     "Non-Employee Director" shall mean a member of Employer's
Board of Directors who is not otherwise an employee of the Employer.


                                       15

         1.15     "Plan" shall mean the Cadence Design Systems, Inc. 1994
Deferred Compensation Plan, including any amendments thereto.

         1.16     "Plan Year" shall mean the year beginning each January 1 and
ending December 31; notwithstanding the foregoing, the initial Plan Year shall
mean the period beginning with the Effective Date and ending on December 31,
1994.

         1.17     "Permanent Disability" shall mean that the Employee is unable
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment that can be expected to result in
death or otherwise meets the definition of "Permanent Disability" as set forth
in the Employer's Long Term Disability Plan. An Employee will not he considered
to have a Permanent Disability unless he or she furnishes proof of such
condition sufficient to satisfy the Employer, in its sole discretion.

         1.18     "Qualifying Stock Option Gain" shall mean an amount equal to
the fair market value of shares (or share equivalent units) of Stock acquired
upon exercise of one or more Eligible Stock Options using a Stock-for-Stock
payment method, less the total stock purchase price paid to exercise the
Eligible Stock Options, less amounts withheld pursuant to Section 9.7. All such
amounts shall be calculated using the average of the high and low price of Stock
on the date of exercise of such Eligible Stock Options, as reported on the New
York Stock Exchange.

         1.19     "Stock" shall mean Cadence Design Systems, Inc. common stock,
$0.01 par value, or any other equity securities of Employer designated by the
Committee.

         1.20     "Stock-for-Stock" shall mean a payment method by which certain
Employees, including Non-Employee Directors, exercise their Eligible Stock
Options by paying the exercise price with Stock, as follows: the Employee
delivers to Employer shares of Stock already owned by Employee for at least six
(6) months as of the date of exercise (or, instead of delivering actual shares,
Employee delivers "phantom shares" by delivering an affidavit of ownership of
the already-owned Stock but does not deliver cash or any other property) having
a fair market value equal to the exercise price of the Eligible Stock Options to
be exercised.

         1.21     "Stock Option Subaccount" shall mean (i) the sum of Qualifying
Stock Option Gain deferred in accordance with Section 3.2 of this Plan, plus
(ii) amounts credited or debited in accordance with Section 3.9(d) of this Plan,
less (iii) all distributions made to the Employee or his or her beneficiary in
accordance with Section 3.3(g) of this Plan.

         1.22     "Subsidiary" shall mean any corporation (other than the
Employer) in an unbroken chain of corporations or other entities beginning with
the Employer, if each of the entities other than the last entity in the unbroken
chain owns stock, partnership rights or other ownership interest possessing
fifty (50) percent or more of the total combined voting power of all classes of
stock, partnership rights or other ownership interest in one of the other
entities in such chain.

         1.23     "Trust" or "Trust Agreement" shall mean the Cadence Design
Systems, Inc. 1994 Deferred Compensation Plan Rabbi Trust Agreement, including
any amendments thereto, entered into between the Employer and the Trustee to
carry out the provisions of the Plan.


                                       16

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

         1.25     "Trustee" shall mean the designated Trustee acting at any time
under the Trust.

                                    SECTION 2

                                   ELIGIBILITY

         2.1      Eligibility. Eligibility to participate in the Plan shall be
limited to Employees of the Employer who (a) have Eligible Compensation of at
least $150,000 for the Plan Year, (b) are classified as officers,
vice-presidents, directors, or an equivalent title, and (c) have been selected
by the Committee to participate in the Plan. The Committee shall designate
Employees who shall be covered by this Plan in a separate Acknowledgment (in the
form attached hereto as Appendix 1) for each such Employee. Participation in the
Plan shall commence as of the date such Acknowledgment is signed by the Employee
and delivered to the Employer, provided that deferral of compensation under the
Plan shall not commence until the Employee has complied with the election
procedures set forth in Section 3.4. Notwithstanding the foregoing,
participation by an Employee in the Plan does not make such Employee eligible
automatically to defer Qualifying Stock Option Gain. Employees, including
Non-Employee Directors, whose Stock Options are Eligible Stock Options and who
are eligible to defer Qualifying Stock Option Gain under the Plan pursuant to
Section 3.2, will be designated by the Committee in a separate Acknowledgement
(in the form attached hereto as Appendix 2) for each such Employee. Nothing in
the Plan or in the Acknowledgments should be construed to require any
contributions to the Plan on behalf of the Employee by Employer.

         Notwithstanding the foregoing, Non-Employee Directors shall be eligible
to participate in the Plan and shall be eligible to defer Qualifying Stock
Option Gain under the Plan. A Non-Employee Director shall commence participation
in the Plan as of the later of April 1, 1998, or the date the Non-Employee
Director first becomes a Non-Employee Director, provided that deferral of
Compensation under the Plan shall not commence until the Non-Employee Director
has complied with the election procedures set forth in Section 3.4.

                                    SECTION 3

              DEFERRED COMPENSATION & QUALIFYING STOCK OPTION GAIN

         3.1      Deferred Compensation.

                  (a)      Each participating Employee may elect, in accordance
with Section 3.4 of this Plan, to defer semi-annually the receipt of a portion
of the Compensation for active service otherwise payable to him or her by
Employer during each semi-annual period or portion of a semi-annual period that
the Employee shall be employed by the Employer. Any Compensation deferred by
Employee pursuant to Section 3.4 shall be recorded by the Employer in an
Account, maintained in the name of the Employee, which Account shall be credited
with a dollar amount equal to the total amount of Compensation deferred during
each semi-annual period under the Plan, together with earnings thereon credited
in accordance with Section 3.9. The amount or


                                       17

percentage of Compensation that Employee elects to defer under Section 3.4 will
remain constant for the semi-annual period and shall not be subject to change
during such semi-annual period Effective April 1 1998, each such deferral
election as to "base salary" or "director's fees" or discontinuance of a
deferral election as to "base salary" or "director's fees" will continue in
force for each successive year or semiannual period, as appropriate, until or
unless suspended or modified by the filing of a subsequent election with the
Employer by the Employee or Non-Employee Director in accordance with Section 3.4
of the Plan. Each deferral election as to an Employee's "cash bonus" shall
continue in force only for the single semi-annual period in which it is paid,
regardless of the period of time as to which it is awarded, and shall not apply
to any successive semi-annual periods. Any deferral election with respect to a
"cash bonus" must be made prior to the time the amount of the bonus is
determined, prior to the end of the period of time as to which the bonus is
awarded, and at a time that the amount of any such bonus remains substantially
uncertain. All deferrals pursuant to this Section 3.1 shall be fully vested at
all times. Effective April 1, 1998, deferral elections shall be subject to
minimum dollar and maximum percentage amount limits as follows: (i) the minimum
semi-annual deferral amount is $2,500 (prior to July 1, 1998, the minimum annual
deferral amount was $5,000), which shall be withheld from the Employee's or
Non-Employee Director's Compensation, and (ii) the maximum deferral percentage
amount is 80% of the Employee's "base salary," 100% of the Employee's "cash
bonus," and 100% of the Non-Employee Director's "director's fees." For purposes
of the Plan, "base salary" for a given semi-annual period means an "Employee's
regular compensation payable during the semi-annual period, excluding bonuses,
commissions, overtime, incentive payments, non-monetary awards, compensation
deferred pursuant to all Section 125 (cafeteria) or Section 401(k) (savings)
plans of the Employer and other special compensation, and reduced by the tax
withholding obligations imposed on the Employer and any other withholding
requirements imposed by law with respect to such amounts. For purposes of the
Plan, "cash bonus" shall mean amounts (if any) awarded under the bonus policies
maintained by the Employer and any commissions earned on sales. For purposes of
the Plan, "director's fees" for a given semi-annual period means the annual
retainer, per meeting fees, committee meeting fees, and consulting fees payable
during the semi-annual period. Except as otherwise expressly provided herein,
this Section 3.1(a) is effective as of July 1, 1998.

                  (b)      Employer shall not be obligated to make any other
contribution to the Plan on behalf of any Employee at any time. Employer may
make Employer Contributions to the Plan on behalf of one or more Employees.
Employer Contributions, if any, made to Accounts of Employees shall be
determined in the sole and absolute discretion of the Employer, and may be made
without regard to whether the Employee to whose Account such contribution is
credited has made, or is making, contributions pursuant to Section 3.1(a). The
Employer shall not be bound or obligated to apply any specific formula or basis
for calculating the amount of any Employer Contributions and Employer shall have
sole and absolute discretion as to the allocation of Employer Contributions
among participating Employee Accounts. The use of any particular formula or
basis for making an Employer Contribution in one year shall not bind or obligate
the Employer to use such formula or basis in any other year. Employer
Contributions may be subject to a substantial risk of forfeiture in accordance
with the terms of a vesting schedule, which may be selected by the Employer in
its sole and absolute discretion.


                                       18

                  (c)      Amounts deferred under the Plan shall be calculated
and withheld from the Employee's base salary and/or cash bonus after such
compensation has been reduced to reflect salary reduction contributions to the
Employer's Code Section 125 (cafeteria) and Code Section 401(k) (savings) plans,
but before any reductions for contributions to the Code Section 423 (employee
stock purchase) plan.

                  (d)      Effective April 1, 2000, the Committee in its sole
discretion may direct the Trustee to accept the transfer of funds held in trust
under the Cadence Design Systems, Inc. 1996 Deferred Compensation Venture
Investment Trust Agreement ("Telos Trust"), for a participant in the Cadence
Design Systems, Inc. 1996 Deferred Compensation Venture Investment Plan ("Telos
Plan"), which is an unfunded nonqualified deferred compensation plan for a
select group of management and highly compensated executives of the Company, in
which case the transferred funds shall be held by the Trustee under and be
subject to the terms of the Plan and invested and accounted for as directed by
the Committee except as otherwise provided in Section 3.3(e). Such amounts
transferred from the Telos Trust to the Trust ("Transferred Funds") may not be
returned to the Telos Plan or Telos Trust. The transfer of such Transferred
Funds shall not cause any of the participant's rights to a distribution under
the Plan or the Telos Plan (including the Transferred Funds) to be a secured
right to a distribution under either plan.

         3.2      Deferred Qualifying Stock Option Gain.

         Eligible Employees, including Non-Employee Directors, designated by the
Committee as described in Section 2.1 may elect, in accordance with Section
3.4(b) of this Plan, to defer the receipt of Qualifying Stock Option Gain upon
the exercise of any Eligible Stock Option. Any Qualifying Stock Option Gain
deferred by an Employee shall be recorded in a Stock Option Subaccount,
maintained in the name of the Employee, which subaccount shall be credited with
an amount of shares (or share equivalent units) of Stock equal to the total
amount of Qualifying Stock Option Gain deferred, together with any earnings
thereon credited in accordance with Section 3.9(d).

         3.3      Payment of Account Balances.

                  (a)      Effective July 1, 1998, the Employee shall elect
whether he or she will receive distribution of his or her Account, not including
his or her Stock Option Subaccount, subject to tax withholding requirements, (i)
upon reaching a specified age, (ii) upon passage of a specified number of years,
(iii) upon termination of employment of Employee with Employer, (iv) upon the
earlier to occur of (A) termination of employment of Employee with Employer or
(B) passage of a specified number of years or attainment of a specified age, or
(v) upon the later to occur of (A) termination of employment of Employee with
Employer or (B) passage of a specified number of years or attainment of a
specified age, as elected by Employee in accordance with the form established by
the Committee. Such form may permit an election among some or all of the
alternatives listed in this Section 3.3(a), as determined in the Committee's
sole discretion. A designation of the time of distribution shall be required as
a condition of participation under this Plan. The Employee also shall elect to
receive all amounts payable to him or her in a lump sum or in equal monthly
installments over a designated period of five or ten


                                       19

years, pursuant to the provisions of Section 3.3(e). These elections shall be
made in accordance with Section 3.5 of this Plan.

                  (b)      Distributions shall be made to the maximum extent
allowable under the election made by Employee, except that no distribution shall
be made to the extent that the receipt of such distribution, when combined with
the receipt of all other "applicable employee remuneration" (as defined in Code
Section 162(m)(4)) would cause any remuneration received by the Employee to be
nondeductible by the Employer under Code Section 162(m)(1). The portion of any
distributable amount that is not distributed by operation of this Section 3.3(b)
shall be distributed in subsequent years in the manner elected by the Employee
until the Employee's Account has been fully liquidated. The commencement date of
the lump sum payment or the five- or ten-year period (whichever is applicable)
shall be automatically extended, when necessary to satisfy the requirements of
this subsection, for one-year periods until all Account balances have been
distributed in the manner elected by the Employee.

                  (c)      Effective July 1, 1998, upon termination of
Employee's employment with Employer by reason of death or Permanent Disability
prior to the time when payment of Account balances otherwise would commence
under the provisions of Section 3.3(a), Employee or Employee's designated
Beneficiary will be entitled to receive all amounts credited to the Account of
Employee as of the date of his or her death or Permanent Disability
(notwithstanding any contrary election to receive distributions under the first
sentence of Section 3.3(a)). Upon termination of Employee's employment with
Employer by reason other than death or Permanent Disability prior to the date
when payment of Account balances otherwise would commence under the provisions
of Section 3.3(a), the Employer may, in the sole discretion of the Committee,
distribute to Employee or Employee's designated Beneficiary all amounts credited
to the Employee's Account as of the date of such termination (notwithstanding
any contrary election to receive distributions under the first sentence of
Section 3.3(a)). Said amounts shall be payable in the form determined pursuant
to the provisions of Section 3.3(e).

                  (d)      Upon the death of Employee prior to complete
distribution to him or her of the entire balance of his or her Account (and
after the date of termination of employment with Employer), the balance of his
or her Account on the date of death shall be payable to Employee's designated
Beneficiary pursuant to Section 3.3(e). Effective July 1, 1998, notwithstanding
any other provision of the Plan to the contrary, the Employee's designated
Beneficiary may receive the distribution of the remaining portion of such
deceased Employee's Account in the form of a lump sum if the Beneficiary
requests such a distribution and the Committee, in its sole discretion, consents
to such a distribution.

                  (e)      The Employer shall distribute or direct distribution
of the balance of amounts previously credited to Employee's Account, in a lump
sum, or in monthly installments over a period of five (5) years or ten (10)
years as Employee shall designate. A designation of the form of distribution
shall be required as a condition of participation under this Plan. Distribution
of the lump sum or the first installment shall be made or commence within ninety
(90) days following the date specified in the first sentence of Section 3.3(a),
or as otherwise provided in 3.3(c). Subsequent installments, if any, shall be
made on the first day of each month following the last installment as determined
by Employer. The amount of each installment shall be calculated by dividing the
Account balance as of the date of the distribution


                                       20

by the number of installments remaining pursuant to the Employee's distribution
election. Each such installment, if any, shall take into account earnings
credited to the balance of the Account remaining unpaid. The Employee's
distribution election shall be made on a form provided by Employer.

         Notwithstanding any provision herein to the contrary, effective April
1, 2000, Transferred Funds from the Telos Trust under the Telos Plan to the
Trust for the benefit of a participant in the Telos Plan, shall be distributable
under the Plan according to the terms of the elections permitted and made by the
participant under the Telos Plan unless subsequently modified by the participant
as permitted under this Plan.

                  (f)      Effective April 1, 1998, for purposes of this Section
3.3, reference to termination of employment shall also include termination of
service as a Non-Employee Director of the Employer (except in the event such
termination is due to becoming an Employee).

                  (g)      An Employee, including a Non-Employee Director, shall
make a separate election to receive distributions from his or her Stock Option
Subaccount, subject to tax withholding requirements. Upon termination of
Employee's employment with Employer by reason of death or Permanent Disability
prior to the time when payment of Employee's Stock Option Subaccount balance
otherwise would commence pursuant to Employee's election, Employee or Employee's
designated Beneficiary will be entitled to receive all amounts credited to the
Stock Option Subaccount of Employee as of the date of his or her death or
Permanent Disability (notwithstanding any contrary election to receive
distributions pursuant to this Section 3.3(g)). Upon termination of Employee's
employment with Employer by reason other than death or Permanent Disability
prior to the date when payment of Employee's Stock Option Subaccount balance
otherwise would commence pursuant to Employee's election, Employer may, in the
sole discretion of the Committee, distribute to Employee or Employee's
designated Beneficiary all amounts credited to Employee's Account as of the date
of such termination (notwithstanding any contrary election to receive
distributions pursuant to this Section 3.3(g)). All distributions from an
Employee's Stock Option Subaccount shall be made in the form of Stock, except
for distributions upon a Change in Control, to be made in a lump sum payment in
accordance with Section 3.6.

         3.4      ELECTION TO DEFER.

                  (a)      Compensation. Each election of an Employee to defer
Compensation as provided in Section 3.1 of this Plan shall be in writing, signed
by the Employee, and delivered to Employer, together with all other documents
required under the provisions of this Plan, within such time as determined by
the Committee and communicated to those Employees who are eligible to
participate in the Plan. Such deferral elections must be delivered to Employer
prior to the beginning of the Plan Year with respect to which the Compensation
to be deferred is otherwise payable to Employee. Provided, however, that
effective April 1, 1998, an Employee who is hired or promoted to a position of
eligibility for participation in the Plan during a Plan Year (effective January
1, 2001, on or before the first business day of a semi annual period) or a
Non-Employee Director who is elected to become a Non-Employee Director shall
have thirty (31)) days from the date of notification of eligibility for
participation in the Plan in which to submit the required election documents for
the then current semi-annual period. Any deferral


                                       21

election made by Employee shall be irrevocable with respect to any Compensation
covered by such election, including Compensation payable in the semi-annual
period in which the election suspending or modifying the prior deferral election
is delivered to Employer. Notwithstanding the foregoing, with respect to cash
bonuses payable to an Employee for the year ended December 31, 1996, but which
will not be paid to the Employee until after January 1, 1997, the Employee may
make a separate deferral election with respect to, or revise a previous deferral
election with respect to, such cash bonuses until such time on or before
December 31, 1996 as determined by the Committee, so long as at that time the
amount of any such bonus has not yet been determined and remains substantially
uncertain. The Employer shall withhold the amount or percentage of base salary
specified to be deferred in equal amounts for each payroll period and shall
withhold the amount or percentage of each cash bonus specified to be deferred at
the time or times such bonus is or otherwise would be paid to the Employee. The
election to defer Compensation shall be made on the form provided by Employer.
Effective April 1, 1998, the Employer shall withhold the amount or percentage of
director's fees specified to be deferred at the time or times such director's
fees are or otherwise would be paid to the Non-Employee Director.
Notwithstanding the foregoing, with respect to Compensation payable to a
Non-Employee Director for the Plan Year ending December 31, 1998, but which will
not be paid to the Non-Employee Director until after March 31, 1998, the
Non-Employee Director may make a deferral election with respect to such
Compensation until March 31, 1998. Notwithstanding any other provision of the
Plan to the contrary, with respect to base salary and cash bonuses payable to an
Employee for the six-month period from July 1, 1998 through December 31, 1998,
prior to July 1, 1998, the Employee may revise a previous deferral election with
respect to such base salary to increase (but not decrease) the amount or
percentage of base salary to be deferred. Except as otherwise expressly provided
herein, this Section 3.4(a) is effective as of July 1, 1998.

                  (b)      Qualifying Stock Option Gain. Notwithstanding any
provision of Section 3.4(a) to the contrary, with respect to Qualifying Stock
Option Gain to be deferred, (i) the Employee, including a Non-Employee Director,
must make a separate deferral election on a separate deferral election form with
respect to such Qualifying Stock Option Gain; (ii) such form must be timely
delivered to the Vice President of Human Resources or his or her designee at
least six (6) months before the date the Employee elects to exercise the
Eligible Stock Option; (iii) the Eligible Stock Option must be exercised using
an actual or phantom Stock-for-Stock payment method; and (iv) the Stock actually
or constructively delivered by the Employee to exercise the Eligible Stock
Option must have been owned by the Employee during the entire six (6) month
period before its delivery. The amount of Qualifying Stock Option Gain permitted
to be deferred also may be limited by other terms or conditions set forth in the
stock option plan or agreement under which the relevant stock option or options
were granted. The Employee's Qualifying Stock Option Gain deferral election
shall be made on a form provided by Employer.

         3.5      DISTRIBUTION ELECTION.

         The initial distribution election of an Employee as provided in Section
3.3 of this Plan, including an election made pursuant to Section 3.3(g) of this
Plan, shall be in writing, signed by the Employee, and delivered to Employer,
together with all other documents required under the provisions of this Plan,
within such period of time determined by the Committee and communicated to those
Employees who are eligible to participate in the Plan. Such distribution
elections must be delivered to the Employer prior to the beginning of the first
Plan Year in which


                                       22

Employee is eligible to participate in the Plan, or, in the case of n
distribution election pursuant to Section 3.3(g), prior to six months before the
date of exercise of an Eligible Stock Option. Provided, however, that effective
April 1, 1998, an Employee who is hired or promoted to a position of eligibility
for participation in the Plan or a Non-Employee Director who is elected to
become a Non-Employee Director during a Plan Year shall have thirty (30) days
from the date of notification of eligibility for participation in the Plan in
which to submit the required distribution election documents. If permitted by
the Committee, an Employee may change the terms of his or her initial
distribution election by making a new election, and any such new election will
be effective as of the later of the date that is (a) six (6) months following
the date the new election is made or (b) the first day of the Plan Year
following the Plan Year in which the new election is made and such new election
will apply to the Employee's entire Account, except for the Employee's Stock
Option Subaccount. Any changes to an Employee's distribution election pursuant
to Section 3.3(g) must be submitted on a separate form, and such changes will
apply only to the Employee's Stock Option Subaccount. An Employee may not make a
new election once distributions from the Plan have commenced or which would
first become effective at a time when distributions from the Plan have
commenced. Notwithstanding any other provisions of this Section 3.5, an
Employee's distribution election shall be in the form established by the
Committee in accordance with the terms of the Plan.

         3.6      PAYMENT UPON CHANGE IN CONTROL.

         Notwithstanding any other provisions of this Plan (including without
limitation Section 3.3), the aggregate balance credited to and held in the
Employees' Accounts, including any Stock Option Subaccounts, shall be
distributed to Employees in a lump sum on the thirtieth day following a Change
in Control (except that distribution shall be on the sixtieth day in the case of
a Change in Control under Section 5.1(a)), as defined in Section 5.1, unless the
Committee, the Board of Directors of the Employer, or the 401(k)/NQDC
Administrative Committee of the Employer (as each is composed immediately prior
to such Change in Control), in the sole discretion of any of the foregoing,
decides prior to that date that Employees' Accounts shall remain in the Plan.

         3.7      HARDSHIP.

                  (a)      An Employee may apply for distributions from his or
her Account to the extent that the Employee demonstrates to the reasonable
satisfaction of the Committee that he or she needs the funds due to Hardship.
For purposes of this Section 3.7, a distribution is made on account of Hardship
only if the distribution is made on account of an unforeseeable immediate and
heavy emergency financial need of the Employee and is necessary to satisfy that
emergency financial need. Whether an Employee has an immediate and heavy
emergency financial need shall be determined by the Committee based on all
relevant facts and circumstances, and shall include, but not be limited to, the
need to pay funeral expenses of a family member; the need to pay expenses for
medical care for Employee, the Employee's spouse or any dependent of Employee
resulting from sudden unexpected illness or accident; payments necessary to
prevent the eviction of Employee from Employee's principal residence or
foreclosure on the mortgage on that residence; or other similar extraordinary
and unforeseeable circumstances arising as a result of events beyond the control
of Employee. A Hardship distribution shall not exceed the amount required to
relieve the financial need of the Employee, nor shall a Hardship distribution be
made


                                       23

if the need may be satisfied from other resources reasonably available to the
Employee. For purposes of this paragraph, an Employee's resources shall be
deemed to include those assets of the Employee's spouse and minor children that
are reasonably available to the Employee. Prior to approving a Hardship
distribution, Employer shall require the Employee to certify in writing that the
Employee's financial need cannot reasonably be relieved:


                           (i)      through reimbursement or compensation by
         insurance or otherwise or


                           (ii)     by other distributions or nontaxable (at the
         time of the loan) loans from plans maintained by the Employer or by any
         other employer, or by borrowing from commercial sources on reasonable
         commercial terms, in an amount sufficient to satisfy the need.

                  (b)      Any Employee receiving a Hardship distribution under
this section shall be ineligible to defer any additional compensation under the
Plan until the first day of the Plan Year following the second anniversary of
the date of the distribution. In addition, a new Election of Deferral must be
submitted to the Employer as a condition of participation in the Plan.

         3.8      EMPLOYEE'S RIGHT UNSECURED.

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

         3.9      INVESTMENT OF CONTRIBUTION.

                  (a)      The investment options available to each Employee
shall be determined by the Employer and set forth in a separate written
document, a copy of which shall be attached hereto and by this reference is
incorporated herein. Each Employee shall have the sole and exclusive right to
direct the Trustee as to the investment of his or her Accounts in accordance
with policies arid procedures implemented by the Trustee. The right of an
Employee to direct the investment of his or her Account into one or more of the
available investment options shall not in any way be considered to alter the
fact that an Account is a bookkeeping account only that measures the Employer's
obligation to pay benefits hereunder, that the assets being invested at the
direction of an Employee are assets of the Employer and that the Employee's
rights under the Plan remain those of an unsecured, general creditor of the
Employer.

         Employer shall not be liable for any investment decision made by any
Employee while such funds are held by the Trustee.


                                       24

                  (b)      Accounts shall be credited with the actual financial
performance or earnings generated by such investments directed by the Employee
and made by the Trustee, until the Account has been fully distributed to the
Employee or to the Employee's designated Beneficiary.

                  (c)      Notwithstanding any other provision in this Section
3.9 to the contrary, the Committee may determine not to take account of
Employee's designated investments and determine to have the Employee's Account
invested in any other manner as the Committee shall determine.

                  (d)      Notwithstanding any other provision in this Section
3.9 to the contrary, no investment options are available to an Employee with
respect to amounts held in the Employee's Stock Option Subaccount. Such Stock
Option Subaccount only shall be credited or debited with the actual financial
performance or earnings generated by Stock. During the deferral period, dividend
equivalents will be credited in the form of additional shares or share
equivalent units of Stock to the Employee's Stock Option Subaccount.

                                    SECTION 4

                           DESIGNATION OF BENEFICIARY

         4.1      DESIGNATION OF BENEFICIARY.

         Employee may designate a Beneficiary or Beneficiaries to receive all
amounts, if any, due hereunder to Employee but unpaid at the time of Employee's
death by written notice thereof to Employer at any time prior to Employee's
death and may revoke or change the Beneficiary designated therein without the
Beneficiary's consent by written notice delivered to Employer at any time and
from time to time prior to Employee's death. If Employee is married and a
resident of a community property state, one half of any amount due hereunder
which is the result of an amount contributed to the Plan during such marriage is
the community property of the Employee's spouse and Employee may designate a
Beneficiary or Beneficiaries to receive only the Employee's one-half interest.
If Employee shall have failed to designate a Beneficiary, or if no such
Beneficiary shall survive him or her, then such amount shall be paid to his or
her estate. Designations of Beneficiaries shall be made on the form provided by
Employer.

                                    SECTION 5

                                CHANGE IN CONTROL

         5.1      CHANGE IN CONTROL.

         For the purposes of this Plan, "Change in Control" means, the happening
of any of the following:

                  (a)      The first public announcement or public
acknowledgment (including without limitation, a report filed pursuant to Section
13(d) of the Securities Exchange Act of 1934 as amended (the "Exchange Act")) by
the Employer that a "person," as such term is used in


                                       25

Sections 13(d) and 14(d) of the Exchange Act (other than the Employer, a
Subsidiary or an employee benefit plan of the Employer or a Subsidiary, or other
controlled affiliate of the Employer, including any trustee of such plan acting
as trustee), is or has become the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act or comparable successor rule), directly or indirectly, of
securities of the Employer representing fifty percent (50%) or more of the
combined voting power of the Employer's then outstanding Common Stock entitled
to vote in the election of directors, where such person's beneficial ownership
of the Employer's Common Stock was not initiated by the Employer or approved by
the Employer's Board of Directors;

                  (b)      The sale, lease or other disposition of all or
substantially all of the assets of the Employer;

                  (c)      The merger or consolidation of the Employer with or
into another corporation not initiated by the Employer, in which the Employer is
not the surviving corporation and the stockholders of the Employer immediately
prior to the merger or consolidation fail to possess direct or indirect
beneficial ownership of more than eighty percent (80%) of the voting power of
the securities of the surviving corporation (or if the surviving corporation is
a controlled affiliate of another entity, then the required beneficial ownership
shall be determined with respect to the securities of that entity which controls
the surviving corporation and is not itself a controlled affiliate of any other
entity) immediately following such transaction, or a reverse merger not
initiated by the Employer, in which the Employer is the surviving corporation
and the stockholders of the Employer immediately prior to the reverse merger
fail to possess direct or indirect beneficial ownership of more than eighty
percent (80%) of the securities of the Employer (or if the Employer is a
controlled affiliate of another entity, then the required beneficial ownership
shall be determined with respect to the securities of that entity which controls
the Employer and is not itself a controlled affiliate of any other entity)
immediately following the reverse merger. For purposes of this Section 5.1(c),
any person who acquired securities of the Employer prior to the occurrence of a
merger, reverse merger, or consolidation in contemplation of such transaction
and who after such transaction possesses direct or indirect beneficial ownership
of at least ten percent (10%) of the Common Stock of the Employer or the
surviving corporation (or if the Employer or the surviving corporation is a
controlled affiliate, then of the appropriate entity as determined above)
immediately following such transaction shall not be included in the group of
stockholders of the Employer immediately prior to such transaction;

                  (d)      A change in the composition of the Board of Directors
of the Employer, as a result of which fewer than a majority of the directors are
Incumbent Directors. "Incumbent Directors" shall mean directors who either (i)
are directors of the Employer as of the date hereof, or (ii) are elected, or
nominated for election, to the Board of Directors of the Employer with the
affirmative votes of at least a majority of the Incumbent Directors at the time
of such election or nomination (but shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors to the Employer); or

                  (e)      Any liquidation or dissolution of the Employer.


                                       26


                                    SECTION 6

                                TRUST PROVISIONS

      6.1 Trust Agreement. The Employer may establish the Trust for the purpose
of retaining assets, including deferred Qualifying Stock Option Gain, set aside
by Employer pursuant to the Trust Agreement for payment of all or a portion of
the amounts payable pursuant to the Plan. Any benefits not paid from the Trust
shall be paid solely from Employer's general funds, and any benefits paid from
the Trust shall be credited against and reduce by a corresponding amount the
Employer's liability to Employees under the Plan. No special or separate fund,
other than the Trust Agreement, shall be established and no other segregation of
assets shall be made to assure the payment of any benefits hereunder. All Trust
Funds shall be subject to the claims of general creditors of the Employer in the
event the Employer is Insolvent as defined in Section 3 of the Trust Agreement.
The obligations of the Employer to pay benefits tinder the Plan constitute an
unfunded, unsecured promise to pay and Employees shall have no greater rights
than general creditors of the Employer.

                                    SECTION 7

                AMENDMENT, TERMINATION AND TRANSFERS BY COMMITTEE

      7.1 Amendment. The Committee shall have the right to amend this Plan at
any time and from time to time, including a retroactive amendment. Any such
amendment shall come effective upon the date stated therein, and shall be
binding on all Employees, except as otherwise provided in such amendment;
provided, however, that said amendment shall not affect adversely benefits
payable to an affected Employee without the Employee's written approval.

      7.2 Termination. The Committee shall have the right to terminate this Plan
at any time and direct the lump sum payments of all assets held by the Trust if
the Employer is not Insolvent (as defined in Article 3 of the Trust Agreement)
at that time.

7.3     TRANSFERS BY COMMITTEE.

      (a) In the event that an Employee transfers employment from the Employer
to a Subsidiary, the Committee shall have the right, but no obligation, to
direct the Trustee to transfer funds in an amount equal to the amount credited
to such Employee's Account (the "Transferred Account") to a trust established
under a Transferee Plan maintained by such Subsidiary. The Committee shall
determine, in its sole discretion, whether such transfer shall be made and the
timing of such transfer. Such transfer shall be made only if, and to the extent,
approval of such transfer is obtained from the Trustee. No transfer shall be
made unless the Subsidiary meets the requirements of subsection 7.3(b)(i) as of
the date of the transfer.

      (b) Definitions.

            (i) For purposes of this Section 7.3, "Subsidiary" shall mean any
      corporation (other than the Employer) in an unbroken chain of corporations
      beginning with the Employer, if each of the corporations other than the
      last corporation in the


                                       27

      unbroken chain owns stock possessing fifty (50) percent or more of the
      total combined voting power of all classes of stock in one of the other
      corporations in such chain.

            (ii) For purposes of this Section 7.3, "Transferee Plan" shall mean
      an unfunded, nonqualified deferred compensation plan described in Section
      201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security
      Act of 1974 ("ERISA").

      (c) No transfer shall be made under this Section 7.3 unless the Employee
for whose benefit the Transferred Account is held executes a written waiver of
all of such Employee's rights and benefits under this Plan in such form as shall
be acceptable to the Committee.

                                    SECTION 8

                                 ADMINISTRATION

      8.1 Administration. The Committee shall administer and interpret this Plan
in accordance with the provisions of the Plan and the Trust Agreement. Any
determination or decision by the Committee shall be conclusive and binding on
all persons who at any time have or claim to have any interest whatever under
this Plan. The Committee may employ legal counsel, consultants, actuaries and
agents as it may deem desirable in the administration of the Plan and may rely
on the opinion of such counsel or the computations of such consultant or other
agent. The Committee shall have the authority to delegate some or all of the
powers and responsibilities under the Plan and the Trust Agreement to such
person or persons as it shall deem necessary, desirable or appropriate for
administration of the Plan.

      8.2 Liability of Committee; Indemnification. To the maximum extent not
prohibited by law, no member of the Committee shall be liable to any person and
in any event shall be indemnified by the Employer for any action taken or
omitted in connection with the interpretation and administration of this Plan
unless attributable to his or her own bad faith or willful misconduct.

      8.3 Expenses. The costs of the establishment of the Plan and the adoption
of the Plan by Employer, including but not limited to legal and accounting fees,
shall be borne by Employer. The expenses of administering the Plan and the Trust
shall be borne by the Trust unless the Employer elects in its sole discretion to
pay some or all of those expenses; provided, however, that Employer shall bear,
and shall not be reimbursed by, the Trust for any tax liability of Employer
associated with the investment of assets by the Trust.

                                    SECTION 9

                            GENERAL AND MISCELLANEOUS

      9.1 Rights Against Employer. Except as expressly provided by the Plan, the
establishment of this Plan shall not be construed as giving to any Employee or
to any person whomsoever, any legal, equitable or other rights against the
Employer, or against its officers, directors, agents or shareholders, or as
giving to any Employee or Beneficiary any equity or


                                       28

other interest in the assets, business or shares of Employer stock or giving any
Employee the right to be retained in the employment of the Employer. Neither
this plan nor any action taken hereunder shall be construed as giving to any
Employee the right to be retained in the employ of the Employer or as affecting
the right of the Employer to dismiss any Employee. Any benefit payable under the
Plan shall not be deemed salary or other compensation for the purpose of
computing benefits under any employee benefit plan or other arrangement of the
Employer for the benefit of its Employees. Nothing in the Plan or in any
instrument executed pursuant thereto shall confer upon any Non-Employee Director
any right to continue in the service of the Employer in any capacity or shall
affect any right of the Employer, its Board of Directors or stockholders to
remove any Non-Employee Director pursuant to the Employer's By-Laws and the
provisions of the Delaware General Corporation Law.

      9.2 Assignment or Transfer. No right, title or interest of any kind in the
Plan shall be transferable or assignable by any Employee or Beneficiary or be
subject to alienation, anticipation, encumbrance, garnishment, attachment,
execution or levy of any kind, whether voluntary or involuntary, nor subject to
the debts, contracts, liabilities, engagements, or torts of the Employee or
Beneficiary. Any attempt to alienate, anticipate, encumber, sell, transfer,
assign, pledge, garnish, attach or otherwise subject to legal or equitable
process or encumber or dispose of any interest in the Plan shall be void.

      9.3 Severability. If any provision of this Plan shall be declared illegal
or invalid for any reason, said illegality or invalidity shall not affect the
remaining provisions of this Plan but shall be fully severable, and this Plan
shall be construed and enforced as if said illegal or invalid provision had
never been inserted herein.

      9.4 Construction. The article and section headings and numbers are
included only for convenience of reference and are not to be taken as limiting
or extending the meaning of any of the terms and provisions of this Plan.
Whenever appropriate, words used in the singular shall include the plural or the
plural may be read as the singular. When used herein, the masculine gender
includes the feminine gender.

      9.5 Governing Law. The validity and effect of this Plan and the rights and
obligations of all persons affected hereby shall be construed and determined in
accordance with the laws of the State of California unless superseded by federal
law.

      9.6 Payment Due to Incompetence. If the Committee receives evidence that
an Employee or Beneficiary entitled to receive any payment under the Plan is
physically or mentally incompetent to receive such payment, the Committee may,
in its sole and absolute discretion, direct the payment to any other person or
Trust which has been legally appointed by the courts or to any other person
determined by the Employer to be a proper recipient on behalf of such person
otherwise entitled to payment, or any of them, in such manner and proportion as
the Employer may deem proper. Any such payment shall be in complete discharge of
the Employer's obligations under this Plan.

      9.7 Tax. The Employer may withhold from any benefits payable under this
Plan, all federal, state, city or other taxes as shall be required pursuant to
any law or governmental regulation or ruling. In the case of an Employee's
exercise of an Eligible Stock Option and


                                       29

election to defer Qualifying Stock Option Gain, Employer shall withhold from
Employee's non-deferred Compensation and/or Qualifying Stock Option Gain, in a
manner determined by Employer, Employee's share of FICA and other employment
taxes on such deferred Qualifying Stock Option Gain. If necessary, the Committee
may reduce the deferred Qualifying Stock Option Gain in order to comply with
this Section 9.7.

      9.8 Attorney's Fees. Employer shall pay the reasonable attorney's fees
incurred by any Employee in an action brought against Employer to enforce
Employee's rights under the Plan, provided that such fees shall only be payable
in the event that the Employee prevails in such action.

      9.9 Plan Binding on Successors/Assignees. This Plan shall be binding upon
and inure to the benefit of the Employer and its successor and assigns and the
Employee and the Employee's designee and estate.

      The Employer has caused its authorized officer to execute this amended and
restated Plan this _____ day of _______________, 2002.


                                    CADENCE DESIGN SYSTEMS, INC.


                                    By:
                                           ------------------------------------
                                    Name:
                                           ------------------------------------
                                    Title:
                                           ------------------------------------


                                       30

                                   APPENDIX 1

                                 ACKNOWLEDGMENT

      The undersigned Employee hereby acknowledges that Employer has selected
him or her as a participant in the Cadence Design Systems, Inc. 1994 Deferred
Compensation Plan, subject to all terms and conditions of the Plan, a copy of
which has been received, read, and understood by the Employee in conjunction
with executing this Acknowledgment. Employee acknowledges that he or she has had
satisfactory opportunity to ask questions regarding his or her participation in
the Plan and has received satisfactory answers to any questions asked. Employee
also acknowledges that he or she has sufficient knowledge and experience in
financial and business matters to be capable of evaluating the merits and risks
of participation in the Plan. Employee understands that his or her participation
in the Plan shall not begin until this Acknowledgment has been signed by
Employee and returned to Employer.

Dated:                             Signed:
      -------------------------           ---------------------------------
                                                      Employee


                                   CADENCE DESIGN SYSTEMS, INC.



Dated:                             Signed:
      -------------------------           ---------------------------------
                                                      [Officer]






                                        i

                                   APPENDIX 2

                                 ACKNOWLEDGMENT
               (FOR DEFERRAL OF QUALIFYING STOCK OPTION GAIN ONLY)

      The undersigned Employee hereby acknowledges that Employer has selected
him or her as a participant in the portion of Cadence Design Systems, Inc. 1994
Deferred Compensation Plan pertaining to the deferral of Qualifying Stock Option
Gain (as defined in the Plan document), subject to all terms and conditions of
the Plan, a copy of which has been received, read, and understood by the
Employee in conjunction with executing this Acknowledgment. Employee
acknowledges that he or she has had satisfactory opportunity to ask questions
regarding his or her participation in the portion of the Plan pertaining to the
deferral of Qualifying Stock Option Gain and has received satisfactory answers
to any questions asked. Employee also acknowledges that he or she has sufficient
knowledge and experience in financial and business matters to be capable of
evaluating the merits and risks of such participation in the Plan. Employee
understands that his or her participation in the portion of the Plan pertaining
to the deferral of Qualifying Stock Option Gain shall not begin until this
Acknowledgment has been signed by Employee and returned to Employer.

Dated:                             Signed:
      -------------------------           ---------------------------------
                                                      Employee


                                   CADENCE DESIGN SYSTEMS, INC.



Dated:                             Signed:
      -------------------------           ---------------------------------
                                                      [Officer]





                                       ii

EX-10.12

                                                                   EXHIBIT 10.12

December 15, 2000


Dear Lavi,

On behalf of Cadence, I am pleased to offer you an interim position of Senior
Vice President and Deputy General Manager of the EDA IC Division. This position
will report to Jim Hogan, Senior Vice President Business Development and General
Manager EDA IC Division. Effective April 1, 2001, you will assume the role of
Senior Vice President and General Manager of the EDA IC Division, reporting to
Ray Bingham. As a senior officer of the company, your compensation will include
an annualized base salary of $350,000 and an annualized target bonus of
$250,000. In addition, you will be issued an option to purchase 300,000 shares
of Cadence Design Systems common stock. You will also receive an interest-free
real estate loan of $500,000, forgivable in full on February 1, 2003. In the
event you terminate employment (for reasons other than cause), prior to February
1, 2002, the loan becomes due and payable in full within six months. In the
event you terminate employment (for reasons other than cause), prior to February
1, 2003, one half of the loan ($250,000) will be due and payable within six
months after your termination date. You will be responsible for paying taxes, if
any, associated with the forgiveness of the loan and it's interest-free nature.
The loan will be secured against your home at _____________________. You will be
provided an Executive Retention Agreement, as is provided for our senior
officers, but which will also include forgiveness of the real estate loan noted
above in the event of change of control.

Please read the additional details for incentives in the attached "Employment
Terms". This offer is contingent upon successfully passing the Cadence
background verification.

Cadence offers a comprehensive Employee Benefits package including: VP vacation
plan; eight paid holidays per year and three floating paid holidays per calendar
year; 401(k); non-qualified deferred compensation (NQDC Plan); and an Employee
Stock Purchase Plan. We also provide a wide variety of health and welfare
benefits through Cadence Compositions, our cafeteria-style benefits plan. Under
this plan, you will be able to choose from several different options in each
benefit area, including Medical, Dental, Vision, Life and Disability Insurance.
Additional details on all these benefits can be found in the "Employee Benefits"
pamphlet and will be discussed in depth at your "New Employee Orientation"
during your first week of employment. Please keep in mind that Cadence is an at
will employer as described in the attached "Employment Terms".

New Employee Orientations will be conducted by Cadence Human Resources at 2670
Seely Road, Bldg. #11, every Monday at 8:00 A.M. If you are not going to be in
San Jose, you can dial-in on Tuesday at 11 A.M. PST by calling 888/710-8640 and
use the pass code "Orientation". It is important to schedule your start date on
Monday or Tuesday for payroll purposes. During this session, benefits, payroll,
policies and procedures, and the email and phone systems will be covered. Please
be prepared to provide proper identification in order to complete the United
States Immigration forms.

December 15, 2000
Lavi Lev

Lavi, if you have any questions, please do not hesitate to contact me. We look
forward to having you on our team!

Sincerely,

/s/ Ron Kirchenbauer
Sr. Vice President Employee and Workplace Services, and CIO

Cc: Ray Bingham



                                       4

December 15, 2000
Lavi Lev

                                EMPLOYMENT TERMS

NON-QUALIFIED DEFERRED COMPENSATION (NQDC) PLAN

As a participant of the Non-Qualified Deferred Compensation Plan (NQDC), you
will be eligible to defer up to 80% of your salary and 100% of your bonus income
- - without the annual IRS limitations imposed on tax-qualified retirement plans,
such as the 401 (k) plan. By deferring income into the NQDC plan, you can
substantially reduce your taxable wage base. Taxes on both the deferred income
and earnings on investments are not assessed until you begin to receive
distributions. New participants are eligible to enroll twice each year, January
1 and July 1. Participants will automatically receive enrollment and detailed
plan information during the stated enrollment periods.

VP VACATION PLAN

As a participant in the vice president vacation plan, personal time off may be
taken at the discretion of you and your manager. There will be no need to submit
vacation request forms, there will be no set limits, and no need to carry over
or accrue vacation days. In short, this flexible policy represents an efficient
and simple way to put the responsibility for time away from Cadence squarely in
your hands.

CONFIDENTIALITY AND NON-DISCLOSURE

Cadence has a policy of non-disclosure to anyone within our company of any
confidential and/or proprietary information regarding your current employer
and/or anyone else with whom you have by reason of your employment signed or are
covered by a non-disclosure or similar agreement. Accordingly, please do not
use, or disclose to Cadence any proprietary information belonging to your
employer or any other person or company with which you have signed an agreement.

EMPLOYMENT

Cadence is an at-will employer. You are not being promised any particular term
of employment. The employment relationship may be terminated by either you or
Cadence at any time for any reason, with or without cause, and with or without
notice. No one at Cadence is empowered, unless specifically authorized in
writing by the Sr. VP of Employee and Workplace Services, to make any promise,
express or implied, that employment is for any minimum or fixed term or that
cause is required for the termination of employment relationship.

Please take your time reading through this entire packet. Should you have any
questions regarding it's content, feel free to give me a call. Kindly
sign/complete and return the following documents:

Original Offer Letter and Employment Terms
Employee Profile
Employee Proprietary Information and Inventions Agreement
Employment Application


                                       5

This is to verify my acceptance of the above stated offer and employment terms:



/s/ Lavi Lev                        12/15/00                    2/5/00
- -----------------------------       ---------------------       ----------------------
                                                          
Lavi Lev                            Today's Date                Desired Start Date





                                       6

                                 PROMISSORY NOTE

$500,000.00                                                     February 6, 2001

CITY: Saratoga                                               COUNTY: Santa Clara

STATE: California

FOR VALUE RECEIVED, the undersigned, Lavi A. Lev and Sarah Lev ("BORROWER")
hereby promises to pay to the order of Cadence Design Systems, Inc., ("LENDER")
having its principal office at 2655 Seely Road, in San Jose, California in
lawful money of the United States of America, the sum of Five Hundred Thousand
Dollars and Zero Cents ($500,000.00) plus interest at the rate as described
below on the unpaid balance with principal and interest to be paid on the terms
and conditions set forth below in this Promissory Note (the "NOTE").

1.      ADDITIONAL DEFINITIONS.

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

        (b) "APPLICABLE FEDERAL RATE" shall mean the short-term applicable
Federal rate (as defined in the CODE) for monthly compounding that is in effect
as of the date of this agreement.

        (c) "PRINCIPAL RESIDENCE" shall mean the personal residence to be
purchased and used by EMPLOYEE as a principal residence within the meaning of
Section 217 of the CODE and the Regulations thereunder, which PRINCIPAL
RESIDENCE is described in the Deed of Trust attached hereto as EXHIBIT A,
provided that EMPLOYEE acquires a fifty percent (50 %) or greater interest in
such personal residence.

        (d) "TERMINATION OF EMPLOYMENT" shall mean the termination of EMPLOYEE's
employment relationship with LENDER for any reason or no reason, with or without
cause, including the death or retirement of EMPLOYEE.

        (e) "DUE DATE" shall mean the second (2nd) year anniversary of the date
of this NOTE or, if earlier occurring, the date of an event causing acceleration
under Section 6 of this NOTE.

2.      INTEREST.

        (a) Except as provided in Section 2.c., this NOTE shall bear the
interest rate of zero percent (0.00 %) per annum. Payments of interest only, if
more than zero percent (0.00 % ), are due monthly.

        (b) Except as provided in Section 2.c, no payment of principal shall be
due and payable until the DUE DATE, at which time all unpaid accrued interest
and the principal balance of this NOTE shall be due and payable.


                                       7

        (c) Upon the DUE DATE, interest on the unpaid principal balance of this
NOTE shall accrue at the APPLICABLE FEDERAL RATE, compounded monthly.

        (d) All payments shall be applied first against accrued interest, and
second against principal.

3.      FORGIVENESS/REPAYMENT OF LOAN.

        (a) For each full year lapsing from the date of this NOTE during which
EMPLOYEE has remained continuously employed by LENDER, LENDER shall forgive a
principal amount in accordance with the following schedule:

        Anniversary of Date of NOTE                Amount Forgiven

        First                                      $250,000.00

        Second                                     $250,000.00

        (b) Any amount forgiven may be deemed as compensation to EMPLOYEE on the
date forgiven. LENDER will report and withhold the amount of all such
compensation to the Internal Revenue Service and any such state and local taxing
authorities as is required by law; however, on the date an amount is forgiven
EMPLOYEE will pay to Lender an amount equal to Lender's withholding obligation
for taxes attributable to any taxable income arising out of the forgiveness of
this loan or any portion thereof.

        (c) This forgiveness schedule will cease upon the earlier of the DUE
DATE or the date of TERMINATION OF EMPLOYMENT.

        (d) Except as forgiven pursuant to this NOTE, the entire unpaid
principal balance of this NOTE, together with any accrued interest, is due and
payable as of the DUE DATE.

4.      PREPAYMENT.  EMPLOYEE may prepay all or part of this NOTE without
penalty, fee or acceleration of the due date of this NOTE.

5.      SECURITY.  This NOTE shall be secured by a Deed of Trust (attached
hereto as EXHIBIT A) the EMPLOYEE's PRINCIPAL RESIDENCE. Such Deed of Trust
shall be executed by EMPLOYEE and, if EMPLOYEE has a spouse, EMPLOYEE's spouse.

6.      ACCELERATION OF DUE DATE. The entire remaining principal balance of this
NOTE and accrued interest thereon, shall, at the election of LENDER (however,
the election to accelerate shall be automatic if an order for relief described
in Section 6.j. has been entered), become immediately due and payable upon the
occurrence of any of the following, irrespective of the DUE DATE as otherwise
defined in this NOTE:

        (a) One Hundred and Eighty Days (180) following TERMINATION OF
EMPLOYMENT of EMPLOYEE.


                                       8

        (b) The refinancing of any loan secured by a Deed of Trust on the
PRINCIPAL RESIDENCE, except when EMPLOYEE refinances the loan secured by the
first Deed of Trust on EMPLOYEE's PRINCIPAL RESIDENCE under the following
conditions:

               (i) The amount refinanced must not exceed the current principal
        balance on the loan secured by the first Deed of Trust on EMPLOYEE's
        PRINCIPAL RESIDENCE; and

               (ii) The Deed of Trust securing this NOTE must remain in effect
        and in at least the same position with respect to its priority.

        (c) The placement of any further encumbrance on the PRINCIPAL RESIDENCE,
whether voluntary or involuntary, and whether junior or senior to the Deed of
Trust securing EMPLOYEE's obligations pursuant to this NOTE.

        (d) The sale, conveyance, alienation, or other transfer by EMPLOYEE of
all or any portion of its interest in the PRINCIPAL RESIDENCE, whether voluntary
or involuntary, by act of law or otherwise (except to a living or revocable
trust of which EMPLOYEE is a trustee).

        (e) Any other change that removes EMPLOYEE as a holder of record of
title to the PRINCIPAL RESIDENCE.

        (f) EMPLOYEE ceases to occupy the PRINCIPAL RESIDENCE as EMPLOYEE's
principal residence for any reason.

        (g) Any failure on the part of the EMPLOYEE to make any payment when the
same is due.

        (h) Any failure on the part of the EMPLOYEE (i) to perform or observe
any of its covenants or other obligations under the Deed of Trust securing this
NOTE, and (ii) to commence and proceed diligently to cure such default within
fifteen (15) days after written notice thereof is given by LENDER, and in any
event to cure such default within thirty (30) days after the date on which such
notice is given.

        (i) The destruction or condemnation of the real property subject to the
Deed of Trust or any material portion thereof.

        (j) If there is entered against EMPLOYEE an order for relief under Title
11 of the United States Code (Bankruptcy).

        (k) Any default by EMPLOYEE of EMPLOYEE's covenants or other obligations
under this NOTE.

7.      MAXIMUM INTEREST AMOUNT. If fulfillment of any obligation under this
NOTE shall be prohibited by law at the time performance of such obligation is
due, the obligation to be fulfilled shall be reduced to the maximum not so
prohibited, and if from any circumstance LENDER should ever receive as interest
an amount that would exceed the highest lawful interest rate applicable to this
NOTE, such amount as would be excessive interest shall be applied to the


                                       9

reduction of the unpaid principal balance and not to the payment of interest.
This provision shall control every other provision of this NOTE and all other
agreements between EMPLOYEE and LENDER.

8.      COLLECTION COSTS BORNE BY EMPLOYEE. In the event of any failure on the
part of EMPLOYEE to make any payment when the same is due, LENDER shall be
entitled to recover from EMPLOYEE all costs of effecting collection of the same,
including reasonable attorneys' fees and all costs of collection. Unpaid
principal and interest subject to collection shall bear interest at the
APPLICABLE FEDERAL RATE.

9.      CODE SECTION 7872 COVENANTS OF EMPLOYEE. EMPLOYEE covenants the
following:

        (a) EMPLOYEE will apply the loan proceeds exclusively towards payoff of
existing loans secured against EMPLOYEE's PRINCIPAL RESIDENCE:

        (b) EMPLOYEE will perform substantial services for LENDER throughout the
term of this NOTE.

        (c) EMPLOYEE reasonably expects to be entitled to and will itemize
deductions for each year during which this loan is outstanding.

10.     GOVERNING LAW.  This NOTE shall be enforced in accordance with the laws
of the State of Texas and shall be construed in accordance therewith without
regard to principles of conflicts of laws.

11.     NOTICE. All notices or other communications required or given hereunder
shall be in writing and shall be deemed effectively given when presented
personally or on the date of receipt if sent by courier service or U.S. Mail
(certified or registered, postage prepaid, return receipt requested) to the
parties at the addresses given below or such other addresses as the parties may
hereafter designate in writing. The date shown on the courier's confirmation of
delivery or return receipt shall be conclusive as to the date of receipt.

               EMPLOYEE :    Lavi A. Lev



               LENDER:       Cadence Design Systems, Inc.
                             2655 Seely Road
                             San Jose, CA

12.     MERGER AND INTEGRATION. This NOTE (including the Deed of Trust referred
to in Section 5) contains the entire agreement between EMPLOYEE and LENDER on
the terms of this loan, and is the complete, final, and exclusive embodiment of
their agreement with regard to this loan. EMPLOYEE acknowledges and represents
that this NOTE is entered into without reliance on any promise or representation
other than those expressly contained herein and that this NOTE cannot be
modified except in a writing signed by both EMPLOYEE and LENDER.


                                       10

13.     WAIVER. Failure by LENDER to enforce any provision or provisions of this
NOTE shall not in any way be construed as a waiver of any such provision or
provisions, nor prevent LENDER thereafter from enforcing each and every other
provision of this NOTE. The rights granted LENDER herein are cumulative and
shall not constitute a waiver of LENDER's right to assert all other legal
remedies available to it under the circumstances.

14.     SUCCESSORS. This NOTE shall be binding upon and shall inure to the
benefit of the parties hereto and their respective representatives, heirs,
administrators, successors and assigns except as otherwise provided herein.

15.     NO ASSIGNMENT. In no event shall the benefits of this NOTE be
transferred or assigned by EMPLOYEE.

        IN WITNESS WHEREOF, EMPLOYEE has set its hand to this NOTE effective as
of the date set forth above.


/s/ Lavi A. Lev                               /s/ Sarah Lev
- -----------------------------                 -----------------------------
Lavi A. Lev                                   Sarah Lev


STATE OF CALIFORNIA   )
                      )ss
COUNTY OF SANTA CLARA)

On   2-10-01   before me,   Judy Coulter       personally appeared
   -----------            --------------------
Lavi A. Lev and Sarah Lev known to me (or proved to me on the basis of
satisfactory evidence) to be the person(s) whose name(s) are subscribed to the
within instrument and acknowledged to me that they executed the same in their
authorized capacity(ies), and that by their signatures) on the instrument the
person(s), or the entity upon behalf of which the person(s) acted, executed the
instrument.

WITNESS my hand and official seal

Signature  /s/ Judy Coulter
          --------------------------
Commission Expires Mar. 11, 2004






                                       11

EX-10.16

                                                                   EXHIBIT 10.16

                                RESIDENTIAL LEASE

        This Residential Lease is entered in as of March 1, 2003 by and between
849 COLLEGE AVENUE, INC., a California corporation ("Landlord"), and KEVIN
BUSHBY and ELIZABETH BUSHBY (collectively "Tenant"). Landlord and Tenant hereby
agree as follows:

1.      PROPERTY: Landlord rents to Tenant and Tenant rents from Landlord, the
real property and improvements described as: _________________________
("Premises"), including the following personal property: all stereo and
television systems and rack to be included, large screen TV in family room and
all satellite dishes and receivers, all window coverings, draperies and washer
and dryer. Tenant acknowledges that all systems and appliances will be received
in "as is" condition.

2.      TERM: The term begins on March 1, 2003 ("Commencement Date") and shall
terminate on February 29, 2004 at 11:59 p.m., subject to Tenant's Options to
extend set forth in Paragraph 35 hereto. Any holding over after the term of this
Lease expires, with Landlord's consent, shall create a month-to-month tenancy
which either party may terminate by giving written notice to the other at least
thirty (30) days prior to the intended termination date. Such notice may be
given on any date. Rent shall be at a rate equal to rent for the immediately
preceding month, unless otherwise notified by Landlord, payable in advance. All
other terms and conditions of this Lease shall remain in full force and effect
during the holdover period.

3.      RENT: Tenant agrees to pay rent ("Rent") at the rate of Seven Thousand
Five Hundred Dollars and 00/100 ($7,500) per month for the initial term of the
Lease. Rent shall be payable in advance no later than the first (1st) day of
each calendar month, and is delinquent on the next day. If the Commencement Date
falls on any day other than the first day of the month, rent shall be prorated
based on a 30-day period and paid in advance. If Tenant has paid one full
month's rent in advance of the Commencement Date, rent for the second calendar
month shall be prorated based on a 30-day period. The rent shall be paid to 849
College Avenue, Inc., at 2655 Seely Avenue, Building 5, San Jose, California
95134 Attention: Cadence Real Estate, or at any other location specified by
Landlord in writing to Tenant.

4.      SECURITY DEPOSIT:

        (a) Tenant agrees to pay Fifteen Thousand Dollars ($15,000) as a
security deposit ("Security Deposit"). All or any portion of the Security
Deposit may be used, as reasonably necessary, to: (1) cure Tenant's default in
payment of Rent, Late Charges, NSF fees, or other sums due; (2) repair damage,
excluding ordinary wear and tear, caused by Tenant or by a guest or licensee of
Tenant; (3) clean the Premises, if necessary, upon termination of tenancy; (4)
replace or return personal property or appurtenances. Subject to Landlord's
offset for nonpayment, the Security Deposit shall not be used by Tenant in lieu
of payment of last month's rent. If all or any portion of the Security Deposit
is used during the tenancy, Tenant agrees to reinstate the Security Deposit to
its full amount within five (5) days after written notice is delivered to
Tenant. Within three (3) weeks after Tenant vacates the Premises, Landlord shall
(1) furnish Tenant an itemized statement indicating the amount of any Security
Deposit received

and the basis for its disposition, and (2) return any remaining portion of the
Security Deposit to Tenant. No interest will be paid on the Security Deposit,
unless required by local law.

        (b) Notwithstanding the provisions of this Paragraph 4, in the event
that Tenant fails to timely make any payment of Rent or other monetary payment
under this Lease ("Tenant's Monetary Default"), Landlord shall immediately
offset Tenant's Monetary Default against the Security Deposit on the date upon
which Tenant's Monetary Default occurs. If the Security Deposit is insufficient
to offset the amount of Tenant's Monetary Default, Landlord shall offset from
Kevin Bushby's earnings from Cadence Design Systems, Inc. ("Cadence") an amount
equal to Tenant's Monetary Default, on the date upon which Tenant's Monetary
Default occurs. Furthermore, as a condition of this Lease, Tenant shall execute
and deliver to Cadence a Request for Automatic Payment of Rent Through Payroll
Deduction in the form attached hereto as Exhibit A. In the event Kevin Bushby
revokes the agreement authorizing the automatic payment of rent to Landlord via
payroll deduction, or in the event that agreement is otherwise invalidated or
rendered unenforceable, Landlord has the right to, and may at its option,
immediately terminate the Lease.

5.      PARKING: The right to parking is included in the Rent charged pursuant
to Paragraph 3. Driveways or other exterior areas designed for parking are to be
used for parking operable motor vehicles, except for trailers, boats, campers,
buses or trucks (other than pick-up trucks). Parking areas are to be kept clean.
Vehicles leaking oil, gas or other motor vehicle fluids shall not be parked on
the Premises. Mechanical work or storage of inoperable vehicles is not allowed
in parking areas or elsewhere on the Premises.

6.      LATE CHARGE/NSF CHECKS: Tenant acknowledges that either late or
non-payment of Rent or issuance of a non-sufficient funds ("NSF") check may
cause Landlord to incur costs and expenses, the exact amount of which are
extremely difficult and impractical to determine. These costs may include, but
are not limited to, processing, enforcement and accounting expenses. If any
installment of Rent due from Tenant is not received by Landlord on the date due,
or if a check is returned NSF, Tenant shall pay to Landlord, respectively, or
Landlord may immediately deduct from the Security Deposit or Tenant's Cadence
earnings an additional sum of $50.00 as a "Late Charge" and $25.00 as a NSF fee,
either or both of which shall be deemed additional Rent. Landlord and Tenant
agree that these charges represent a fair and reasonable estimate of the costs
Landlord may incur by reason of Tenant's late or NSF payment. Any Late Charge or
NSF fee due shall be paid with the current installment of Rent. Landlord's
acceptance of any Late Charge or NSF fee shall not constitute a waiver as to any
default of Tenant. Landlord's right to collect a Late Charge or NSF fee shall
not be deemed an extension of the date Rent is due under Paragraph 3, nor
prevent Landlord from exercising any other rights and remedies under this Lease,
including, without limitation, under Paragraph 4(b) hereof, or as otherwise
provided by law.

7.      CONDITION OF PREMISES: Tenant has examined the Premises, all furniture,
furnishings, appliances and landscaping, if any, and fixtures, including smoke
detector(s). Tenant is accepting the Premises in "as-is" condition.

8.      NEIGHBORHOOD CONDITIONS: Tenant is advised to satisfy him or herself as
to neighborhood or area conditions, including schools, proximity and adequacy of
law enforcement,


                                       13

crime statistics, registered felons or offenders, fire protection, other
governmental services, proximity to commercial, industrial or agricultural
activities, existing and proposed transportation, construction and development
which may affect noise, view, or traffic, airport noise, noise or odor from any
source, wild and domestic animals, other nuisances, hazards, or circumstances,
facilities and condition of common areas, conditions and influences of
significance to certain cultures and/or religions, and personal needs,
requirements and preferences of Tenant.

9.      UTILITIES: Tenant agrees to pay for all utilities and services for the
Premises.

10.     OCCUPANTS: The Premises are for the sole use as a personal residence by
the following named persons only: Kevin Bushby, Elizabeth Bushby and family.

11.     MAINTENANCE: Tenant shall properly use, operate, and safeguard the
Premises, including if applicable, any landscaping, furniture, furnishings, and
appliances, and all mechanical, electrical, gas and plumbing fixtures, and keep
them clean and sanitary. Tenant, at all times during the term and at Tenant's
sole cost and expense, shall keep the Premises and every part thereof in good
condition and repair, including, but not limited to, capital repairs and repairs
to and maintenance of the swimming pool. Tenant shall maintain and water the
garden, landscaping, trees, and shrubs. Landlord shall have no obligation to
make any repairs to or undertake any maintenance of the Premises during the
initial or any extension Term of this Lease.

12.     ALTERATIONS: Tenant shall not make any alterations in or about the
Premises without Landlord's prior written consent, including: painting,
wallpapering, adding or changing locks, installing antenna or satellite dish.
Notwithstanding the foregoing, Tenant, at Tenant's sole cost and expense, shall
be permitted to make cosmetic alterations costing less than Ten Thousand Dollars
($10,000) per year without Landlord's prior consent.

13.     KEYS/LOCKS: Tenant will receive prior to the Commencement Date key(s) to
the Premises and remote control device(s) for garage door/gate opener(s), if
applicable. If Tenant re-keys existing locks or opening devices, Tenant shall
immediately deliver copies of all keys to Landlord. Tenant shall pay all costs
and charges related to loss of any keys or opening devices. Tenant may not
remove locks, even if installed by Tenant.

14.     ENTRY: Tenant shall make the Premises available to Landlord or its
representative for the purpose of entering to make necessary or agreed repairs,
decorations, alterations, or improvements, or to supply necessary or agreed
services, or to show the Premises to prospective or actual purchasers, tenants,
mortgagees, lenders, appraisers, or contractors. Landlord and Tenant agree that
twenty-four (24) hours notice (oral or written) shall be reasonable and
sufficient notice. In an emergency, Landlord or its representative may enter the
Premises at any time without prior notice.

15.     SIGNS: Tenant authorizes Landlord to place For Sale/Lease signs on the
Premises during the final sixty (60) days of the term of this Lease.

16.     ASSIGNMENT/SUBLETTING: Tenant shall not sublet all or any part of the
Premises, or assign or transfer this Lease or any interest in it, without the
prior written consent of Landlord,


                                       14

which consent shall not be unreasonably withheld. Unless such consent is
obtained, any assignment, transfer or subletting of the Premises or this Lease
or tenancy, by voluntary act of Tenant, operation of law, or otherwise, shall be
null and void, and, at the option of Landlord, terminate this Lease. Any
proposed assignee, transferee or sublessee shall submit to Landlord an
application and credit information for Landlord's approval, and, if approved,
sign a separate written agreement with Landlord and Tenant. Landlord's consent
to any one assignment, transfer, or sublease, shall not be construed as consent
to any subsequent assignment, transfer or sublease, and does not release Tenant
of Tenant's obligation under this Lease.

17.     POSSESSION: If Landlord is unable to deliver possession of the Premises
on Commencement Date, such Date shall be extended to date on which possession is
made available to Tenant.

18.     TENANT'S OBLIGATIONS UPON VACATING PREMISES: Upon termination of this
Lease, Tenant shall: (a) give Landlord all copies of all keys or opening devices
to the Premises; (b) vacate the Premises and surrender it to Landlord empty of
all persons; (c) vacate any/all parking and/or storage space; (d) deliver the
Premises to Landlord in the same condition as received on the Commencement Date,
ordinary wear and tear and permitted alterations excepted; (e) clean the
Premises; (f) give written notice to Landlord of Tenant's forwarding address,
and (g) repair any damage to the Premises caused by removal of Tenants' fixtures
and fittings. All improvements installed by Tenant, with or without Landlord's
consent, shall become the property of Landlord upon termination.

19.     BREACH OF CONTRACT/EARLY TERMINATION: In addition to any obligations
established by Paragraph 18, in event of termination by Tenant prior to
completion of the original term of this Lease, Tenant shall also be responsible
for the immediate payment of lost rent, rental commissions, advertising
expenses, and painting costs necessary to ready Premises for re-rental by offset
against the Security Deposit or Tenant's Cadence earnings, if not paid in
advance by Tenant. This Paragraph 19 shall not apply to an early termination
election pursuant to Paragraph 34.

20.     TEMPORARY RELOCATION: Tenant agrees, upon demand of Landlord, to
temporarily vacate the Premises for a reasonable period, to allow for
fumigation, or other methods, to control wood destroying pests or organisms, or
other repairs to the Premises. Tenant agrees to comply with all instructions and
requirements necessary to prepare the Premises to accommodate pest control,
fumigation or other work, including bagging or storage of food and medicine, and
removal of perishables and valuables. Tenant shall only be entitled to a credit
of rent equal to the per diem rent for the period of time Tenant is required to
vacate the Premises.

21.     DAMAGE TO PREMISES: If, by no fault of Tenant, the Premises are totally
or partially damaged or destroyed by fire, earthquake, accident or other
casualty, which render the Premises uninhabitable, either Landlord or Tenant may
terminate this Lease by giving the other written notice. Rent shall be abated as
of date of damage. The abated amount shall be the current monthly rent prorated
on a 30-day basis. If this Lease is not terminated, Landlord shall promptly
repair the damage, and rent shall be reduced based on the extent to which the
damage interferes with Tenant's reasonable use of the Premises. If damage occurs
as a result of an act of


                                       15

Tenant or Tenant's guests, only Landlord shall have the right of termination,
and no reduction in rent shall be made.

22.     INSURANCE: Tenant's personal property and vehicles are not insured by
Landlord or, if applicable, owner's association, against loss or damage due to
fire, theft, vandalism, rain, water, criminal or negligent acts of others, or
any other cause. Tenant is to carry Tenant's own insurance (Renter's Insurance)
to protect Tenant from any such loss.

23.     WATERBEDS: Tenant shall not use or have waterbeds on the Premises
unless: (a) Tenant obtains a valid waterbed insurance policy; (b) Tenant
increases the security deposit in an amount equal to one-half of one month's
rent; and (c) the bed conforms to the floor load capacity of the Premises.

24.     WAIVER: The waiver of any breach or default shall not be construed as a
continuing waiver of the same or any subsequent breach or default.

25.     NOTICE: Notices may be served by hand, by regular, certified or
registered mail with postage prepaid at the following address, or at any other
location subsequently designated:

        Landlord:                                  Tenant:

        849 College Avenue, Inc.                   ____________________
        2655 Seely Avenue                          ____________________
        San Jose, CA 95134,
        Attn:  Cadence Real Estate

26.     TENANT ESTOPPEL CERTIFICATE: Tenant shall execute and return a tenant
estoppel certificate delivered to Tenant by Landlord or Landlord's agent within
three (3) days after its receipt. The tenant estoppel certificate shall be in
reasonable form and shall acknowledge, among other things, that this Lease is
unmodified and in full force, or in full force as modified, and state, among
other things, the modifications. Failure to comply with this requirement shall
be deemed Tenant's acknowledgment that the tenant estoppel certificate is true
and correct, and may be relied upon by a lender or purchaser.

27.     JOINT AND INDIVIDUAL OBLIGATIONS: If there is more than one Tenant, each
one shall be individually and completely responsible for the performance of all
obligations of Tenant under this Lease, jointly with every other Tenant, and
individually, whether or not in possession.

28.     DATA BASE DISCLOSURE: NOTICE: The California Department of Justice,
sheriff's departments, police departments serving jurisdictions of 200,000 or
more, and many other local law enforcement authorities maintain for public
access a data base of the locations of persons required to register pursuant to
paragraph (1) of subdivision (a) of Section 290.4 of the Penal Code. The data
base is updated on a quarterly basis and a source of information about the
presence of these individuals in any neighborhood. The Department of Justice
also maintains a Sex Offender Identification Line through which inquiries about
individuals may be made. This is a "900" telephone service. Callers must have
specific information about individuals they are


                                       16

checking. Information regarding neighborhoods is not available through the "900"
telephone service.

29.     DEFAULT. The occurrence of any one or more of the following events shall
constitute a default of the Lease by Tenant:

        (a)    The vacation or abandonment of the Premises by Tenant.

        (b) The failure by Tenant to make any payment of Rent or any other
payment required to be made by Tenant under this Lease, as and when due.

        (c) The failure by Tenant to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Tenant
other than monetary obligations referred to in subparagraph (b), above, where
such failure shall continue for a period of fifteen (15) days after written
notice thereof from Landlord to Tenant; provided, however, that if the nature of
Tenant's noncompliance is such that more than fifteen (15) days are reasonably
required for its cure, then Tenant shall not be deemed to be in default if
Tenant commenced such cure within said fifteen (15) day period and thereafter
diligently pursues such cure to completion. To the extent permitted by law, such
fifteen (15) day notice shall constitute the sole and exclusive notice required
to be given to Tenant under applicable unlawful detainer statutes.

30.     LANDLORD'S REMEDIES. In the event of any default or breach of this Lease
by Tenant, Landlord may at any time thereafter, without notice or demand and
without limiting Landlord in the exercise of any right or remedy which Landlord
may have by reason of such default:

        (a) Terminate Tenant's right to possession of the Premises by any lawful
means, in which case this Lease and the term hereof shall terminate and Tenant
shall immediately surrender possession of the Premises to Landlord. In such
event Landlord shall be entitled to recover by immediate offset against the
Security Deposit or Tenant's Cadence earnings from Tenant all damages incurred
by Landlord by reason of Tenant's default including, but not limited to, the
cost of recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys' fees,
and any real estate commission actually paid; the worth at the time of award by
the court having jurisdiction thereof of the amount by which the unpaid Rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Tenant proves could be reasonably avoided.

        (b) Maintain Tenant's right to possession in which case this Lease shall
continue in effect whether or not Tenant shall have vacated or abandoned the
Premises. In such event Landlord shall be entitled to enforce all of Landlord's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder. The Landlord has the remedy described in California
Civil Code Section 1951.4.

        (c) Pursue any other remedy now or hereafter available to Landlord under
the laws of the State of California. Unpaid installments of rent and other
unpaid monetary obligations of Tenant under the terms of this Lease shall bear
interest from the date due at the maximum rate then allowable by law.


                                       17

31.     ATTORNEY'S FEES: In any action or proceeding arising out of this Lease,
the prevailing party between Landlord and Tenant shall be entitled to reasonable
attorney's fees and costs.

32.     ENTIRE CONTRACT: Time is of the essence. All prior agreements between
Landlord and Tenant are incorporated in this Lease which constitutes the entire
contract. It is intended as a final expression of the parties' agreement, and
may not be contradicted by evidence of any prior agreement or contemporaneous
oral agreement. The parties further intend that this Lease constitutes the
complete and exclusive statement of its terms, and that no extrinsic evidence
whatsoever may be introduced in any judicial or other proceeding, if any,
involving this Lease. Any provision of this Lease which is held to be invalid
shall not affect the validity or enforceability of any other provision in this
Lease.

33.     AGENCY.  There are no agency relationship(s) for this transaction.

34.     OPTION TO TERMINATE. Landlord or Tenant, upon one hundred eighty (180)
days prior written notice to the other, may terminate this Lease for any cause
and upon the expiration of said one hundred eighty (180) day period, all of
Tenant's right, title and interest in and to the Premises shall forever cease
(including, without limitation, Tenant's rights under Paragraph 35 hereof). Upon
such termination, the provisions of Paragraph 18 of the Lease shall apply.

35.     OPTION(S) TO EXTEND.

        (a) So long as no default exists under the terms of this Lease, Landlord
hereby grants to Tenant the option to extend the term of this Lease for three
(3) additional twelve (12) month periods (each, an "Option", collectively, the
"Options") commencing when the applicable prior term expires upon each and all
of the following terms and conditions:

        (i) To exercise an Option, Tenant must give written notice of such
election to Landlord at least one hundred twenty (120) days prior to the date
that the Option period would commence (the "Option Notice"). If the Option
Notice is not delivered in accordance with the terms of this Lease, the Option
shall automatically expire. Each Option may only be exercised consecutively.

        (ii) Any extension of the term pursuant to an Option ("Option Term")
shall be under the same terms and conditions as provided in this Lease except
for the provisions of this Lease granting the Options and adjustment to the
Rent.

        (iii) The Options are personal to the original Tenant, and cannot be
assigned or exercised by anyone other than said original Tenant and only while
the original Tenant is in full possession of the Premises.

        (iv) The monthly Rent of an Option Term shall be calculated using the
method set forth in subparagraph (b) below.

        (b)    Market Rental Value Adjustments.


                                       18

        (i) On the commencement date of each Option Term, the Rent shall be
adjusted to the Market Rental Value ("MRV") of the Premises. Within fifteen (15)
days of receipt by Landlord of Tenant's Option Notice, Landlord shall select an
appraiser ("Appraiser") with at least ten (10) years of current experience in
the appraisal of similar real property in Santa Clara County, California. The
Appraiser shall hold an MAI designation (or such other designation as may be the
pre-eminent appraisal designation) and shall not have had, within the last five
(5) years previous to such appointment, a legal, business, financial,
professional or personal relationship with either Landlord or Tenant, except in
relation to the determination of prior MRV for this Lease. The Appraiser shall
determine the MRV within thirty (30) days of the date of Tenant's Option Notice.
In determining the MRV, the Appraiser shall be guided by the following
principles: the MRV shall be determined by reference to residential properties
in the Santa Clara County area most comparable to the Premises and shall take
into account, but not be limited to, the size, age and quality of the
improvements. The MRV determined by the Appraiser shall be in writing and shall
become the Rent for the succeeding option term; provided that the new monthly
MRV-based Rent shall not be less than the Rent payable for the month immediately
preceding the rent adjustment. If Tenant is unwilling to pay the Rent as
adjusted by the MRV (or if no adjustment is made in accordance with the
immediately preceding sentence), Tenant shall so notify Landlord within ten (10)
days of receipt of the written determination of the new Rent and the Option (and
all future Option(s)) shall automatically terminate with no further rights and
obligations on either party with respect to the same, and this Lease shall
terminate on the scheduled expiration date. The Landlord shall pay all costs and
expenses of the Appraiser.

36.     OPTION TO PURCHASE.

        (a) Grant. Landlord grants to Tenant an option to purchase the Premises
(the "Purchase Option") on the terms and conditions set forth in this Paragraph
36.

        (b) Purchase Notice. To exercise the Purchase Option, Tenant must give
Landlord written notice exercising the Purchase Option (the "Purchase Notice")
at least one hundred twenty-one (121) days prior to the expiration of the Term
(as the Term may be extended pursuant to Section 35 above). Tenant's delivery to
Landlord of the Purchase Notice shall form an agreement to purchase and sell the
Premises (the "Agreement to Purchase"), which shall consist of the terms and
conditions in this Paragraph 36, as supplemented at Landlord's option by a
standard realtor association form purchase and sale agreement to be mutually
acceptable to the parties, as reasonably modified to acknowledge the use and
occupancy of the Premises by Tenant since the Commencement Date (the "Purchase
and Sale Agreement").

        (c) Appraisal; Fair Market Rent. The purchase price (the "Purchase
Price") to be paid by Tenant to Landlord for the Premises shall be the greater
of (i) $5,500,000, or (ii) the then fair market value (the "Fair Market Value")
of the Premises. The Fair Market Value of the Premises will be determined as
follows. Within fifteen (15) days following the date of Tenant's Purchase
Notice, Landlord and Tenant each shall select an appraiser with the
qualifications set forth in Paragraph 35. If either of the parties fails to
appoint an appraiser within the specified 15-day period, the appraiser timely
appointed shall make the appraisal on his or her own. The two appraisers
appointed hereunder shall timely meet to determine the Fair Market Value of the
Premises based on the most probable price which the Premises should bring in a
competitive and open market in an arms-length transaction with reference to
comparable residential properties in


                                       19

the Santa Clara County area most comparable to the Premises and taking into
account, without limitation, the size, age and quality of the improvements of
the Premises. The two appraisers shall deliver a written appraisal to the
parties within thirty (30) days following the appointment of the second
appraiser. If the two appraisers are unable to reach agreement during said
30-day period, the two appraisers shall appoint a third appraiser within ten
(10) days. Within fifteen (15) days following the appointment of the third
appraiser, the appraisers shall deliver a written appraisal to the parties,
which appraisal shall be based on the majority opinion of the three appraisers.
All appraisers appointed pursuant to this Paragraph 36 shall have the
qualifications set forth in Paragraph 35 above. Each party shall be responsible
for the cost of the appraiser it appoints and one-half of the cost of the third
appraiser (if one is appointed), except as provided in Paragraph 36(d) below.

        (d) Purchase Price. If the Fair Market Value contained in the appraisal
delivered hereunder is greater than $5,500,000, the Fair Market Value shall be
the Purchase Price of the Premises. In such event and only in such event, Tenant
may elect not to proceed with the purchase of the Premises by giving written
notice to Landlord within fifteen (15) days of receipt of the appraisal. Upon
delivery of such notice, the Purchase Option shall automatically terminate with
no further rights and obligation on either party with respect to the same, other
than Tenant's obligation to reimburse Landlord for Landlord's appraiser costs,
which reimbursable appraiser costs shall constitute additional Rent under this
Lease.

        (e) Close of Purchase Transaction; Payment of Purchase Price. Unless
Tenant elects to cancel the purchase of the Premises pursuant to Paragraph 36(d)
above, the close of the purchase transaction shall occur through an escrow
established by the parties no later than forty-five (45) days following delivery
of the appraisal, unless Landlord and Tenant agree to another closing date. The
Purchase Price for the Premises shall be paid to the appointed escrow holder all
in cash on the close of escrow and shall be reduced by the cost of any cosmetic
or capital improvements made to the Premises by Tenant in accordance with the
terms of this Lease or otherwise approved by the Landlord. This Lease shall
continue in full force and effect up to the close of escrow.

        (f) Personal Nature. The Purchase Option is personal to Tenant and may
not be transferred to, or exercised for the benefit of, any third party. If this
Lease is terminated as a result of a breach or default by Tenant, or if Tenant
transfers this Lease with or without Landlord's written consent, the Purchase
Option shall expire and be of no further force or effect. If Tenant is in breach
or default under this Lease (i) on the date the Purchase Notice is given, or
(ii) on the Closing Date, the same shall constitute a breach or default under
the Agreement to Purchase and, at Landlord's election, Landlord may terminate
the sale of the Premises.

                  [Remainder of page intentionally left blank]




                                       20

    The parties have executed this Lease as of the date first written above.


TENANT:                                           LANDLORD:

                                                  849 COLLEGE AVENUE, INC.
/s/ Kevin Bushby
- ------------------------
KEVIN BUSHBY
                                                  By:  /s/ R.L. Smith McKeithen
                                                       ------------------------
                                                          R.L. Smith McKeithen
/s/ Elizabeth Bushby                              Its:  Secretary
- ------------------------                               ------------------------
ELIZABETH BUSHBY






                                       21

                                    EXHIBIT A

         REQUEST FOR AUTOMATIC PAYMENT OF RENT THROUGH PAYROLL DEDUCTION



                                       22

EX-10.67

                                                                   EXHIBIT 10.67

                   AMENDMENT TO EXECUTIVE SEPARATION, RELEASE
                            AND CONSULTING AGREEMENT

        This Amendment to Executive Separation, Release and Consulting Agreement
(this "Amendment") is made and entered into as of the 23rd day of August, 2002,
by and between Ronald R. Barris (the "Executive") and Cadence Design Systems,
Inc. (the "Company").

                                   WITNESSETH

        WHEREAS, the Executive and the Company have entered into that certain
Executive Separation, Release and Consulting Agreement dated as of December 3,
2001 (the "Agreement"), which is incorporate herein by this reference; and

        WHEREAS, the Executive and the Company desire to amend the Agreement as
more particularly set forth herein.

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

        1.     Consulting. Section 3a of the Agreement is hereby amended and
restated in its entirety as follows:

               (X) $376,000.00, less taxes and standard withholdings required by
               law to be withheld, and deductions requested by Executive, to be
               paid out in twelve equal payments on the fifteenth of each month,
               beginning December 15, 2001; (Y) a bonus in the amount of
               $403,146.23, less taxes and withholdings required by law to be
               withheld, and amounts requested by him to be deducted, including
               (i) $ 21,855.00, representing the depreciated cost of the Halcon
               Agenda Race Track Desk, Halcon Elliptical Conference Table and
               (5) Harrington leather chairs (which are currently located in
               Executive's former office at the Company's Chelmsford,
               Massachusetts campus and which the Company agrees to move, at the
               Company's cost, to Executive's property located at 8 Winterberry
               Path, Acton, Massachusetts); and (ii) $ 53,146.23, representing
               the remaining principal and accrued interest (as of February 15,
               2002) due under the promissory note delivered by the Executive to
               the Company dated as of July 15, 2000, on or about February 15,
               2002, so long as Executive continues in his part-time employment
               capacity with the Company through that date and has not in any
               way breached this Agreement; and (Z) a bonus in the amount of
               $569,813.45 for consulting services performed during the period
               from

               December 3, 2001 through August 16, 2002, less taxes and standard
               withholdings required by law to be withheld, and deductions
               requested by Executive, to be paid on or about August 22, 2002;

        2.     Ratification. The Executive and the Company hereby ratify and
confirm the Agreement, as modified by this Amendment. In addition, the Executive
hereby releases the Company as of the date hereof in accordance with the
provisions of Section 8 of the Agreement with the same effect as if such Section
8 were restated herein in its entirety.

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

CADENCE DESIGN SYSTEMS, INC.


By: /s/ William Porter
Name:    William Porter
Title:  Sr. VP & CFO



/s/ Ronald R. Barris
Ronald R. Barris



                                       24

EX-21.01

                                                                   EXHIBIT 21.01

                          CADENCE DESIGN SYSTEMS, INC.
                         SUBSIDIARIES OF THE REGISTRANT

The Registrant's subsidiaries and the country in which each is incorporated or
organized, are as follows:

                                                            
1Chip Silicon Systems, Inc.                                    U.S.A.
849 College Avenue, Inc.                                       U.S.A.
Accent S.r.l.(1)                                               Italy
Altius Solutions, Inc.                                         U.S.A.
Ambit Design Systems, Inc.                                     U.S.A.
Arkos Design Systems, Inc.                                     U.S.A.
Beijing Cadence Electronics Technology Co., Ltd.               China
Cadence (Barbados) FSC Inc.                                    Barbados
Cadence China Ltd.                                             Hong Kong
Cadence China Technologies Pte. Ltd.                           Hong Kong
Cadence Credit Corporation                                     U.S.A.
Cadence Design Foundry, Inc.                                   U.S.A.
Cadence Design Foundry UK Ltd.                                 United Kingdom
Cadence Design Service Y.K.                                    Japan
Cadence Design Systems (Canada) Limited                        Canada
Cadence Design Systems (Cyprus) Limited                        Cyprus
Cadence Design Systems (India) Private Ltd.                    India
Cadence Design Systems (Ireland) Limited                       Ireland
Cadence Design Systems (Israel) Limited                        Israel
Cadence Design Systems (Japan) B.V.                            Netherlands
Cadence Design Systems (S) Pte Ltd.                            Singapore
Cadence Design Systems (Taiwan) B.V.                           Netherlands
Cadence Design Systems AB                                      Sweden
Cadence Design Systems Asia Ltd.                               Hong Kong
Cadence Design Systems B.V.                                    Netherlands
Cadence Design Systems GmbH                                    Germany
Cadence Design Systems I B.V.                                  Netherlands
Cadence Design Systems Limited                                 United Kingdom
Cadence Design Systems Ltd.                                    Hungary
Cadence Design Systems S.A.S.                                  France
Cadence Design Systems S.r.l.                                  Italy
Cadence Design Systems Business Services Limited               Hungary
Cadence Design Technologies PTE Limited(2)                     Singapore
Cadence International Sales Corporation                        U.S. Virgin Islands
Cadence Korea Ltd.                                             Korea
Cadence Methodology Services Company Limited                   Taiwan
Cadence Netherlands B.V.                                       Netherlands
Cadence Receivables Consolidation Corporation                  U.S.A.
Cadence Receivables Corporation                                U.S.A.
Cadence Taiwan, Inc.                                           Taiwan
Cadence Technology Inc.                                        U.S.A.
Cadence Technology Limited                                     Ireland
CadMOS Design Technology, Inc.                                 U.S.A.
Castlewilder                                                   Ireland
Celestry Design Technologies, Inc.                             Korea
Celestry Design Technologies, Inc.                             U.S.A.
Celestry Design Technologies (Singapore) PTE Ltd.              Singapore
Celestry Design Technologies (Taiwan) Co., Ltd.                Taiwan
Celestry Design Technologies GmbH                              Germany



                                                            
Celestry Design Technologies SAS                               France
Celestry Micro Electronics (Beijing) Co., Ltd.                 China
Cooper & Chyan Technology, Inc.                                U.S.A.
Daffodil Acquisition II, Inc.                                  U.S.A.
Daffodil Acquisition LLC                                       U.S.A.
Daffodil Acquisition, Inc.                                     U.S.A.
Design Acceleration, Inc.                                      U.S.A.
Detente Technology, Inc.                                       U.S.A.
Diablo Lighting, Inc.                                          U.S.A.
Diablo Research Company LLC                                    U.S.A.
DSM Technologies, Inc.                                         U.S.A.
JTA Research Incorporated                                      U.S.A.
Microsim Corporation                                           U.S.A.
Orcad, Inc.                                                    U.S.A.
Parvimmo S.C.I.                                                France
Project Black, Inc.                                            U.S.A.
Project Don, Inc.                                              U.S.A.
Quickturn Design Systems Asia, Inc.                            U.S.A.
Quickturn Design Systems FSC, Inc.                             Barbados
Quickturn Design Systems GmbH                                  Germany
Quickturn Design Systems International, Inc.                   U.S.A.
Quickturn Design Systems, Inc.                                 U.S.A.
River Oaks Place Associates                                    U.S.A.
Seely Avenue Corp.                                             U.S.A.
Seely Properties, Inc.                                         U.S.A.
Silicon Perspective Corporation                                Canada
Silicon Perspective Corporation                                U.S.A.
Silicon Perspective (Holding) Corporation                      U.S.A.
Silicon Perspective Ltd.                                       Israel
Silicon Perspective S.A.R.L.                                   France
Simon Software, Inc.                                           U.S.A.
Simplex Solutions GmbH                                         Germany
Simplex Solutions Ltd.                                         Israel
Simplex Solutions KK                                           Japan
Simplex Solutions SAS                                          France
Simplex Solutions UK Ltd.                                      United Kingdom
Simplex Special Purpose, Inc.                                  U.S.A.
Speedsim, Inc.                                                 U.S.A.
SpinCircuit, Inc.                                              U.S.A.
SpinCircuit India                                              India
Symbionics Group Limited                                       United Kingdom
Synthesia AB                                                   Sweden
Tality, LP                                                     U.S.A.
Tality Canada B.V.                                             Netherlands
Tality Canada Corporation                                      Canada
Tality Holdings BV                                             Netherlands
Tality Holdings Inc.                                           U.S.A.
Tality India Services Private Ltd.                             India
Tality Transition Corporation                                  U.S.A.
UniCAD, Inc.                                                   U.S.A.
Westport Technologies                                          Canada
Zhongguanun - Cadence Institute of Software Technology
Management Company, Ltd.                                       China



- ----------
(1) Cadence has 49% ownership.
(2) Cadence Design Systems (Ireland) Limited owns 19% of this entity.

EX-23.01

                                                                   EXHIBIT 23.01

                          INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Cadence Design Systems, Inc.:

We consent to the incorporation by reference in the registration statements
(No.s 333-103250, 333-102648, 333-101693, 333-101692, 333-88390, 333-87674,
333-85080, 333-82044, 333-75874, 333-65116, 333-56898, 333-69589, 333-33330,
333-93609, 333-85591, 333-69589, 333-71717, 333-65529, 333-61029, 333-40047,
333-34599, 333-27109, 333-18963, 333-53913, 33-48371 and 33-43025) on Form S-8
of Cadence Design Systems, Inc., of our report dated January 21, 2003, except as
to Note 20, which is as of February 5, 2003, relating to the consolidated
balance sheet of Cadence Design Systems, Inc., as of December 28, 2002 and the
consolidated income statement and consolidated statements of stockholders'
equity and cash flows for the year then ended, and the 2002 financial statement
schedule, appearing elsewhere in this Form 10-K.

Our report refers to our audit of the adjustments and disclosures that were
applied to revise the 2001 and 2000 consolidated financial statements as more
fully described in Note 2 to the consolidated financial statements. However, we
were not engaged to audit, review, or apply any procedures to the 2001 and 2000
consolidated financial statements of Cadence Design Systems, Inc. other than
with respect to such adjustments and disclosures.


/s/ KPMG LLP


Mountain View, California
March 12, 2003

EX-23.02

                                                                   EXHIBIT 23.02

              INFORMATION REGARDING CONSENT OF ARTHUR ANDERSEN LLP

        Section 11(a) of the Securities Act of 1933, as amended (the "Securities
Act"), provides that if any part of a registration statement at the time such
part becomes effective contains an untrue statement of a material fact or an
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, any person acquiring a security
pursuant to such registration statement (unless it is proved that at the time of
such acquisition such person knew of such untruth or omission) may assert a
claim against, among others, every accountant who has consented to be named as
having prepared or certified any part of the registration statement, or as
having prepared or certified any report or valuation which is used in connection
with the registration statement, with respect to the statement in such
registration statement, report or valuation which purports to have been prepared
or certified by the accountant.

        On March 22, 2002, Cadence Design Systems, Inc. ("Cadence") determined
not to renew the engagement of Arthur Andersen LLP ("Andersen") as its
independent auditor and retained KPMG LLP as Cadence's independent auditors with
respect to the audit of Cadence's consolidated financial statements for its
fiscal year ending December 28, 2002. This Form 10-K is incorporated by
reference into Cadence's previously filed registration statements on Form S-8
(File Nos. 33-17722, 33-22652, 33-32373, 33-34910, 33-36110, 33-36674, 33-43025,
33-45001, 33-48371, 33-53913, 333-18963, 333-27109, 333-34599, 333-40047,
333-61029, 333-65529, 333-71717, 333-85591, 333-93609, 333-69589, 333-56898,
333-33330, 333-65116, 333-75874, 333-82044, 333-85080, 333-87674, 333-88390,
333-101692, 333-101693, 333-102648 and 333-103250) (the "Registration
Statements") and, for purposes of determining liability under the Securities
Act, is deemed a new registration statement for each Registration Statement into
which it is incorporated by reference. After reasonable efforts, Cadence has
been unable to obtain Andersen's written consent to the incorporation by
reference into the Registration Statements of Andersen's audit report with
respect to Cadence's consolidated financial statements for the fiscal years
ended December 30, 2000 and December 29, 2001. Under these circumstances, Rule
437a under the Securities Act permits Cadence to file this Form 10-K without a
written consent from Andersen. As a result, Andersen will not have any liability
under Section 11(a) of the Securities Act for any untrue statements of material
fact contained in the financial statements audited by Andersen or any omissions
of a material fact required to be stated therein. Accordingly, you would be
unable to assert a claim against Andersen under Section 11(a) of the Securities
Act for any purchases of securities under the Registration Statements made on or
after the date of this Form 10-K. In addition, the ability of Andersen to
satisfy any claims (including claims arising from Andersen's provision of
auditing and other services to Cadence) may be limited as a practical matter due
to recent events regarding Andersen. To the extent provided in Section
11(b)(3)(C) of the Securities Act, however, other persons who are liable under
Section 11(a) of the Securities Act, including the Cadence's officers and
directors, may still rely on Andersen's original audit reports as being made by
an expert for purposes of establishing a due diligence defense under Section
11(b) of the Securities Act.