10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2003
OR
	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to
Commission file number 1-10606

CADENCE DESIGN SYSTEMS, INC.

(Exact name of Registrant as Specified in Its Charter)

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

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

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

      On October 31, 2003, 263,048,739 shares of the registrant’s common stock, $0.01 par value, were outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	CONDENSED CONSOLIDATED BALANCE SHEETS
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 4.1
EXHIBIT 4.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

CADENCE DESIGN SYSTEMS, INC.

INDEX

			Page
PART I.		FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheets: September 27, 2003 and December 28, 2002		3
		Condensed Consolidated Statements of Operations: Three and Nine Months Ended September 27, 2003 and September 28, 2002		4
		Condensed Consolidated Statements of Cash Flows: Nine Months Ended September 27, 2003 and September 28, 2002		5
		Notes to Condensed Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		51
	Item 4.	Controls and Procedures		54
PART II.		OTHER INFORMATION
	Item 1.	Legal Proceedings		55
	Item 2.	Changes in Securities and Use of Proceeds		57
	Item 3.	Defaults Upon Senior Securities		58
	Item 4.	Submission of Matters to a Vote of Security Holders		58
	Item 5.	Other Information		58
	Item 6.	Exhibits and Reports on Form 8-K		58
		Signatures		59

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

			September 27,			December 28,
			2003			2002
			(Unaudited)
Current Assets:
	Cash and cash equivalents		$	394,203		$	371,327
	Short-term investments			30,146			24,286
	Receivables, net			288,658			313,968
	Inventories			15,141			9,614
	Prepaid expenses and other			60,674			39,448
		Total current assets		788,822			758,643
Property, plant and equipment, net				394,889			434,491
Acquired intangibles, net				1,126,111			883,339
Installment contract receivables, net				126,434			113,185
Other assets				235,069			248,603
Total Assets			$	2,671,325		$	2,438,261
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Current portion of capital lease obligations		$	801		$	1,609
	Accounts payable and accrued liabilities			311,905			297,399
	Deferred revenue			219,859			212,882
		Total current liabilities		532,565			511,890
Long-Term Liabilities:
	Long-term portion of capital lease obligations			80			659
	Convertible notes			420,000			- - - -
	Long-term debt			- - - -			52,000
	Other long-term liabilities			267,118			214,407
		Total long-term liabilities		687,198			267,066
Stockholders’ Equity:
	Common stock and capital in excess of par value			917,231			1,100,380
	Deferred stock compensation			(45,516	)		(44,426	)
	Retained earnings			565,496			607,460
	Accumulated other comprehensive income (loss)			14,351			(4,109	)
		Total stockholders’ equity		1,451,562			1,659,305
Total Liabilities and Stockholders’ Equity			$	2,671,325		$	2,438,261

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

3

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

			Three Months Ended						Nine Months Ended
			September 27,			September 28,			September 27,			September 28,
			2003			2002			2003			2002
Revenue:
	Product		$	151,678		$	210,286		$	453,590		$	655,399
	Services			33,773			33,992			100,962			114,284
	Maintenance			83,025			82,958			246,237			247,087
		Total revenue		268,476			327,236			800,789			1,016,770
Costs and Expenses:
	Cost of product			5,075			14,630			20,305			62,552
	Cost of services			22,192			28,078			69,790			89,628
	Cost of maintenance			12,662			16,007			41,666			49,775
	Marketing and sales			80,758			103,216			249,638			296,167
	Research and development			84,179			84,647			257,677			241,092
	General and administrative			18,814			26,267			65,598			89,349
	Amortization of acquired intangibles			27,790			22,034			79,093			59,731
	Amortization of deferred stock compensation (A)			12,548			10,465			31,685			21,412
	Mentor Graphics settlement			(14,500	)		- - - -			(14,500	)		- - - -
	Restructuring and other charges			62,874			- - - -			64,226			73,231
	Write-off of acquired in-process technology			2,000			6,600			7,500			34,000
		Total costs and expenses		314,392			311,944			872,678			1,016,937
Income (loss) from operations				(45,916	)		15,292			(71,889	)		(167	)
	Interest expense			(2,392	)		(663	)		(3,706	)		(1,563	)
	Other income (expense), net			2,295			171			(2,989	)		(3,748	)
Income (loss) before provision (benefit) for income taxes				(46,013	)		14,800			(78,584	)		(5,478	)
	Provision (benefit) for income taxes			(31,018	)		6,569			(36,620	)		11,267
Net income (loss)			$	(14,995	)	$	8,231		$	(41,964	)	$	(16,745	)
Basic net income (loss) per share			$	(0.06	)	$	0.03		$	(0.16	)	$	(0.07	)
Diluted net income (loss) per share			$	(0.06	)	$	0.03		$	(0.16	)	$	(0.07	)
Weighted average common shares outstanding				266,755			267,300			267,605			256,461
Weighted average common and potential common shares outstanding – – assuming dilution				266,755			271,437			267,605			256,461
(A) Amortization of deferred stock compensation would be further classified as follows:
Cost of services			$	1,111		$	1,360		$	2,459		$	2,131
Marketing and sales				3,413			3,594			10,115			7,482
Research and development				7,356			4,258			17,311			7,472
General and administrative				668			1,253			1,800			4,327
			$	12,548		$	10,465		$	31,685		$	21,412

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

4

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

					Nine Months Ended
					September 27,			September 28,
					2003			2002
Cash and Cash Equivalents at Beginning of Period					$	371,327		$	206,311
Cash Flows from Operating Activities:
	Net loss					(41,964	)		(16,745	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation and amortization				143,347			148,735
		Amortization of deferred stock compensation				31,685			21,412
		Net investment gain on sale, equity (income) loss and write-down				81			(22,410	)
		Write-off of long-term investment securities				6,095			13,408
		Write-off of acquired in-process technology				7,500			34,000
		Write-off of inventory				- - - -			9,338
		Non-cash restructuring and other charges				19,035			7,490
		Provisions for losses on trade accounts receivable				16,598			8,433
		Other non-cash items				3,309			2,175
		Changes in operating assets and liabilities, net of effect of acquired businesses:
			Receivables			69,414			(39,573	)
			Proceeds from the sale of receivables			33,661			162,797
			Inventories			(5,527	)		1,238
			Prepaid expenses and other			(11,357	)		3,977
			Installment contract receivables			(74,949	)		(211,184	)
			Other assets			20,842			(41,672	)
			Accounts payable and accrued liabilities			(74,743	)		(42,596	)
			Deferred revenue			(13,604	)		(22,065	)
			Other long-term liabilities			(21,102	)		33,264
				Net cash provided by operating activities		108,321			50,022
Cash Flows from Investing Activities:
	Proceeds from sale and maturities of short-term investments – – available-for-sale					- - - -			47,695
	Purchases of short-term investments – – available-for-sale					- - - -			(10,051	)
	Proceeds from sale of equipment					9,147			- - - -
	Purchases of property, plant and equipment					(52,353	)		(95,817	)
	Investment in venture capital partnerships and equity investments					(34,341	)		(6,193	)
	Net cash paid in business combinations and acquired intangibles					(143,136	)		(40,226	)
				Net cash used for investing activities		(220,683	)		(104,592	)
Cash Flows from Financing Activities:
	Proceeds from credit facility					45,000			95,000
	Principal payments on credit facility and capital leases					(98,424	)		(1,150	)
	Proceeds from issuance of convertible notes					420,000			- - - -
	Payments of convertible notes issuance costs					(11,463	)		- - - -
	Proceeds from sale of common stock warrants					56,441			- - - -
	Purchase of convertible notes hedge					(134,637	)		- - - -
	Proceeds from issuance of common stock					54,323			73,608
	Purchases of treasury stock					(210,952	)		(158,187	)
				Net cash provided by financing activities		120,288			9,271
Effect of exchange rate changes on cash						14,950			3,123
Increase (decrease) in cash and cash equivalents						22,876			(42,176	)
Cash and Cash Equivalents at End of Period					$	394,203		$	164,135

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

5

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

      The Condensed Consolidated Financial Statements included in this Quarterly Report have been prepared by Cadence Design Systems, Inc., or Cadence, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements are meant to be, and should be, read in conjunction with the Consolidated Financial Statements and the notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002.

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

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

      Certain amounts in the Condensed Consolidated Financial Statements for the three and nine months ended September 28, 2002 have been reclassified to conform to the September 27, 2003 presentation. Cadence does not consider such reclassifications to be significant.

NOTE 2. NEW ACCOUNTING STANDARDS

      In January 2003, the Financial Accounting Standards Board, or 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. On October 8, 2003, the FASB deferred the implementation date for the consolidation requirements of FIN 46 as it relates to variable interest entities that existed before February 1, 2003. The consolidation requirements of FIN 46 will apply to variable interest entities that existed prior to February 1, 2003 in financial statements issued for periods ending after December 15, 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 determined the adoption of FIN 46 will not have a material effect on its consolidated financial position, results of operations or cash flows.

      In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 requires companies to classify and measure certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that requires a transfer of assets and that meets the definition of liabilities in Concepts Statement 6 and other recognition criteria in SFAS No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises,” be reported as a liability. SFAS No. 150 also requires that certain obligations that could be settled by issuance of an entity’s equity but lack other characteristics of equity be reported as liabilities even though the obligation does not meet the definition of liabilities in Concepts

6

Statement No. 6. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for periods beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on our consolidated financial position, results of operations or cash flows.

NOTE 3. ACQUISITIONS

Verplex Systems, Inc.

      In August 2003, Cadence acquired Verplex Systems, Inc., or Verplex, a privately-held developer of verification technology. Cadence purchased Verplex to acquire key personnel and technology. The aggregate initial purchase price was $85.1 million, which included the payment of cash, the fair value of assumed options and acquisition costs. The purchase price and goodwill will increase if certain performance goals related to bookings and product development are achieved over a period of approximately three years following the acquisition. Verplex’s results of operations and the estimated fair values of the assets acquired and liabilities assumed have been included in Cadence’s Condensed Consolidated Financial Statements from the date of acquisition.

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

				(In thousands)
Current assets				$	18,092
Property, plant and equipment					495
Other assets					387
Acquired intangibles:
	Existing technology (five-year weighted-average useful life)				16,000
	Backlog (three-year weighted-average useful life)				5,400
	Patents (five-year weighted-average useful life)				4,400
	In-process technology				2,000
	Non-compete agreements (three-year weighted-average useful life)				1,700
	Trademarks (five-year weighted-average useful life)				1,100
Goodwill					53,998
		Total assets acquired			103,572
Current liabilities					9,074
Long-term liabilities					9,400
		Total liabilities assumed			18,474
			Net assets acquired	$	85,098

      The $2.0 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 write-off of acquired in-process technology is a component of operating expenses in the Condensed Consolidated Statements of Operations.

      The $54.0 million of goodwill was assigned to the Product segment. The goodwill is not expected to be deductible for income tax purposes.

Innotech Corporation

      In June 2003, Cadence acquired distribution rights to certain customers, certain assets and key personnel from Innotech Corporation, or Innotech, a publicly-traded developer and distributor of software, electronic devices and semiconductor manufacturing equipment in Japan. Concurrent with this acquisition, Cadence also modified its distributor agreement with Innotech. Prior to the acquisition, Cadence licensed most of its software products in Japan through Innotech, of which Cadence was, and continues to be, a 15% stockholder.

7

Cadence now directly licenses its software products to customers for which Cadence acquired the distribution rights from Innotech.

      Cadence considered 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,” in concluding that a business was acquired in this transaction. Cadence also determined that the distributor arrangement and the agreement to acquire a portion of Innotech’s business should be combined for the purposes of determining the total initial purchase price, as both of these agreements with Innotech were entered into concurrently.

      The aggregate purchase price of this acquisition was $78.7 million, which includes cash and acquisition costs. The estimated fair values of the assets acquired and liabilities assumed have been determined, in part, by a third party appraiser through established valuation techniques and included in Cadence’s Condensed Consolidated Financial Statements from the date of acquisition.

      The following table summarizes the preliminary allocation of the purchase price for the Innotech distribution rights and assets and the estimated amortization period for the acquired intangibles:

				(In thousands)
Receivables, net				$	27,409
Acquired intangibles:
	Distribution rights (ten-year weighted-average useful life)				30,100
	Customer contracts and related relationships (ten-year weighted-average useful life)				8,600
	Non-compete agreements (four-year weighted-average useful life)				1,800
Goodwill					36,104
		Total assets acquired			104,013
Current liabilities					25,276
		Total liabilities assumed			25,276
			Net assets acquired	$	78,737

      The $36.1 million of goodwill was assigned to the Product segment. The goodwill is expected to be deductible for income tax purposes.

Get2Chip.com, Inc.

      In April 2003, Cadence acquired Get2Chip.com, Inc., or Get2Chip, a privately-held developer of nanometer-scale synthesis technology. Cadence purchased Get2Chip to acquire key personnel and technology. The aggregate initial purchase price was $79.1 million, which included the payment of cash, the fair value of assumed options and acquisition costs. The purchase price and goodwill will increase if certain performance goals related to bookings and product development are achieved in each of the three years following the acquisition. Get2Chip’s results of operations and the estimated fair values of the assets acquired and liabilities assumed have been included in Cadence’s Condensed Consolidated Financial Statements from the date of acquisition.

8

      The following table summarizes the preliminary allocation of the purchase price for Get2Chip and the estimated amortization period for the acquired intangibles:

				(In thousands)
Current assets				$	3,795
Property, plant and equipment					270
Other assets					95
Acquired intangibles:
	Existing technology (six-year weighted-average useful life)				13,300
	In-process technology				3,800
	Patents (six-year weighted-average useful life)				2,600
	Non-compete agreements (three-year weighted-average useful life)				2,100
	Other intangibles (one-year weighted-average useful life)				400
Goodwill					57,215
		Total assets acquired			83,575
Current liabilities					4,515
		Total liabilities assumed			4,515
			Net assets acquired	$	79,060

      The $3.8 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 write-off of acquired in-process technology is a component of operating expenses in the Condensed Consolidated Statements of Operations.

      The $57.2 million of goodwill was assigned to the Product segment. The goodwill is not expected to be deductible for income tax purposes.

Celestry Design Technologies, Inc.

      In January 2003, Cadence acquired Celestry Design Technologies, Inc., or Celestry, a privately-held developer of silicon modeling tools and full-chip circuit simulation technology. Cadence purchased Celestry to acquire key personnel and technology. The aggregate initial purchase price was $64.4 million, which included the payment of cash, the fair value of assumed options and acquisition costs. The purchase price and goodwill will increase if certain performance goals related to bookings and product development are achieved in each of the first two years following the acquisition. Celestry’s results of operations and the estimated fair values of the assets acquired and liabilities assumed have been included in Cadence’s Condensed Consolidated Financial Statements from the date of acquisition.

9

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

				(In thousands)
Current assets				$	18,253
Property, plant and equipment					871
Acquired intangibles:
	Existing technology (four-year weighted-average useful life)				15,700
	Maintenance agreements (four-year weighted-average useful life)				4,700
	Patents (four-year weighted-average useful life)				1,900
	In-process technology				1,700
	Trademarks (one-year weighted-average useful life)				700
Goodwill					39,284
		Total assets acquired			83,108
Current liabilities					11,269
Other long-term liabilities					7,434
		Total liabilities assumed			18,703
			Net assets acquired	$	64,405

      The $1.7 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 Condensed Consolidated Statements of Operations.

      The $39.3 million of goodwill was assigned to the Product segment. The goodwill is not expected to be deductible for income tax purposes.

Other Acquisitions

      For the nine months ended September 27, 2003, Cadence also acquired one other company for an initial aggregate purchase price of $16.0 million, which included the payment of cash and acquisition costs. The purchase price and goodwill will increase if certain performance goals related to bookings, product development and employee retention are achieved in each of the three years following the acquisition.

      Goodwill of $7.6 million recorded in connection with this acquisition was assigned to the Product segment and is not expected to be deductible for income tax purposes.

      Comparative pro forma financial information for acquisitions completed in 2003 has not been presented because the results of operations were not material to Cadence’s Condensed Consolidated Financial Statements.

Acquisition-Related Earnouts

      In the nine months ended September 27, 2003, Cadence recorded an additional $22.4 million of goodwill that consisted of $2.4 million in cash and 1.7 million shares, valued at $20.0 million. In addition, Cadence recorded $2.1 million in additional deferred stock compensation representing 0.2 million shares. The additional goodwill and deferred stock compensation related to the achievement of certain performance goals related to bookings, product development and employee retention resulting from acquisitions. The goodwill is not expected to be deductible for income tax purposes.

10

NOTE 4.     ACQUIRED INTANGIBLES

      Described below is goodwill, other acquired intangibles and purchased software as of September 27, 2003 and December 28, 2002:

	2003		2002
	(In thousands)
Goodwill	$	864,827	$	663,197
Other acquired intangibles, net		259,131		219,203
Purchased software, net		2,153		939
Total	$	1,126,111	$	883,339

Goodwill

      The changes in the carrying amount of goodwill for the nine months ended September 27, 2003 are as follows:

	Product			Services
	Segment			Segment		Total
	(In thousands)
Balance as of December 28, 2002	$	533,862		$	129,335	$	663,197
Goodwill resulting from acquisitions during the year		158,062			- - - -		158,062
Additions due to contingent consideration		54,607			- - - -		54,607
Adjustments to goodwill		(11,039	)		- - - -		(11,039	)
Balance as of September 27, 2003	$	735,492		$	129,335	$	864,827

Other Acquired Intangibles

      Other acquired intangibles with finite lives are classified as of September 27, 2002 and December 28, 2002 as follows:

	As of September 27, 2003							As of December 28, 2002
						Weighted							Weighted
						Average							Average
	Gross Carrying		Accumulated			Remaining		Gross Carrying		Accumulated			Remaining
	Amount		Amortization			Useful Life		Amount		Amortization			Useful Life
	(In thousands)							(In thousands)
Existing Technology	$	511,420	$	(323,831	)		3.1 Years	$	453,261	$	(258,185	)		2.9 Years
Agreements and Relationships		40,600		(9,946	)		2.1 Years		23,500		(4,170	)		3.2 Years
Distribution Rights		30,100		(752	)		9.8 Years		- - - -		- - - -			- - - -
Tradenames/ trademarks/patents		5,100		(1,395	)		3.3 Years		3,300		(547	)		3.3 Years
Other		14,466		(6,631	)		2.1 Years		6,869		(4,825	)		1.5 Years
Total other acquired intangibles	$	601,686	$	(342,555	)			$	486,930	$	(267,727	)

      For the three months ended September 27, 2003, amortization of other acquired intangible assets was $27.1 million as compared to $21.7 million for the same period in 2002. For the nine months ended September 27, 2003, amortization of other intangible assets was $79.1 million as compared to $58.4 million for the same period in 2002.

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Estimated amortization expense is as follows:
	Three months ended January 3, 2003	$	25,148
	Year ended December 25, 2004		88,609
	Year ended December 31, 2005		63,002
	Year ended December 30, 2006		33,100
	Year ended December 29, 2007		21,472
	Thereafter		27,800
Total estimated amortization expense		$	259,131

NOTE 5. LONG-TERM NON-MARKETABLE INVESTMENT SECURITIES

      Cadence’s long-term non-marketable investment securities are carried at cost and are included in Other assets in the Condensed Consolidated Balance Sheets. During the third quarter, Cadence made long-term non-marketable security investments of $24.9 million. If Cadence determines that an other-than-temporary decline in value exists in a long-term non-marketable investment security, Cadence writes down the investment to its fair value. In the three and nine months ended September 27, 2003, Cadence recorded write-downs of long-term non-marketable investment securities of $1.0 million and $6.1 million, respectively. In the nine months ended September 28, 2002, Cadence recorded write-downs of long-term non-marketable investment securities of $13.4 million. Cadence did not have write-downs of long-term non-marketable investment securities during the third quarter of 2002. These write-downs are included in Other expense, net, in the Condensed Consolidated Statement of Operations.

NOTE 6. RESTRUCTURING AND OTHER CHARGES

      In 2001, Cadence announced a plan of restructuring, or the 2001 Restructuring, intended to reduce costs by eliminating excess personnel and consolidating facilities and resources. The restructuring activities were in response 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 also aimed at certain other business and infrastructure groups. The 2001 Restructuring was accounted for in accordance with EITF No. 94-3.

      In July 2003, Cadence announced an additional plan of restructuring, or the 2003 Restructuring, intended to reduce costs and realize efficiencies by eliminating excess personnel and consolidating facilities and resources throughout the company. The facilities and asset-related portions of this restructuring were accounted for in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” The severance and benefits charges were accounted for in accordance with SFAS No. 112 “Employers Accounting for Postemployment Benefits – An Amendment of FASB Statements No. 4 and 43.”

      During the nine months ended September 27, 2003, Cadence recorded $64.2 million of restructuring and other charges, consisting of $26.7 million of asset-related charges, $24.7 million of severance and benefits and $12.8 million net facilities costs related to space reductions and closure of excess facilities.

      Of the $26.7 million of asset-related charges, $10.8 million was directly related to the 2001 and 2003 Restructurings and $15.9 million was for other charges. The $10.8 million of asset-related restructuring charges were incurred primarily in connection with a fee owed to a third party due to a reduction in headcount, write-off of leasehold improvements for facilities included in the 2003 Restructuring, disposal of excess equipment and contract termination costs. The $15.9 million of other charges primarily related to decreases in the useful lives and abandonment of certain long-lived assets.

      The 2003 Restructuring will result in the termination of employment of approximately 560 employees. Costs resulting from this restructuring included severance payments, severance related benefits and outplacement services. All terminations and termination benefits associated with this restructuring were communicated

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to the affected employees prior to September 27, 2003, with all termination benefits expected to be paid by October 2, 2004.

      The $12.8 million of net facilities costs primarily related to space reductions at six sites and closure of five sites under the 2003 Restructuring, along with further consolidation of two sites included in prior restructuring activities. Cadence ceased use of all facilities included in the 2003 Restructuring prior to September 27, 2003.

      Since 2001, Cadence has recorded facilities consolidation charges under the 2001 Restructuring of $68.9 million, related to space reductions or closures of 32 sites. As of September 27, 2003, 22 of these sites had been vacated and space reductions occurred at ten sites.

      Closure and space reduction costs included payments required under leases, less any applicable estimated sublease income after the properties were abandoned, lease buyout costs and costs to maintain facilities during the period after abandonment. To estimate the lease loss, which is the loss after Cadence’s cost recovery efforts from subleasing a building, certain assumptions were made related to the: (1) time period over which the relevant building would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges.

      As of September 27, 2003, Cadence has accrued the low end of the lease loss range related to all worldwide restructuring activities initiated since 2001, which is estimated to be $24.1 million. This amount will be adjusted in the future based upon changes in the assumptions used to estimate the lease loss. As of September 27, 2003, Cadence has estimated that the high end of the lease loss range could be as much as $48.4 million if sublease rental rates decrease in applicable markets or if it takes longer than currently expected to find a suitable tenant to sublease the facilities.

      The following tables present the activity associated with restructuring and other charges for the three and nine months ended September 27, 2003:

		For the Three Months Ended September 27, 2003
					Severance
		Asset-			And			Excess
		Related			Benefits			Facilities			Total
		(In thousands)
	Balance, June 28, 2003	$	1,361		$	3,283		$	39,460		$	44,104
	Restructuring and other charges, net		26,339			23,874			12,661			62,874
	Non-cash charges		(18,984	)		147			(270	)		(19,107	)
	Cash charges		(761	)		(15,743	)		(2,900	)		(19,404	)
Balance, September 27, 2003		$	7,955		$	11,561		$	48,951		$	68,467

		For the Nine Months Ended September 27, 2003
					Severance
		Asset-			And			Excess
		Related			Benefits			Facilities			Total
		(In thousands)
	Balance, December 28, 2002	$	3,155		$	23,802		$	53,442		$	80,399
	Restructuring and other charges, net		26,701			24,707			12,818			64,226
	Reclassifications		(757	)		279			478			- - - -
	Non-cash charges		(20,015	)		326			654			(19,035	)
	Cash charges		(1,129	)		(37,553	)		(18,441	)		(57,123	)
Balance, September 27, 2003		$	7,955		$	11,561		$	48,951		$	68,467

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      The $68.5 million of restructuring and other costs that are accrued as of September 27, 2003, consist of $39.0 million in Accounts payable and accrued liabilities and $29.5 million in Other long-term liabilities in the Condensed Consolidated Balance Sheets.

NOTE 7.     CONVERTIBLE NOTES

      In August 2003, Cadence issued $420.0 million principal amount of Zero Coupon Zero Yield Senior Convertible Notes due 2023, or the Notes, to two initial purchasers in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A, for which Cadence received net proceeds of approximately $408.5 million after transaction fees of approximately $11.5 million. The Notes were issued by Cadence at approximately 98% of par and bear no interest. The Notes are convertible into Cadence common stock initially at a conversion price of $15.65 per share, which would result in an aggregate of 26.8 million shares issued upon conversion, subject to adjustment upon the occurrence of specified events. Cadence may redeem for cash all or any part of the Notes on or after August 15, 2008 for 100.00% of the principal amount. The holders may require Cadence to repurchase for cash all or any portion of their Notes on August 15, 2008 for 100.25% of the principal amount, on August 15, 2013 for 100.00% of the principal amount or on August 15, 2018 for 100.00% of the principal amount. The Notes do not contain any restrictive financial covenants.

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

      In addition, in the event of a significant change in Cadence’s corporate ownership or structure, the holders may require Cadence to repurchase all or any portion of their Notes for 100% of the principal amount. Upon a significant change in Cadence’s corporate ownership or structure, in certain circumstances, Cadence may choose to pay the repurchase price in cash, shares of Cadence’s common stock or a combination of cash and shares of Cadence’s common stock.

      Cadence has agreed to file a shelf registration statement with respect to the resale of the Notes and the common stock issuable upon the conversion of the Notes with the SEC within 90 days from the initial issuance of the Notes.

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

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

      The costs incurred in connection with the convertible notes hedge transactions and the proceeds from the sales of the warrants are included as a net reduction in common stock and capital in excess of par in the accompanying Condensed Consolidated Balance Sheet as of September 27, 2003, in accordance with the guidance in EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” Subsequent changes in the fair value of these convertible notes hedge and warrant transactions will not be recognized as long as the instruments remain classified in equity. The convertible notes and hedge and warrant transactions are expected to reduce the potential dilution from the conversion of the Notes. If the convertible notes hedge transactions settle in Cadence’s favor, Cadence could be exposed to credit risk related to the other party.

      Subsequent to the issuance of the Notes, Cadence terminated its senior credit facilities.

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NOTE 8. CONTINGENCIES

Legal Proceedings

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

      On July 21, 1999, Mentor Graphics Corporation, or Mentor, filed suit against Quickturn Design Systems, Inc., or Quickturn, in the U.S. District Court for the District of Delaware, alleging that Quickturn’s Mercury™ 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 99-5464 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™ product infringed these patents. Mentor subsequently filed Civil Action No. C 02-1426 SI, realleging that Quickturn’s Mercury™ hardware emulation systems infringed U.S. Patent No. 5,777,489. This action was consolidated with Civil Action No. C 99-5464 SI. This action was dismissed on September 30, 2003, upon motion of the parties after Mentor, Cadence and their respective affiliated parties entered into a settlement agreement effective September 23, 2003, or the Mentor Settlement. Under the Mentor Settlement, Cadence, Mentor and their respective affiliated parties settled all outstanding litigation between the companies relating to emulation and acceleration systems. The companies also agreed that, for a period of seven years, neither will sue the other over patented emulation and acceleration technology. Mentor also paid Cadence $18.0 million in cash under the Mentor Settlement. This amount, net of related legal costs, was recorded during the three months ended September 27, 2003.

      On March 24, 2000, Mentor and Meta Software Corporation 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 dismissed on September 30, 2003, upon motion of the parties pursuant to the Mentor Settlement.

      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 00-01030 SI, C 00-03291 SI and C 02-1426 SI) began on

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January 6, 2003. On February 19, 2003, the jury found in favor of Quickturn and Cadence on all remaining claims before them. Mentor filed motions to set aside the jury’s verdict on the patent counts. On July 30, 2003, the Court entered orders denying Mentor’s motions to set aside the jury’s verdict. This action was dismissed on September 30, 2003, upon motion of the parties pursuant to the Mentor Settlement.

      On July 29, 2002, IKOS Systems, Inc., a subsidiary of Mentor, filed a complaint against Cadence and Quickturn in the U.S. District Court for the District of Delaware, Civil Action No. 02-1335, accusing Quickturn’s Palladium™ 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 Delaware court ordered the action to be transferred to the U.S. District Court for the Northern District of California, where it was assigned Civil Action No. C 02-5343 JF. On January 6, 2003, Quickturn and Cadence filed a motion to amend their Answer and Counterclaims in this suit to add a counterclaim alleging that IKOS’ VStation products infringe Quickturn’s U.S. Patent No. 5,036,473. On February 24, 2003, the Court granted Quickturn and Cadence’s motion. On June 5, 2003, Quickturn and Cadence filed additional counterclaims alleging that IKOS’ VStation products infringe Quickturn’s U.S. Patent No. 5,329,470 and U.S. Patent No. 5,477,475. On June 25, 2003, Mentor and IKOS filed additional counterclaims alleging that certain unidentified Quickturn emulation products infringe IKOS’ U.S. Patent No. 6,223,148 and U.S. Patent No. 5,649,176, and seeking further unspecified damages and injunctive relief. This action was dismissed on October 2, 2003, upon motion of the parties pursuant to the Mentor Settlement.

      On February 28, 2003, a purported class action entitled Liu, et al. v. Credit Suisse First Boston Corporation, et al., Case No. 03-CV-20459-Martinez/ Dube was filed in the U.S. District Court for the Southern District of Florida. The complaint was amended on June 19, 2003. As amended, the complaint named 25 separate defendants, including Simplex Solutions, Inc. Simplex was acquired by Cadence in June 2002. The amended complaint charged six underwriter defendants and 19 issuer defendants (four of whom were subsequently voluntarily dismissed) with conspiracy to manipulate the price of the issuers’ stock following their respective initial public offerings by disseminating false financial information. The amended complaint charged each defendant with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The amended complaint sought damages in an unspecified amount and it also sought certain equitable relief. On August 12, 2003, the federal Judicial Panel on Multidistrict Litigation transferred this action to the U.S. District Court for the Southern District of New York, which is handling a similar litigation entitled In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). On October 2, 2003, plaintiffs filed a motion for leave to further amend their complaint. In their amended complaint, Simplex is no longer named as a defendant in the action.

      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 financial position or results of operations.

Other Contingencies

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

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

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

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NOTE 9. STOCKHOLDERS’ EQUITY

Net Income (Loss) Per Share

      Basic net income (loss) per share is computed by dividing net income (loss), the numerator, by the weighted average number of shares of common stock outstanding, the denominator, during the period. Diluted net income per share gives effect to equity instruments considered to be potential common shares, if dilutive, computed using the treasury stock method of accounting. During the three and nine months ended September 27, 2003 and during the nine months ended September 28, 2002, dilutive net loss per share is computed without the effect of equity instruments considered to be potential common shares as the impact would be anti-dilutive.

      The following table presents the potential common shares outstanding during the three and nine months ended September 27, 2003 and September 28, 2002 which were not included in the computation of diluted net income (loss) per share because their effect would be antidilutive:

	Three Months Ended				Nine Months Ended
	September 27,		September 28,		September 27,		September 28,
	2003		2002		2003		2002
	(In thousands)
Options to purchase shares of common stock (various expiration dates through 2013)		39,727		47,820		55,162		68,978
Warrants to purchase shares of common stock (various expiration dates through 2008)		26,829		140		26,829		140
Restricted shares not vested		1,079		1,036		1,079		1,036
Total potential common shares outstanding		67,635		48,996		83,070		70,154

      The weighted average shares issuable upon conversion of the Notes have been excluded in the calculation of diluted net income (loss) because the inclusion of such shares would have been anti-dilutive.

Stock Repurchase Plan

      In August 2001, Cadence authorized a share repurchase program under which repurchased shares with a value of up to $500.0 million are used for general corporate purposes, including the share issuance requirements of Cadence’s employee stock option and purchase plans and acquisitions. Cadence repurchased 11.2 million shares of its common stock at a total cost of $151.9 million during the three months ended September 27, 2003 as compared to 3.0 million shares of its common stock at a total cost of $42.1 million for the three months ended September 28, 2002. Cadence repurchased 17.4 million shares of its common stock at a total cost of $213.8 million during the nine months ended September 27, 2003 as compared to 7.5 million shares of its common stock at a total cost of $116.1 million for the nine months ended September 28, 2002. As of September 27, 2003, the remaining repurchase authorization under this program totaled $217.1 million.

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Stock-Based Compensation

Employee Stock Purchase Plans

      The following table presents the common shares issued under Cadence’s employee stock purchase plans:

	Three Months Ended				Nine Months Ended
	September 27,		September 28,		September 27,		September 28,
	2003		2002		2003		2002
	(In thousands, except per share amounts)
Cadence shares issued under the employee stock purchase plans		1,974		1,616		4,135		2,548
Weighted average purchase price	$	8.33	$	10.58	$	8.38	$	13.68
Weighted average fair value	$	13.67	$	12.45	$	11.71	$	16.66

      The purchase dates under Cadence’s employee stock purchase plans are generally in February and August.

Other Stock-Based Compensation

      At September 27, 2003, Cadence had six other stock-based employee compensation plans under which Cadence is making grants. 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. Using the Black-Scholes option pricing model, the weighted average fair value of options granted during the three months ended September 27, 2003 was $7.06 as compared to $6.90 during the three months ended September 28, 2002. The weighted average fair value of options granted during the nine months ended September 27, 2003 was $5.71 as compared to $9.66 during the nine months ended September 28, 2002.

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      The following table illustrates the effect on net income (loss) and net income (loss) per share as if Cadence had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation using the Black-Scholes option pricing model.

			Three Months Ended						Nine Months Ended
			September 27,			September 28,			September 27,			September 28,
			2003			2002			2003			2002
			(In thousands, except per share amounts)
Net income (loss):
	As reported		$	(14,995	)	$	8,231		$	(41,964	)	$	(16,745	)
	Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects			4,141			4,762			16,793			9,742
	Deduct: Stock-based employee compensation expense determined under fair-value method for all awards, net of related tax effects			(28,612	)		(26,653	)		(82,794	)		(94,249	)
	Pro forma		$	(39,466	)	$	(13,660	)	$	(107,965	)	$	(101,252	)
Basic net income (loss) per share:
	As reported		$	(0.06	)	$	0.03		$	(0.16	)	$	(0.07	)
	Pro forma		$	(0.15	)	$	(0.05	)	$	(0.40	)	$	(0.39	)
Diluted net income (loss) per share:
	As reported		$	(0.06	)	$	0.03		$	(0.16	)	$	(0.07	)
		Pro forma	$	(0.15	)	$	(0.05	)	$	(0.40	)	$	(0.39	)

NOTE 10. COMPREHENSIVE INCOME (LOSS)

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

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

		Three Months Ended					Nine Months Ended
		September 27,			September 28,		September 27,			September 28,
		2003			2002		2003			2002
		(In thousands)
Net income (loss)		$	(14,995	)	$	8,231	$	(41,964	)	$	(16,745	)
Translation gain			14,068			325		14,950			2,710
Unrealized gain (loss) on investments, net of related tax effects			(2,436	)		4,870		3,510			(26,727	)
	Comprehensive income (loss)	$	(3,363	)	$	13,426	$	(23,504	)	$	(40,762	)

NOTE 11. MENTOR GRAPHICS SETTLEMENT

      Effective September 23, 2003, Cadence entered into a settlement with Mentor. Under the settlement, Cadence, Mentor and their respective affiliated parties settled all outstanding litigation between the companies and such affiliated parties relating to emulation and acceleration systems. The companies also agreed that, for a period of seven years, neither will sue the other over patented emulation and acceleration technology.

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Mentor also paid Cadence $18.0 million in cash under the settlement. This amount, net of related legal costs, was recorded during the three months ended September 27, 2003.

NOTE 12. 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 from software licensing, hardware sales and hardware leases. The Services segment includes revenue and associated costs to provide methodology and design services either to assist companies in developing electronic designs or to assume responsibility for the design effort for customers that outsource this work. The Maintenance segment includes revenue and associated costs primarily for a technical support organization. Maintenance agreements are offered to customers either as part of Cadence’s product license agreements or separately.

      Segment income (loss) from operations is defined as gross margin under generally accepted accounting principles, less operating expenses (Marketing and sales, Research and development and General and administrative), Amortization of deferred stock compensation, Restructuring and other charges, Mentor Graphics settlement, Write-off of acquired in-process technology, Interest expense and Other expense, net. Profitability information about Cadence’s segments is available only to the extent of gross margin by segment and write-off of acquired in-process technology. Operating expenses, Amortization of deferred stock compensation, Restructuring and other charges, Mentor Graphics settlement and Interest expense and Other expense, net are managed on a functional basis. Cadence does not identify or allocate Operating expenses, Amortization of deferred stock compensation, Restructuring and other charges, Mentor Graphics settlement and Interest expense and Other expense, net because the information is not available by segment and is not reviewed by Cadence’s CEO to make decisions about resources to be allocated among the segments or to assess their performance. There are no differences between the accounting policies used to measure profit and loss for segments and those used on a consolidated basis. Revenue is defined as revenue from external customers 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 CEO 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.

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      The following tables present information about reported segments for the three months ended September 27, 2003 and September 28, 2002.

		For the Three Months Ended September 27, 2003
								Non-
								Allocated			Consolidated
		Product		Services		Maintenance		Costs			Total
		(In thousands)
Revenue		$	151,678	$	33,773	$	83,025	$	- - - -		$	268,476
Cost of revenue			5,075		22,192		12,662		- - - -			39,929
Amortization of acquired intangibles			25,968		1,218		604		- - - -			27,790
	Gross margin		120,635		10,363		69,759		- - - -			200,757
Operating expenses and amortization of deferred stock compensation			- - - -		- - - -		- - - -		196,299			196,299
Restructuring and other charges			- - - -		- - - -		- - - -		62,874			62,874
Mentor Graphics settlement			- - - -		- - - -		- - - -		(14,500	)		(14,500	)
Write-off of acquired in-process technology			2,000		- - - -		- - - -		- - - -			2,000
Interest expense and Other expense, net			- - - -		- - - -		- - - -		97			97
Segment income (loss) from operations		$	118,635	$	10,363	$	69,759	$	(244,770	)	$	(46,013	)

		For the Three Months Ended September 28, 2002
								Non-
								Allocated			Consolidated
		Product		Services		Maintenance		Costs			Total
		(In thousands)
Revenue		$	210,286	$	33,992	$	82,958	$	- - - -		$	327,236
Cost of revenue			14,630		28,078		16,007		- - - -			58,715
Amortization of acquired intangibles			20,218		1,447		369		- - - -			22,034
	Gross margin		175,438		4,467		66,582		- - - -			246,487
Operating expenses and amortization of deferred stock compensation			- - - -		- - - -		- - - -		224,595			224,595
Write-off of acquired in-process technology			6,600		- - - -		- - - -		- - - -			6,600
Interest expense and Other expense, net			- - - -		- - - -		- - - -		492			492
Segment income (loss) from operations		$	168,838	$	4,467	$	66,582	$	(225,087	)	$	14,800

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      The following tables present information about reported segments for the nine months ended September 27, 2003 and September 28, 2002.

		For the Nine Months Ended September 27, 2003
								Non-
								Allocated			Consolidated
		Product		Services		Maintenance		Costs			Total
		(In thousands)
Revenue		$	453,590	$	100,962	$	246,237	$	- - - -		$	800,789
Cost of revenue			20,305		69,790		41,666		- - - -			131,761
Amortization of acquired intangibles			72,846		4,514		1,733		- - - -			79,093
	Gross margin		360,439		26,658		202,838		- - - -			589,935
Operating expenses and amortization of deferred stock compensation			- - - -		- - - -		- - - -		604,598			604,598
Restructuring and other charges			- - - -		- - - -		- - - -		64,226			64,226
Mentor Graphics settlement			- - - -		- - - -		- - - -		(14,500	)		(14,500	)
Write-off of acquired in-process technology			7,500		- - - -		- - - -		- - - -			7,500
Interest expense and Other expense, Net			- - - -		- - - -		- - - -		6,695			6,695
Segment income (loss) from operations		$	352,939	$	26,658	$	202,838	$	(661,019	)	$	(78,584	)

		For the Nine Months Ended September 28, 2002
								Non-
								Allocated			Consolidated
		Product		Services		Maintenance		Costs			Total
		(In thousands)
Revenue		$	655,399	$	114,284	$	247,087	$	- - - -		$	1,016,770
Cost of revenue			62,552		89,628		49,775		- - - -			201,955
Amortization of acquired intangibles			57,044		2,189		498		- - - -			59,731
	Gross margin		535,803		22,467		196,814		- - - -			755,084
Operating expenses and amortization of deferred stock compensation			- - - -		- - - -		- - - -		648,020			648,020
Restructuring and other charges			- - - -		- - - -		- - - -		73,231			73,231
Write-off of acquired in-process technology			34,000		- - - -		- - - -		- - - -			34,000
Interest expense and Other expense, Net			- - - -		- - - -		- - - -		5,311			5,311
Segment income (loss) from operations		$	501,803	$	22,467	$	196,814	$	(726,562	)	$	(5,478	)

      Internationally, Cadence markets and supports its products and services primarily through its subsidiaries. During the six months ended June 28, 2003, Cadence licensed most of its software products in Japan through Innotech, of which Cadence is an approximately 15% stockholder. In June 2003, Cadence purchased certain assets from Innotech including distribution rights for certain customers in Japan. Since June 2003,

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Cadence directly licenses its software products to customers for which Cadence acquired the distribution rights from Innotech.

      Revenue is attributed to geography based on the country in which the customer is domiciled. In the three months ended September 27, 2003, one customer accounted for more than 10% of total revenue as compared to two customers, which each accounted for more than 10% of total revenue, for the three months ended September 28, 2002. In the nine months ended September 27, 2003, no individual customer accounted for greater than 10% of total revenue. In the nine months ended September 28, 2002, one customer accounted for greater than 10% of total revenue.

      The following table presents a summary of revenue by geography:

				For the Three Months Ended				For the Nine Months Ended
				September 27,		September 28,		September 27,		September 28,
				2003		2002		2003		2002
				(In thousands)
North America:
	United States			$	150,191	$	186,830	$	425,172	$	561,180
	Other				5,650		6,723		17,183		22,589
		Total North America			155,841		193,553		442,355		583,769
Europe:
	Germany				19,616		15,441		45,838		49,612
	United Kingdom				8,205		12,464		27,588		59,792
	Other Europe				24,252		33,170		65,098		104,172
		Total Europe			52,073		61,075		138,524		213,576
Japan and Asia
	Japan				35,340		47,115		148,380		145,212
	Asia				25,222		25,493		71,530		74,213
		Total Japan and Asia			60,562		72,608		219,910		219,425
			Total	$	268,476	$	327,236	$	800,789	$	1,016,770

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

				As of
				September 27,		December 28,
				2003		2002
				(In thousands)
North America:
	United States			$	344,081	$	382,648
	Other				643		903
		Total North America			344,724		383,551
Europe:
	United Kingdom				31,447		32,245
	Other				3,823		5,285
		Total Europe			35,270		37,530
Japan and Asia
	Japan				1,863		2,542
	Asia				13,032		10,868
		Total Japan and Asia			14,895		13,410
			Total	$	394,889	$	434,491

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

      The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (the “2002 Annual Report”). Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “should,” “will” and “would” and words of similar import, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events and speak only as of the date of this Quarterly Report on Form 10-Q, 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 the “Factors That May Affect Future Results,” “Critical Accounting Policies,” “Results of Operations,” “Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report on Form 10-Q and the risks discussed in our other SEC filings, which identify important risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements. Unless specifically noted, references to “Cadence,” “we,” “our” or similar terms in this Quarterly Report on Form 10-Q are references to Cadence and its subsidiaries.

Overview

      We provide a broad range of software and other technology. We also offer design and methodology services for the product development requirements of the world’s leading electronics companies. We license our electronic design automation, or EDA, software, sell or lease our hardware technology and provide a range of services throughout the world to help accelerate and manage their product development processes. Our products and services are used 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. With approximately 4,800 employees, we have sales offices, design centers and research facilities around the world.

      Since 2001, IC manufacturers and electronics systems companies have experienced a downturn in demand and production which has resulted in reduced research and development spending by many of our customers. During the third quarter of 2003, some IC manufacturers and electronics companies experienced a gradual recovery in revenue, but continued to be focused on cost reductions.

Acquisitions

      In August 2003, we acquired Verplex Systems, Inc., or Verplex, a privately-held developer of verification technology. We purchased Verplex to acquire key personnel and technology. The aggregate initial purchase price was $85.1 million, which included the payment of cash, the fair value of assumed options and acquisition costs. The purchase price and goodwill will increase if certain performance goals related to bookings and product development are achieved over a period of approximately three years following the acquisition. Verplex’s results of operations and the estimated fair values of the assets acquired and liabilities assumed have been included in our Condensed Consolidated Financial Statements from the date of acquisition.

      In June 2003, we acquired distribution rights to certain customers, certain assets and key personnel from Innotech Corporation, or Innotech, a publicly-traded developer and distributor of software, electronic devices and semiconductor manufacturing equipment in Japan. Concurrent with this acquisition, we also modified our distributor agreement with Innotech. Prior to the acquisition, we licensed most of our software products in

24

Japan through Innotech, of which we were, and continue to be, a 15% stockholder. We now directly license our software products to customers for which we have acquired the distribution rights from Innotech.

      The aggregate purchase price of this acquisition was $78.7 million, which included cash and acquisition costs. The estimated fair values of the assets acquired and liabilities assumed have been determined, in part, by a third party appraiser through established valuation techniques and included in our Condensed Consolidated Financial Statements from the date of acquisition.

      In April 2003, we acquired Get2Chip.com, Inc., or Get2Chip, a privately-held developer of nanometer-scale synthesis technology. We purchased Get2Chip to acquire key personnel and technology. The aggregate initial purchase price was $79.1 million, which included the payment of cash, the fair value of assumed options and acquisition costs. The purchase price and goodwill will increase if certain performance goals related to bookings and product development are achieved in each of the three years following the acquisition. Get2Chip’s results of operations and the estimated fair values of the assets acquired and liabilities assumed have been included in our Condensed Consolidated Financial Statements from the date of acquisition.

      In January 2003, we acquired Celestry Design Technologies, Inc., or Celestry, a privately-held developer of silicon modeling tools and full-chip circuit simulation technology. We purchased Celestry to acquire key personnel and technology. The aggregate initial purchase price was $64.4 million, which included the payment of cash, the fair value of assumed options and acquisition costs. The purchase price and goodwill will increase if certain performance goals related to bookings and product development are achieved in each of the first two years following the acquisition. Celestry’s results of operations and the estimated fair value of the assets acquired and liabilities assumed have been included in our Condensed Consolidated Financial Statements from the date of acquisition.

      For a number of our acquisitions, payment of a portion of the purchase price is contingent upon the acquired entity’s achievement of certain performance goals, which generally relate to bookings, product development or employee retention. As a result, the amount of cash consideration or shares of our common stock issued to former stockholders of the acquired entity will increase as performance goals are achieved over a period of one to three years following completion of the respective acquisition. Accordingly, goodwill and deferred stock compensation expense will also increase upon attainment of such goals.

      The specific performance goal levels and amounts and timing of contingent purchase price payments vary with each acquisition. In the nine months ended September 27, 2003, we paid $2.4 million in cash and issued 1.7 million shares to former stockholders of the acquired companies, valued at $20.0 million, as contingent purchase price payments for which we recorded an additional $22.4 million of goodwill. In addition, we recorded $2.1 million in additional deferred stock compensation for the issuance of 0.2 million shares as contingent purchase price payments to former stockholders of acquired entities. The additional goodwill and deferred stock compensation related to the achievement of certain performance goals related to bookings, product development and employee retention resulting from acquisitions. The goodwill is not expected to be deductible for income tax purposes.

Critical Accounting Policies

      Our critical accounting policies are as follows:

• revenue recognition;

• estimating valuation allowances and accrued liabilities;

• accounting for income taxes;

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

• restructuring charges.

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Revenue recognition

      We classify revenue by the three sources from which it is earned. Product revenue includes fees associated with the licensing of our software and sale of our hardware products. Maintenance revenue includes fees associated with providing technical support for our products and Services revenue includes fees received for performing methodology and design services.

          Product revenue

      We license software using three different license types:

• 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. In general, revenue associated with subscription licenses is recognized ratably over the term of the license commencing upon the effective date of the license and delivery of the licensed product.

• Term licenses – software licensed for a specific time period, generally two to three years, with no rights to return and, generally, limited rights to remix the licensed software. In general, revenue associated with term licenses is recognized upon the effective date of the license and delivery of the licensed product.

• Perpetual licenses – software licensed on a perpetual basis with no right to return or exchange the licensed software. In general, revenue associated with perpetual licenses is recognized upon the effective date of the license and delivery of the licensed product.

      The timing of revenue recognition for our licenses will differ depending on the license models and depending on the individual terms and conditions associated with each particular license agreement. Following is a discussion about the significant management judgments and estimates that are made and used to determine the amount of revenue recognized in any accounting period.

      We apply 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. We also apply the provisions of Statements of Financial Accounting Standards, or SFAS, No. 13, “Accounting for Leases,” to all hardware lease transactions.

      We recognize 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 exists for all undelivered elements of an arrangement, but does not exist for the delivered elements, revenue is recognized using the residual method. A discussion about these revenue recognition criteria and their applicability to our transactions follows:

Persuasive evidence of an arrangement

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

Product delivery

      Software 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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Fee is fixed or determinable

      We assess whether a fee is fixed or determinable primarily based on the payment terms associated with the transaction. We use installment contracts for term and subscription licenses for customers for which we have established a history of collecting under the original contract without providing concessions on payments, products or services. Our installment contracts generally have payment periods that are equal to or less than the time period of the licenses, the payments are generally collected quarterly, and periodic payments are generally made in equal or nearly equal installments. When the timing of payments is less favorable to us, revenue under such licenses is recognized when payments under the contract become due and payable. If we no longer had a history of collecting under the original contract without providing concessions on term licenses, revenue from term licenses would be required to be recognized when payments under the installment contract become due and payable. These changes could have a material impact on our results of operations.

Collection is probable

      We assess 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, we defer the revenue and recognize it upon receipt of cash payment.

Vendor-Specific Objective Evidence

      Our VSOE for maintenance is generally based upon the customer’s annual renewal rates. VSOE for services is generally based on the price charged when the services are sold separately. If VSOE does not exist for all elements of an arrangement 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 residual portion of the arrangement fee is recognized immediately as product revenue.

Maintenance revenue

      Maintenance revenue consists of fees for providing technical support and software updates on a when-and-if available basis. We recognize 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, we allocate a portion of the revenue to maintenance revenue.

Services 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. We estimate 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. We have 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 the recognition of all revenue and costs would be deferred until the project was completed. This change could have a material impact on our results of operations. 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.

Estimating valuation allowances and accrued liabilities

      The preparation of our Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported

27

amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

      We specifically analyze accounts receivable and also analyze 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 were to make different judgments or utilize different estimates.

Accounting for income taxes

      We use the asset and liability method to account for income taxes. We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax liability and 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. We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance for deferred tax assets or increase this allowance in a period, we may need to include an expense within the tax provision in our Condensed Consolidated Statements of Operations.

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

Valuation of long-lived and intangible assets, including goodwill

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

      For long-lived assets to be held and used, including acquired intangibles, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparing its carrying amount to the expected future undiscounted cash flows expected to result from the use and eventual disposition of that asset, excluding future interest costs that would be recognized as an expense when incurred. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in forecasting future operating results and proceeds from disposition which are used in the preparation of projected cash flows. Material impairment charges could be necessary should different conditions prevail or different judgments be made.

Restructuring charges

      Since 2001 we have undertaken significant restructuring initiatives. All restructuring activities initiated prior to fiscal year 2003 were accounted for in accordance with EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs

28

Incurred in a Restructuring).” For restructuring activities initiated after fiscal year 2002, we accounted for the facilities and asset-related portions of this restructuring in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” The severance and benefits charges were accounted for in accordance with SFAS No. 112 “Employers Accounting for Postemployment Benefits – An Amendment of FASB Statements No. 4 and 43.”

      These restructuring initiatives have required us to make a number of estimates and assumptions related to losses on excess facilities vacated or consolidated, particularly the timing of subleases and sublease terms. Closure and space reduction costs included in our restructuring charges include payments required under leases, less any applicable estimated sublease income after the facilities are abandoned, lease buyout costs and costs to maintain facilities during the period after abandonment.

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

Results of Operations

Revenue

		Three Months Ended						Nine Months Ended
		September 27,		September 28,				September 27,		September 28,
		2003		2002		% Change		2003		2002		% Change
		(In millions, except percentages)
Product		$	151.7	$	210.2		(28)%	$	453.6	$	655.4		(31)%
Services			33.8		34.0		(1)%		101.0		114.3		(12)%
Maintenance			83.0		83.0		0%		246.2		247.1		0%
	Total revenue	$	268.5	$	327.2		(18)%	$	800.8	$	1,016.8		(21)%
Sources of Revenue as a Percent of Total Revenue
Product			56%		65%				57%		65%
Services			13%		10%				12%		11%
Maintenance			31%		25%				31%		24%

      Product revenue decreased $58.5 million in the three months ended September 27, 2003 and decreased $201.8 million in the nine months ended September 27, 2003, when compared to the same periods in 2002, primarily due to a reduction in sales volume and a shift in the mix of software license types executed in each period.

      The amount of product revenue in future periods will depend, among other things, on our sales volume and pricing to new customers, the extent to which existing customers renew licenses and the timing of the renewals, the extent to which customers prefer subscription, term or perpetual licenses, and the extent to which contracts contain flexible payment terms. In addition, revenue is impacted by the timing of license renewals, changes in the extent to which contracts contain flexible payment terms and changes in the mix of license types (i.e., perpetual, term or subscription) for existing customers, which changes could have the effect of accelerating or delaying the recognition of revenue from the timing of recognition under the original contract. We expect revenue recognized over multiple periods to continue to increase, on an annual basis, as a percentage of product revenue, assuming that customers continue to prefer subscription licenses, or contracts containing flexible payment terms, both of which cause revenue to be deferred to future periods.

      Services revenue decreased $0.2 million in the three months ended September 27, 2003 and decreased $13.3 million in the nine months ended September 27, 2003 when compared to the same periods in 2002, primarily due to a decrease in the Cadence Design Foundry business, offset in part by an increase in

29

methodology services revenue. We believe the decrease in the Cadence Design Foundry revenue is primarily attributable to a reduction in customer spending for this type of external service as a result of the ongoing economic downturn experienced in the electronics industry which we serve. Customers, however, continue to invest in methodology services that help to optimize their in-house design team productivity. Overall, we expect reduced customer spending to affect services revenue in the future to the extent the economy in general, and the electronics industry in particular, continues to experience slow growth.

      Maintenance revenue did not change significantly in the three months ended September 27, 2003 and decreased $0.9 million in the nine months ended September 27, 2003 when compared to the same periods in 2002, due to fewer renewals of maintenance contracts.

      Additional financial information about segments can be found in Note 12 of Notes to Condensed Consolidated Financial Statements.

Revenue by Geography

		Three Months Ended						Nine Months Ended
		September 27,		September 28,				September 27,		September 28,
		2003		2002		% Change		2003		2002		% Change
		(In millions, except percentages)
Domestic		$	150.2	$	186.8		(20)%	$	425.2	$	561.2		(24)%
International			118.3		140.4		(16)%		375.6		455.6		(18)%
	Total revenue	$	268.5	$	327.2		(18)%	$	800.8	$	1016.8		(21)%
Revenue by Geography as a Percent of Total Revenue
Domestic			56%		57%				53%		55%
International			44%		43%				47%		45%

      International revenue decreased $22.1 million in the three months ended September 27, 2003, when compared to the same period in 2002, primarily due to a decrease in product revenue in Japan and a decrease in product and services revenue in Europe, partially offset by an increase in maintenance revenue in Japan and Europe. International revenue decreased $80.0 million in the nine months ended September 27, 2003 when compared to the same period in 2002, primarily due to a decrease in product and services revenue in Europe, partially offset by an increase in maintenance revenue in Japan and Europe. The rate of revenue change varies geographically due to differences in the timing of term license renewals for existing customers in those regions. In addition, both our domestic and international businesses have been affected by the revenue trends previously discussed under “Results of Operations.”

      Foreign currency exchange rates positively affected revenue by $0.7 million for the three months ended September 27, 2003, and $13.7 million for the nine months ended September 27, 2003, when compared to the same periods in 2002, primarily due to 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 12 of Notes to Condensed Consolidated Financial Statements.

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Cost of Revenue

	Three Months Ended						Nine Months Ended
	September 27,		September 28,				September 27,		September 28,
	2003		2002		% Change		2003		2002		% Change
	(In millions, except percentages)
Product	$	5.1	$	14.6		(65)%	$	20.3	$	62.6		(68)%
Services		22.2		28.1		(21)%		69.8		89.6		(22)%
Maintenance		12.7		16.0		(21)%		41.7		49.8		(16)%
Cost of Revenue as a Percent of Related Revenue
Product		3%		7%				4%		10%
Services		66%		83%				69%		78%
Maintenance		15%		19%				17%		20%

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

      Cost of product revenue decreased $9.5 million in the three months ended September 27, 2003 and decreased $42.3 million in the nine months ended September 27, 2003 when compared to the same periods in 2002, due to decreases in amortized software costs, decreases in the amount of CVA revenue and royalty expenses paid to third parties during the three and nine months ended September 27, 2003, and inventory and acquisition-related write-offs during the nine months ended September 27, 2002.

      Cost of product revenue in the future will primarily depend upon the actual mix of hardware and software product contracts in any given period and the degree to which we license and incorporate third-party technology in our products. We expect that cost of product revenue will decline through the remainder of 2003 as compared to the same period of 2002 as a result of lower royalty expenses paid to third parties and software amortization.

      Cost of services revenue primarily includes costs of employee salary and benefits, costs to maintain the infrastructure necessary to manage a services organization and provisions for contract losses, if any. Cost of services revenue decreased $5.9 million in the three months ended September 27, 2003 and decreased $19.8 million in the nine months ended September 27, 2003 when compared to the same periods in 2002, primarily due to decreases in employee salary and benefit costs resulting from a reduction in the number of services professionals. As a result, services gross margin as a percentage of services revenue increased over the same period in 2002. We expect the cost of services revenue to remain flat or decrease slightly during the fourth quarter of 2003 as compared to the fourth quarter of 2002.

      Cost of maintenance revenue includes the cost of customer services, such as employee salary and benefits associated with providing hot-line and on-site support and documentation of maintenance updates. Cost of maintenance revenue decreased $3.3 million in the three months ended September 27, 2003 and decreased $8.1 million in the nine months ended September 27, 2003 when compared to the same periods in 2002, due to decreases in employee salary and benefit costs resulting from the reduction of support personnel. Gross margin on maintenance revenue increased for the three and nine months ended September 27, 2003 when compared to the same periods in 2002, due to decreased costs of maintenance. We expect the cost of maintenance revenue to decrease in the fourth quarter of 2003 as compared to the fourth quarter of 2002.

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Operating Expenses

	Three Months Ended						Nine Months Ended
	September 27,		September 28,				September 27,		September 28,
	2003		2002		% Change		2003		2002		% Change
	(In millions, except percentages)
Marketing and sales	$	80.8	$	103.2		(22)%	$	249.6	$	296.2		(16)%
Research and development		84.2		84.6		(1)%		257.7		241.1		7%
General and administrative		18.8		26.3		(28)%		65.6		89.3		(27)%
Expenses as a Percent of Total Revenue
Marketing and sales		30%		32%				31%		29%
Research and development		31%		26%				32%		24%
General and administrative		7%		8%				8%		9%

      Operating expenses do not include the allocation of stock-based compensation, as noted on our Condensed Consolidated Statements of Operations.

      Marketing and sales expense decreased $22.4 million in the three months ended September 27, 2003 and decreased $46.6 million in the nine months ended September 27, 2003 when compared to the same periods in 2002. The decrease in Marketing and sales expense is primarily due to a decrease in employee headcount and associated costs in the nine months ended September 27, 2003 as compared to the same period in 2002. The decrease in Marketing and sales expense in the three months ended September 27, 2003 when compared to 2002 is also due to a decrease in the use of outside services. Outside services declined primarily as a result of decreased commission payments to Innotech as a result of our acquisition of distribution rights to certain customers from Innotech. Additionally, our marketing program expenses have declined. We expect Marketing and sales expenses for the remainder of 2003 to be lower than the same period in 2002 primarily due to prior and current year restructuring actions.

      Research and development expense decreased $0.4 million in the three months ended September 27, 2003 when compared to the same period in 2002, primarily due to a reduction in outsourced services partially offset by a reduction in capitalized development costs. Research and development expense increased $16.6 million in the nine months ended September 27, 2003 when compared to the same period in 2002, primarily due to an increase in headcount from acquisitions and associated costs and a reduction in capitalized development costs, partially offset by a reduction in outsourced services and research and development projects as a result of the restructuring activities. We expect Research and development expenses to decrease during the remainder of 2003 as compared to the same period in 2002 due to the reduced headcount and associated costs related to the 2003 restructuring activities. However, we expect Research and development expenses on an annual basis to increase in 2003 when compared to 2002 due to the net effect of the factors influencing the three and nine months ended September 27, 2003.

      General and administrative expense decreased $7.5 million in the three months ended September 27, 2003, primarily due to the reversal of the legal expense accrual related to the settlement with Mentor Graphics and a decrease in employee headcount and associated costs in connection with the restructuring activities, partially offset by an increase in bad debt expense and professional fees. General and administrative expense decreased $23.7 million in the nine months ended September 27, 2003 when compared to the same periods in 2002 due to the reversal of the legal expense accrual related to the settlement with Mentor Graphics and a decrease in employee headcount and associated costs as a result of our restructuring efforts. We expect General and administrative expenses to decrease during the fourth quarter of 2003 when compared to the same period in 2002 due to prior and current year restructuring actions.

      Foreign currency exchange rates negatively affected operating expenses by $1.8 million in the three months ended September 27, 2003 and $8.0 million in the nine months ended September 27, 2003, when compared to the same periods in 2002, primarily due to the strengthening of the euro, British pound and Japanese yen in relation to the U.S. dollar.

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Amortization of Acquired Intangibles

	Three Months Ended				Nine Months Ended
	September 27,		September 28,		September 27,		September 28,
	2003		2002		2003		2002
	(In millions, except percentages)
Amortization of acquired intangibles	$	27.8	$	22.0	$	79.1	$	59.7
Amortization of acquired intangibles as a percentage of total revenue		10%		7%		10%		6%

      Amortization of acquired intangibles increased $5.8 million in the three months ended September 27, 2003 and increased $19.4 million in the nine months ended September 27, 2003, when compared to the same periods in 2002, due to the amortization of intangibles acquired from new acquisitions. We expect an increase in amortization of acquired intangibles during the remainder of 2003 and on an annual basis when compared to 2002 due to acquisitions completed in 2003.

Amortization of Deferred Stock Compensation

	Three Months Ended				Nine Months Ended
	September 27,		September 28,		September 27,		September 28,
	2003		2002		2003		2002
	(In millions, except percentages)
Amortization of deferred stock Compensation	$	12.5	$	10.5	$	31.7	$	21.4
Amortization of deferred stock compensation as a percentage of total Revenue		5%		3%		4%		2%

      We amortize deferred stock compensation using the straight-line method. Amortization of deferred stock compensation increased $2.0 million for the three months ended September 27, 2003 when compared to the same period in 2002 and $10.3 million for the nine months ended September 27, 2003 when compared to the same period in 2002. The increase in deferred stock compensation expense primarily relates to certain acquisitions in which we have assumed unvested, in-the-money stock options granted to employees of the acquired companies, and as a result of issuing additional shares to selling shareholders of the acquired entities based on achieving certain performance goals and continued employment of acquired company employees with Cadence. We expect an increase in Amortization of deferred stock compensation during the remainder of 2003 and on an annual basis when compared to 2002 due to acquisitions completed in 2003.

Mentor Graphics Settlement

      Effective September 23, 2003, we entered into a settlement with Mentor. Under the settlement, Cadence, Mentor and their respective affiliated parties settled all outstanding litigation between the companies and such affiliated parties relating to emulation and acceleration systems. The companies also agreed that, for a period of seven years, neither will sue the other over patented emulation and acceleration technology. Mentor also paid us $18.0 million in cash under the settlement. We recorded $14.5 million, net of related legal costs during the three months ended September 27, 2003, for the settlement.

Restructuring and Other Charges

      In 2001, we announced a plan of restructuring, or the 2001 Restructuring, intended to reduce costs by eliminating excess personnel and consolidating facilities and resources. The restructuring activities were in response to the severe economic downturn in the electronics industry. The restructuring was primarily aimed at reducing excess personnel and capacity costs within our Design Foundry business (formerly Tality) and also aimed at certain other business and infrastructure groups.

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      In July 2003, we announced an additional plan of restructuring, or the 2003 Restructuring, intended to reduce costs and realize efficiencies by eliminating excess personnel and consolidating facilities and resources throughout the company.

      A summary of restructuring and other charges is as follows:

		Three Months Ended					Nine Months Ended
		September 27,		September 28,			September 27,		September 28,
		2003		2002			2003		2002
		(In millions)
Severance and benefits		$	23.9	$	1.5		$	24.7	$	28.3
Excess facilities, net			12.7		(2.9	)		12.8		26.3
Asset-related			26.3		1.4			26.7		18.6
	Total restructuring and other charges	$	62.9	$	- - - -		$	64.2	$	73.2

      The $62.9 million of restructuring costs and other charges we recorded in the three months ended September 27, 2003 were comprised of $47.0 million related to the 2003 Restructuring and other charges of $15.9 million. We expect to incur an additional $6 to $8 million of future costs in connection with the 2003 Restructuring, primarily for one-time severance and facilities-related charges which will be expensed as incurred. We expect annualized cost reductions resulting from the 2003 Restructuring of approximately $50 million in employee salary and benefits costs, related to the reduction in workforce and approximately $4 million in facility costs related to facilities consolidated or closed during the quarter ended September 27, 2003, which amounts could vary based on changes in estimates. These workforce reductions are expected to occur throughout the company.

      The 2003 Restructuring will result in the termination of employment of approximately 560 employees. Costs resulting from this restructuring included severance payments, severance related benefits and outplacement services. All terminations and termination benefits associated with this restructuring were communicated to the affected employees prior to September 27, 2003, with all termination benefits expected to be paid by October 2, 2004.

      Of the $26.3 million of asset-related charges incurred during the three months ended September 27, 2003, $10.8 million was directly related to the 2001 and 2003 Restructurings and $15.9 million was for other charges. The $10.8 million of asset-related restructuring charges were incurred primarily in connection with a fee owed to a third party due to a reduction in headcount, write-off of leasehold improvements for facilities included in the 2003 Restructuring, disposal of excess equipment and contract termination costs. The $15.9 million of other charges primarily related to decreases in the useful lives and abandonment of certain long-lived assets.

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

      Net facilities costs primarily related to space reductions at six sites and closure of five sites under the 2003 Restructuring, along with further consolidation of two sites included in prior restructuring activities. We ceased use of all facilities included in the 2003 Restructuring prior to September 27, 2003.

      Since 2001, we have recorded facilities consolidation charges under the 2001 Restructuring of $68.9 million, related to reducing space or closing of 32 sites. As of September 27, 2003, 22 of these sites had been vacated, and space reductions occurred at ten sites.

      Closure and space reduction costs included payments required under leases, less any applicable estimated sublease income after the properties were abandoned, lease buyout costs, and costs to maintain facilities during the period after abandonment. To determine the lease loss, which is the loss after our cost recovery efforts from subleasing a building, certain assumptions were made related to the: (1) time period over which

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the relevant building would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges.

      As of September 27, 2003 we have accrued the low end of the lease loss range related to all worldwide restructuring activities initiated since 2001, which is estimated to be $24.1 million. This amount will be adjusted in the future based upon changes in the assumptions used to estimate the lease loss. As of September 27, 2003, we have estimated that the high end of the lease loss range could be as much as $48.4 million if sublease rental rates decrease in applicable markets or if it takes longer than currently expected to find a suitable tenant to sublease the facilities.

Write-off of Acquired In-process Technology

      Upon consummation of the acquisition of Verplex in August 2003, we immediately charged to expense $2.0 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility had not been established. The value was determined by estimating costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate of 17% 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 June 2004. As of September 27, 2003, expenditures to complete the in-process technology totaled $1.0 million and aggregate expenditures to complete the remaining in-process technology are expected to be approximately $1.0 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require additional research and development after they have reached a state of technological and commercial feasibility.

      Upon consummation of the acquisition of Get2Chip in April 2003, we immediately charged to expense $3.8 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility had not been established. The value was determined by estimating costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate of 17% 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 June 2004. As of September 27, 2003, expenditures to complete the in-process technology totaled $1.4 million and aggregate expenditures to complete the remaining in-process technology are expected to be approximately $6.3 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require additional research and development after they have reached a state of technological and commercial feasibility.

      Upon consummation of the acquisition of Celestry in January 2003, we immediately charged to expense $1.7 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects and discounting the net cash flows back to their present value. The discount rate of 17% included a factor that reflected the uncertainty surrounding successful development of the acquired in-process technology. The in-process technology became commercially viable in March 2003. Expenditures to complete the in-process technology totaled approximately $0.2 million.

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Interest Expense and Other Income (Expense), Net

      Interest expense increased $1.7 million for the three months ended September 27, 2003, and increased $2.1 million for the nine months ended September 27, 2003 when compared to the same periods in 2002, in each case, primarily due to the write-off of prepaid credit facility fees upon termination of our two syndicated, senior unsecured credit facilities and an increase in interest expense related to long-term payments associated with the Innotech acquisition. Other income, net increased $2.1 million for the three months ended September 27, 2003, and other expense, net decreased $0.8 million for the nine months ended September 27, 2003 when compared to the same periods in 2002, primarily due to an increase in foreign currency gains. We expect future interest expense as a result of the amortization of deferred offering costs associated with the convertible notes and imputed interest on long-term payments in connection with the acquisition of the distribution rights of Innotech.

Income Taxes

      The following table presents our effective tax rate:

	Three Months Ended				Nine Months Ended
	September 27,		September 28,		September 27,		September 28,
	2003		2002		2003		2002
Effective tax rate		67%		44%		47%		(206)%

      Based on current estimates, we expect the effective tax rate for the fiscal year ending January 3, 2004 will be approximately 47%. The increase in the effective tax rate, resulting in a larger percentage benefit for income taxes, for the three and nine months ended September 27, 2003 and September 28, 2002, is primarily the result of estimating the following:

• Greater tax rate benefit from research and development tax credits;

• Increase in foreign income which is taxed at a lower rate than the U.S. federal income tax rate; and

• Decrease in the write-off of acquired in-process technology.

      The Internal Revenue Service and other tax authorities regularly examine our income tax returns and a current IRS examination is underway. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. If the Internal Revenue Service or other tax authorities successfully asserts a claim that we owe additional taxes in excess of our provision for income taxes, we would be required to record charges to operations in future periods, and such charges could be substantial.

Liquidity and Capital Resources

      At September 27, 2003, our principal sources of liquidity consisted of $424.3 million of Cash and cash equivalents and Short-term investments, compared to $395.6 million at December 28, 2002.

      Net cash provided by operating activities increased by $58.3 million, to $108.3 million, for the nine months ended September 27, 2003 when compared to $50.0 million net cash provided by operating activities during the comparable period of 2002. The increase is summarized as follows:

		(In millions)
Changes in operating assets and liabilities, net of effect of acquired businesses		$	77.6
Write-off of acquired in-process technology			(26.5	)
Net loss			(25.2	)
Net investment gain on sale, equity income and write-down			22.5
Non-cash restructuring and other charges			12.4
Other			(2.5	)
	Total increase in net cash provided by operating activities	$	58.3

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      We have entered into agreements whereby we may transfer qualifying accounts receivable to certain financing institutions on a non-recourse basis. These transfers are recorded as sales and accounted for in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” During the nine months ended September 27, 2003, we transferred accounts receivable totaling $33.7 million, which approximated fair value, to financing institutions on a non-recourse basis, as compared to $162.8 million transferred during the same period of 2002.

      At September 27, 2003, we had net working capital of $256.3 million, as compared with $246.8 million at December 28, 2002. The increase in net working capital was primarily due to increases in Cash and cash equivalents and Short-term investments of $28.7 million, and increases in Prepaid expenses and other of $21.3 million, partially offset by decreases in Receivables, net of $25.3 million and increases in Accounts payable and accrued liabilities of $14.5 million.

      In addition to our short-term investments, our primary investing activities consisted of business combinations and acquired intangibles, purchases of property, plant and equipment and venture capital partnership and equity investments, which combined represented $229.8 million of cash used for investing activities for the nine months ended September 27, 2003, as compared to $142.2 million for the same period in 2002.

      During the third quarter, we made long-term non-marketable security investments of $24.9 million. These investments are included in Other assets in the Condensed Consolidated Balance Sheets.

      As part of our overall investment strategy, we are a limited partner in two venture capital funds, Telos Venture Partners, L.P., and Telos Venture Partners II, L.P. As of September 27, 2003, we have contributed $80.3 million to these Telos partnerships and are contractually committed to contribute to these partnerships up to an additional $46.7 million. Our investments in the Telos partnerships are recorded in Other assets in the accompanying Condensed Consolidated Balance Sheets.

      In the three months ended September 27, 2003, we received $9.1 million in cash from the sale-leaseback of certain equipment. We will make aggregate payments under the resulting operating leases of $9.1 million over the three to five year life of the operating leases.

      We provide for U.S. income taxes on the earnings of our foreign subsidiaries unless these earnings are considered permanently invested outside of the United States. If some or all of these foreign earnings were to be distributed to our U.S. entities, we would need to provide for additional U.S. income taxes.

      During the nine months ended September 27, 2003, we purchased $211.0 million of our stock through our stock repurchase plan with cash and reissued $54.3 million of stock through our employee option and stock purchase programs.

      As compared to December 28, 2002, Other long-term liabilities increased $52.7 million to $267.1 million at September 27, 2003. The increase was primarily attributable to an increase in indemnity holdbacks from purchase price payments relating to three recent acquisitions and an increase in deferred payments relating to another recent acquisition. The primary components of Other long-term liabilities are $44.1 million of deferred compensation, $29.5 million of accrued restructuring charges and $193.5 million relating to indemnity holdbacks from acquisitions, deferred payments relating to acquisitions and deferred tax liabilities.

      We expect to incur an additional $6 to $8 million of future costs in connection with the 2003 Restructuring, primarily for one-time severance and facilities-related charges which will be expensed as incurred. We expect annualized cost reductions resulting from the 2003 Restructuring of approximately $50 million in employee salary and benefits costs, related to the reduction in workforce and approximately $4 million in facility costs related to facilities consolidated or closed during the quarter ended September 27, 2003, which amounts could vary based on changes in estimates.

      In August 2003, we issued $420.0 million principal amount of Zero Coupon Zero Yield Senior Convertible Notes due 2023, or the Notes, to two initial purchasers in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A, for which we received net proceeds of approximately $408.5 million after transaction fees of approximately $11.5 million. We issued the Notes at approximately

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98% of par and the Notes bear no interest. The Notes are convertible into our common stock initially at a conversion price of $15.65 per share, which would result in an aggregate of 26.8 million shares issued upon conversion, subject to adjustment upon the occurrence of specified events. We may redeem for cash all or any part of the Notes on or after August 15, 2008 for 100.00% of the principal amount. The holders may require us to repurchase for cash all or any portion of their Notes on August 15, 2008 for 100.25% of the principal amount, on August 15, 2013 for 100.00% of the principal amount or on August 15, 2018 for 100.00% of the principal amount. As a result, although the Notes mature in 2023, the holders of the Notes may require us to repurchase their Notes at an additional premium in 2008, which makes it probable that we will be required to repurchase the Notes in 2008 if the Notes are not otherwise converted into our common stock. The Notes do not contain any restrictive financial covenants.

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

      In addition, in the event of a significant change in our corporate ownership or structure, the holders may require us to repurchase all or any portion of their Notes for 100% of the principal amount. Upon a significant change in our corporate ownership or structure, in certain circumstances, we may choose to pay the repurchase price in cash, shares of our common stock or a combination of cash and shares of our common stock.

      We have agreed to file a shelf registration statement with respect to the resale of the Notes and the common stock issuable upon the conversion of the Notes with the SEC within 90 days from the initial issuance of the Notes.

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

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

      The costs incurred in connection with the hedge transaction and the proceeds from the sales of the warrants are included as a net reduction in common stock and capital in excess of par in the accompanying Condensed Consolidated Balance Sheets as of September 27, 2003, in accordance with the guidance in EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” Subsequent changes in the fair value of these convertible notes hedge and warrant transactions will not be recognized as long as the instruments remain classified in equity. The convertible notes hedge and warrants are expected to reduce the potential dilution from the conversion of the Notes. If the convertible notes hedge transactions settle in our favor, we could be exposed to credit risk related to the other party.

      Subsequent to the issuance of the Notes, we terminated our senior credit facilities.

      A summary of Convertible notes and Capital lease obligations follows:

		Payments Due by Period
		(In millions)
		Total		Less than 1 Year		1-3 Years		Thereafter
Capital lease obligations		$	0.9	$	0.8	$	0.1	$	- - - -
Convertible notes			420.0		- - - -		- - - -		420.0
	Total Convertible notes and capital lease obligations	$	420.9	$	0.8	$	0.1	$	420.0

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      In connection with our acquisitions completed prior to September 27, 2003, we are obligated to pay $39.1 million during the next 12 months. In addition, we may be required to pay an additional $70.7 million in cash over the next three years if certain performance goals related to bookings, product development and employee retention are achieved in full.

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

New Accounting Standards

      In January 2003, the Financial Accounting Standards Board, or 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. On October 8, 2003, the FASB deferred the implementation date for the consolidation requirements of FIN 46 as it relates to variable interest entities that existed before February 1, 2003. The consolidation requirements of FIN 46 will apply to variable interest entities that existed prior to February 1, 2003 in financial statements issued for periods ending after December 15, 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. We have determined the adoption of FIN 46 will not have a material effect on our consolidated financial position, results of operations or cash flows.

      In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 requires companies to classify and measure certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that requires a transfer of assets and that meets the definition of liabilities in Concepts Statement 6 and other recognition criteria in SFAS No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises,” be reported as a liability. SFAS No. 150 also requires that certain obligations that could be settled by issuance of an entity’s equity but lack other characteristics of equity be reported as liabilities even though the obligation does not meet the definition of liabilities in Concepts Statement No. 6. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on our consolidated financial position, results of operations or cash flows.

Factors That May Affect Future Results

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

Risk Factors Relating to our Business Operations

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

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

      The IC and electronics systems industries have experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both these industries’ and their customers’ products and a

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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.

      Since 2001, IC manufacturers and electronics systems companies have experienced a downturn in demand and production which has resulted in reduced research and development spending by many of our customers. Any economic downturn could harm our business, operating results and financial condition.

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

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

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

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

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

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

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

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

Fluctuations in customer preferences for license types and other changes in operating results for any fiscal period could hurt our business and the market price of our stock

      We have experienced, and may continue to experience, varied quarterly operating results. In particular, we have experienced quarterly net losses for each of the past three quarters, and we may experience net losses in future periods. In addition, because of the effect on demand of the economic downturn, we expect to record a net loss for the fiscal year ending January 3, 2004. Various factors affect our quarterly operating results and some of them are not within our control. Our quarterly operating results are affected by the timing of significant orders for our software products because a significant number of contracts for our software products are in excess of $5.0 million. The failure to close a contract for one or more orders for our software products could seriously harm our quarterly operating results.

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      Our operating results are also affected by the mix of license types executed in any given period. We license software using three different license types: term, subscription and perpetual. Product revenue associated with term and perpetual licenses is generally recognized at the beginning of the license period, 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.

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

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

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

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

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

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

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

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

      We have acquired and expect to acquire other companies and businesses in the future. While we expect to carefully analyze all potential acquisitions before committing to the transaction, we cannot assure you that our management will be able to integrate and manage acquired products and businesses effectively or that the acquisitions will result in long-term benefits to us or our stockholders. In addition, acquisitions involve a

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number of risks. If any of the following events occurs after we acquire another business, it could seriously harm our business, operating results and financial condition:

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

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

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

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

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

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

• Unanticipated costs;

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

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

      In a number of our acquisitions, we have agreed to make future cash or stock payments based on the performance of the businesses we acquired. The performance goals pursuant to which these future payments may be made generally relate to achievement by the acquired business of bookings, product development or employee retention goals during a specified period following completion of the applicable acquisition. Future acquisitions may involve issuances of stock (which may be dilutive), expenditure of substantial cash resources or the incurrence of material amounts of debt.

      The specific performance goal levels and amounts and timing of contingent purchase price payments vary with each acquisition. In the nine months ended September 27, 2003, we paid $2.4 million in cash and issued 1.7 million shares to former stockholders of the acquired companies, valued at $20.0 million, as contingent purchase price payments for which we recorded an additional $22.4 million of goodwill. In addition, we recorded $2.1 million in additional deferred stock compensation for the issuance of 0.2 million shares as contingent purchase price payments to former stockholders of acquired entities. The additional goodwill and deferred stock compensation related to the achievement of certain performance goals related to bookings, product development and employee retention resulting from acquisitions. The goodwill is not expected to be deductible for income tax purposes. Future acquisitions may result in increased goodwill and other intangible assets, in addition to acquisition-related charges. These assets may eventually be written down to the extent they are deemed to be impaired, and any such write-downs would adversely affect our results.

Our failure to attract, train, motivate and retain key employees may harm our business

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

      In addition, new regulations have been adopted by the New York Stock Exchange that require shareholder approval for new stock option plans and significant amendments to existing plans, including

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increases in options, and prohibit New York Stock Exchange member organizations from giving a proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions. These new regulations could make it more difficult for us 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, we may incur increased compensation costs or find it difficult to attract, retain and motivate employees, which could materially and adversely affect our business.

Our inability to compete in our industries could seriously harm our business

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

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

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

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

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

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

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

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

We may need to change our pricing models to compete successfully

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

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Our failure to obtain software or other intellectual property licenses or adequately protect our proprietary rights could seriously harm our business

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

Intellectual property infringement by or against us could seriously harm our 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, we may be forced to respond to or prosecute intellectual property infringement claims to protect our rights or defend a customer’s rights. These claims, regardless of merit, could consume valuable management time, result in costly litigation, or cause product shipment delays, all of which could seriously harm our business, operating results and financial condition. In settling these claims, we may be required to enter into royalty or licensing agreements with the third parties claiming infringement. These royalty or licensing agreements, if available, may not have terms favorable to us. Being forced to enter into a license agreement with unfavorable terms could seriously harm our business, operating results and financial condition. Any potential intellectual property litigation could force us to do one or more of the following:

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

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

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

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

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

We may not be able to effectively implement our restructuring activities, and our restructuring may negatively impact our business

      The EDA market and the commercial electronics design and methodology services industries are highly competitive and change quickly. We have responded to increased competition and changes in the industries in which we compete by restructuring our operations and reducing the size of our workforce. Despite our efforts to restructure Cadence and its businesses to meet competitive pressures and customer needs, we cannot assure you that we will be successful in implementing these restructuring activities or that the reductions in workforce will not harm our business operations and prospects. Our inability to structure our operations based on current market conditions could negatively impact our business. We also cannot assure you that we will not be required to implement further restructuring activities or reductions in workforce based on changes in the markets and industries in which we compete.

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

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

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

• The timing of customers’ competitive evaluation processes; or

• Customers’ budgetary constraints and budget cycles.

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

      Also, because of the timing of large orders and our customers’ buying patterns, we may not learn of bookings shortfalls, revenue shortfalls, earnings shortfalls or other failures to meet market expectations until late in a fiscal quarter, which could cause even more immediate and serious harm to the trading price of our common stock.

The profitability of our services business depends on factors that are difficult to control

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

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

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

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

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

      We have significant operations outside the United States. Our revenue from international operations as a percentage of total revenue was approximately 44% for the third quarter of 2003 and 43% for the third quarter of 2002. We expect that revenue from our international operations will continue to account for a significant

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portion of our total revenue. We also transact business in various foreign currencies. Recent economic and political uncertainty and the volatility of foreign currencies in certain regions, most notably the Japanese yen and the European Union euro, have had, and may continue to have, a seriously harmful effect on our revenue and operating results.

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

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

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

• The adoption and expansion of government trade restrictions;

• Limitations on repatriation of earnings;

• Limitations on the conversion of foreign currencies;

• Reduced protection of intellectual property rights in some countries;

• Recessions in foreign economies;

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

• Difficulties in managing foreign operations;

• Political and economic instability;

• Unexpected changes in regulatory requirements;

• Tariffs and other trade barriers; and

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

Our operating results could be adversely affected as a result of government review of our tax returns or changes in our effective tax rates

      The Internal Revenue Service and other tax authorities regularly examine our income tax returns and a current IRS examination is underway. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. If the Internal Revenue Service or other tax authorities successfully asserts a claim that we owe additional taxes in excess of our provision for income taxes, we would be required to record charges to operations in future periods, and such charges could be substantial.

      In addition, our future effective tax rates could be adversely affected by the following:

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

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

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

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

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Failure to obtain export licenses could harm our business

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

Proposed regulations related to equity compensation could adversely affect our results of operation

      The Financial Accounting Standards Board, or FASB, among other agencies and entities, is currently considering changes to U.S. GAAP that, if implemented, would require us to record a charge to compensation expense for option grants. We currently account for stock options under SFAS No. 123, “Accounting for Stock-Based Compensation.” As permitted by SFAS No. 123, we have elected to use the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” to measure compensation expense for stock-based awards granted to employees, under which the granting of stock options is not considered compensation. We cannot predict whether this requirement will be adopted, but if adopted it would have an adverse affect on our results of operations.

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

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

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

• Failure to attract new customers or achieve market acceptance;

• Diversion of development resources to resolve the problem;

• Increased service costs; and

• Liability for damages.

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

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

We obtain key components for our hardware products from a limited number of suppliers

      We depend on several suppliers for certain key components and board assemblies used in our hardware-based verification products. Our 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, we currently rely on International Business Machines Corporation to manufacture hardware components for our Palladium™ products. If there were such a reduction or interruption, our results of operations would be seriously harmed. Even if we could eventually obtain these components from alternative sources, a significant delay in our ability to deliver products would result.

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

      Our corporate headquarters, including certain of our research and development operations, and certain of our distribution facilities, are located in the Silicon Valley area of Northern California, which is a region known to experience seismic activity. In addition, several of our facilities, which include our corporate headquarters, certain of our research and development operations, and certain of our distribution operations, are in areas of San Jose that have been identified by the Director of the Federal Emergency Management Agency, or FEMA, as being located in a special flood area. The areas at risk are identified as being in a hundred year flood plain, using FEMA’s Flood Hazard Boundary Map or the Flood Insurance Rate Map. If significant seismic or flooding activity were to occur, our operations may be interrupted, which would adversely impact our business and results of operations.

Acts of war or terrorism could adversely and materially affect our business

      Terrorist acts or military engagement anywhere in the world could cause damage or disruption to us, our customers, partners, distributors or suppliers, or could create political or economic instability, any of which could adversely effect our business, financial condition or results of operations. Furthermore, we are uninsured for losses or interruptions caused by acts of war or terrorism.

Risk Factors Relating to our Securities

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

      We have a substantial level of debt. As of September 27, 2003, we had $420.9 million of outstanding indebtedness, including $420.0 million principal amount of our Notes that we issued in August 2003. The level of our indebtedness, among other things, could:

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

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

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

• reduce funds available for use in our operations;

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

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

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

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

      We are not restricted under our outstanding indebtedness from incurring additional debt, including other senior indebtedness or secured indebtedness. In addition, our outstanding indebtedness does not restrict our ability to pay dividends, issue or repurchase stock or other securities or require us to achieve or maintain any minimum financial results relating to our financial position or results of operations. Future indebtedness could include such financial and other restrictive covenants. If we incur additional indebtedness or other liabilities, our ability to pay our obligations on our outstanding indebtedness could be adversely affected.

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

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

      In addition, a material default on our indebtedness could suspend our eligibility to register securities using certain registration statement forms under SEC guidelines which incorporate by reference substantial information regarding the company rather than requiring quarterly and other revision and updating, which could potentially hinder our ability to raise capital through the issuance of our securities and will increase the costs of such registration to the company.

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

      The market price of our common stock is subject to significant fluctuations in response to the factors set forth in this section entitled “Factors That May Affect Future Results” and other factors, many of which are beyond our control. Such fluctuations, as well as economic conditions generally, may adversely affect the market price of our common stock. In addition, the stock markets in recent years have experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our common stock, regardless of our operating performance.

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

      The terms of our Notes permit the holders to convert the Notes into shares of our common stock. The Notes are convertible into our common stock initially at a conversion price of $15.65 per share, which would result in an aggregate of 26.8 million shares issued upon conversion, subject to adjustment upon the occurrence of specified events. The conversion of some or all of the Notes will dilute the ownership interest of our existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. Prior to the conversion of the Notes, if the trading price of our common stock exceeds the conversion price of the Notes by 145% or more over specified periods, earnings per share will be diluted if and to the extent the convertible notes hedge instruments are not exercised. We may redeem for cash all or any part of the Notes on or after August 15, 2008 for 100.00% of the principal amount. The holders may require us to repurchase for cash all or any portion of their Notes on August 15, 2008 for 100.25% of the principal amount, on August 15, 2013 for 100.00% of the principal amount or on August 15, 2018 for 100.00% of the principal amount.

      Each $1,000 of principal of the Notes will initially be convertible into 63.8790 shares of our common stock, subject to adjustment upon the occurrence of specified events. Holders of the Notes may convert their Notes prior to maturity only if: (1) the price of our common stock reaches $22.69 during periods of time specified by the Notes, (2) specified corporate transactions occur, (3) the Notes have been called for redemption or (4) the trading price of the Notes falls below a certain threshold. As a result, although the Notes mature in 2023, the holders of the notes may require us to repurchase their Notes at an additional

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premium in 2008, which makes it probable that we will be required to repurchase the Notes in 2008 if the Notes are not otherwise converted into our common stock.

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

We may, in certain circumstances be required to repurchase our Notes, upon a significant change in our corporate ownership or structure, in shares of our common stock, which could result in dilution to our existing stockholders

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

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

      We entered into convertible notes hedge transactions with an affiliate of one of the initial purchasers of our Notes at the time of issuance of our Notes, with the objective of reducing the potential dilutive effect of issuing our common stock upon conversion of the Notes. We also entered into warrant transactions. In connection with our convertible notes hedge and warrant transactions, such entity or its affiliates purchased our common stock in secondary market transactions and entered into various over-the-counter derivative transactions with respect to our common stock. Such entity or its affiliates is likely to modify its hedge positions from time to time prior to conversion or maturity of the Notes by purchasing and selling shares of our common stock, other of our securities or other instruments it may wish to use in connection with such hedging. In the past we have also entered into call options and put warrants in connection with our stock repurchase plan. The effect, if any, of any of these transactions and activities on the market price of our common stock could adversely affect the value of our common stock. In addition, subject to the movement in the trading price of our common stock, if the convertible notes hedge transactions settle in our favor, we could be exposed to credit risk related to the other party.

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

      We have not requested a rating of our Notes from any rating agency, and we do not anticipate that the Notes will be rated. However, if one or more rating agencies rates the Notes and assigns the Notes a rating lower than the rating expected by investors, or reduces their rating in the future, the market price or liquidity of our common stock could be harmed.

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

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

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

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

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

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Disclosures about Market Risk

Interest Rate Risk

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

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

      On August 15, 2003, we terminated our two syndicated, senior unsecured credit facilities that allowed us to borrow up to $375.0 million. See “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” for a discussion of the termination of the 2002 credit facilities.

      The table below presents the carrying value and related weighted average interest rates for our 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

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12 months are considered long-term investments. The carrying value of our interest-bearing instruments approximated fair value at September 27, 2003.

				Carrying		Average
				Value		Interest Rate
				(In millions)
Interest-Bearing Instruments:
	Cash equivalents - - variable rate			$	165.0		1.26%
	Commercial Paper - - fixed rate				124.0		1.12%
	Cash - - variable rate				93.9		0.60%
		Total interest-bearing instruments			382.9		1.06%
		Total non-interest bearing cash			11.3
			Total cash and cash equivalents	$	394.2

Foreign Currency Risk

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

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

      We do not use forward contracts for trading purposes. Our 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 September 27, 2003 about our forward foreign currency contracts. The information is provided in U.S. dollar equivalent amounts. The table presents the notional amounts, at contract exchange rates, and the weighted average contractual foreign currency exchange rates. All of these forward contracts matured prior to October 10, 2003 and are no longer outstanding.

				Weighted
				Average
		Notional		Contract
		Principal		Rate
		(In millions)
Forward Contracts:
	Japanese yen	$	86.2		116.23
	British pound sterling		26.2		0.63
	Euro		25.3		0.89
	Canadian dollars		9.9		1.37
	Hong Kong dollars		8.8		7.80
	Swedish krona		4.0		8.20
	Singapore dollars		1.5		1.76
		$	161.9
	Estimated fair value	$	3.5

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

Equity Price Risk

      We repurchase shares of our common stock under our stock repurchase program. Repurchased shares may be used for general corporate purposes including the share issuance requirements of our employee stock option and purchase plans and acquisitions. We 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 our stock repurchase program. The put warrants, if exercised and settled by physical delivery of shares, would entitle the holder to sell shares of our common stock to us at a specified price. Similarly, the call options entitle us to buy shares of our common stock at a specified price. We have the option to elect “net share settlement,” rather than physical settlement, of put warrants that are exercised; that is, we have the right to settle the exercised put warrants with shares of our 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 our common stock. Our stock repurchase program includes the following characteristics:

• We may purchase shares of our common stock on the open market at the prevailing market prices.

• Call options allow us to buy shares of our 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, we will typically exercise the option and receive shares of our stock. If the market price of the common stock is less than the exercise price of a call option, we typically will not exercise the option.

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

• Depending on the exercise price of the put warrants and the market price of our common stock at the time of exercise, “net share settlement” of the put warrants with our common stock could cause us 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 our common stock to fall.

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

      In August 2003, we issued $420.0 million principal amount of Zero Coupon Zero Yield Senior Convertible Notes due 2023, to two initial purchasers in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A, for which we received net proceeds of approximately $408.5 million after transaction fees of approximately $11.5 million. We issued the Notes at approximately 98% of par and the Notes bear no interest. The Notes are convertible into our common stock initially at a conversion price of $15.65 per share, which would result in an aggregate of 26.8 million shares issued upon conversion, subject to adjustment upon the occurrence of specified events. We may redeem for cash all or any part of the Notes on or after August 15, 2008 for 100.00% of the principal amount. The holders may require us to repurchase for cash all or any portion of their Notes on August 15, 2008 for 100.25% of the principal amount, on August 15, 2013 for 100.00% of the principal amount or on August 15, 2018 for 100.00% of the principal amount. As a result, although the Notes mature in 2023, the holders of the Notes may require us to repurchase their Notes at an additional premium in 2008, which makes it probable that we will be required to repurchase the Notes in 2008 if the Notes are not otherwise converted into our common stock. The Notes do not contain any restrictive financial covenants.

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

      In addition, in the event of a significant change in our corporate ownership or structure, the holders may require us to repurchase all or any portion of their Notes for 100% of the principal amount. Upon a significant change in our corporate ownership or structure, in certain circumstances, we may choose to pay the repurchase price in cash, shares of our common stock or a combination of cash and shares of our common stock.

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

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

      The table below provides information as of September 27, 2003 about our outstanding convertible notes hedge transactions. The table presents the contract amounts and the weighted average strike prices. The convertible notes hedge transactions expire on August 15, 2008.

				Estimated
		Fair		Fair
		Maturity		Value
		(In millions, except
		per share amount)
Convertible notes hedge transactions
	Shares		26.8
	Weighted average strike price	$	15.65
	Contract amount	$	134.6	$	120.9

Item 4. Controls and Procedures

      Cadence carried out an evaluation required by Rule 13a-15(b) of the Securities Exchange Act of 1934, under the supervision and with the participation of the company’s management, including the 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 of the end of the period covered by this report.

      Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in the company’s reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures designed with the objective of providing reasonable assurance 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 the company’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 Quarterly Report on Form 10-Q. In the course of this evaluation, Cadence sought to identify any significant deficiencies or material weaknesses in Cadence’s controls, to determine whether the

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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 quarterly so that the conclusions concerning the effectiveness of these controls can be reported in the company’s periodic reports filed with the SEC. 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 necessary. We intend 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 CEO and CFO concluded that Cadence’s disclosure 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 our periodic reports filed with the SEC as of the end of the period covered by this report. During the most recent fiscal quarter, there has not occurred any change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. 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 control system, misstatements due to error or fraud may occur and may not be detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

      On July 21, 1999, Mentor Graphics Corporation, or Mentor, filed suit against Quickturn Design Systems, Inc., or Quickturn, in the U.S. District Court for the District of Delaware, alleging that Quickturn’s Mercury™ 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 99-5464 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™ product infringed these patents. Mentor subsequently filed Civil Action No. C 02-1426 SI, realleging that Quickturn’s Mercury™ hardware emulation systems infringed U.S. Patent No. 5,777,489. This action was consolidated with Civil Action No. C 99-5464 SI. This action was dismissed on September 30, 2003, upon motion of the parties after Mentor, Cadence and their respective affiliated parties entered into a settlement agreement effective September 23, 2003, or the Mentor Settlement. Under the Mentor Settlement, Cadence, Mentor and their respective affiliated parties settled all outstanding litigation between the companies relating to emulation and acceleration systems. The companies also agreed that, for a period of seven years, neither will sue the other over patented emulation and acceleration technology. Mentor also paid Cadence

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$18.0 million in cash under the Mentor Settlement. This amount, net of related legal costs, was recorded during the three months ended September 27, 2003.

      On March 24, 2000, Mentor and Meta Software Corporation 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 dismissed on September 30, 2003, upon motion of the parties pursuant to the Mentor Settlement.

      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 00-01030 SI, C 00-03291 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 filed motions to set aside the jury’s verdict on the patent counts. On July 30, 2003, the Court entered orders denying Mentor’s motions to set aside the jury’s verdict. This action was dismissed on September 30, 2003, upon motion of the parties pursuant to the Mentor Settlement.

      On July 29, 2002, IKOS Systems, Inc., a subsidiary of Mentor, filed a complaint against Cadence and Quickturn in the U.S. District Court for the District of Delaware, Civil Action No. 02-1335, accusing Quickturn’s Palladium™ 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 Delaware court ordered the action to be transferred to the U.S. District Court for the Northern District of California, where it was assigned Civil Action No. C 02-5343 JF. On January 6, 2003, Quickturn and Cadence filed a motion to amend their Answer and Counterclaims in this suit to add a counterclaim alleging that IKOS’ VStation products infringe Quickturn’s U.S. Patent No. 5,036,473. On February 24, 2003, the Court granted Quickturn and Cadence’s motion. On June 5, 2003, Quickturn and Cadence filed additional counterclaims alleging that IKOS’ VStation products infringe Quickturn’s U.S. Patent No. 5,329,470 and U.S. Patent No. 5,477,475. On June 25, 2003, Mentor and IKOS filed additional counterclaims alleging that certain unidentified Quickturn emulation products infringe IKOS’ U.S. Patent No. 6,223,148 and U.S. Patent No. 5,649,176, and seeking further unspecified damages and injunctive relief. This action was dismissed on October 2, 2003, upon motion of the parties pursuant to the Mentor Settlement.

      On February 28, 2003, a purported class action entitled Liu, et al. v. Credit Suisse First Boston Corporation, et al., Case No. 03-CV-20459-Martinez/ Dube was filed in the U.S. District Court for the Southern District of Florida. The complaint was amended on June 19, 2003. As amended, the complaint named 25 separate defendants, including Simplex Solutions, Inc. Simplex was acquired by Cadence in June 2002. The amended complaint charged six underwriter defendants and 19 issuer defendants (four of whom were subsequently voluntarily dismissed) with conspiracy to manipulate the price of the issuers’ stock following their respective initial public offerings by disseminating false financial information. The amended complaint charged each defendant with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The amended complaint sought damages in an unspecified amount and it also sought certain

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equitable relief. On August 12, 2003, the federal Judicial Panel on Multidistrict Litigation transferred this action to the U.S. District Court for the Southern District of New York, which is handling a similar litigation entitled In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). On October 2, 2003, plaintiffs filed a motion for leave to further amend their complaint. In their amended complaint, Simplex is no longer named as a defendant in the action.

      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 financial position or results of operations.

Item 2. Changes in Securities and Use of Proceeds

      In August 2003, in a private placement pursuant to Section 4(2) of the Securities Act, as amended, we issued $420.0 million principal amount of Zero Coupon Zero Yield Senior Convertible Notes due 2023 to two initial purchasers, J.P. Morgan Securities, Inc. and SG Cowen Securities Corporation, for resale to qualified institutional buyers pursuant to SEC Rule 144A, for which we received net proceeds of approximately $408.5 million after transaction fees of approximately $11.5 million. We issued the Notes at approximately 98% of par and the Notes bear no interest. The Notes are convertible into our common stock initially at a conversion price of $15.65 per share, which would result in an aggregate of 26.8 million shares issued upon conversion, subject to adjustment upon the occurrence of specified events. We may redeem for cash all or any part of the Notes on or after August 15, 2008 for 100.00% of the principal amount. The holders may require us to repurchase for cash all or any portion of their Notes on August 15, 2008 for 100.25% of the principal amount, on August 15, 2013 for 100.00% of the principal amount or on August 15, 2018 for 100.00% of the principal amount.

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

      In addition, in the event of a significant change in our corporate ownership or structure, the holders may require us to repurchase all or any portion of their Notes for 100% of the principal amount. Upon a significant change in our corporate ownership or structure, in certain circumstances, we may choose to pay the repurchase price in cash, shares of our common stock or a combination of cash and shares of our common stock.

      In August 2003, we sold warrants for the purchase of up to 26,829,176 shares of our common stock to J.P. Morgan Securities, Inc. for total cash proceeds of approximately $56.4 million in a private offering pursuant to Section 4(2) of the Securities Act of 1933, as amended. The warrants have a conversion price of $23.08 and expire at various dates from February 2008 through May 2008 and must be settled in net shares. Each warrant is automatically converted into one share of our common stock on the various expiration dates if the price of our common stock at the close of trading on the expiration date is greater than the conversion price. Upon conversion, we shall deliver the number of shares of common stock equal to the number of warrants being converted multiplied by the difference between the price of our common stock at the close of trading on the expiration date and the conversion price.

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Item 3. Defaults Upon Senior Securities

      None.

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

      None.

Item 5. Other Information

      None.

Item 6. Exhibits and Reports on Form 8-K

(a) The following exhibits are filed herewith:

Exhibit
Number		Exhibit Title
	4.1	Indenture dated as of August 15, 2003 by and between Cadence Design Systems, Inc. and J.P. Morgan Trust Company, National Association as Trustee, including form of Zero Coupon Zero Yield Senior Convertible Notes due 2023.
	4.2	Registration Rights Agreement dated as of August 15, 2003 by and among Cadence Design Systems, Inc. and J.P. Morgan Securities Inc. and SG Cowen Securities Corporation as Initial Purchasers.
	31.1	Certification of the Registrant’s Chief Executive Officer, H. Raymond Bingham, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
	31.2	Certification of the Registrant’s Chief Financial Officer, William Porter, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
	32.1	Certification of the Registrant’s Chief Executive Officer, H. Raymond Bingham, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of the Registrant’s Chief Financial Officer, William Porter, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

      On October 15, 2003, a current report on Form 8-K was furnished to the SEC to report that Cadence issued a press release and conducted a conference call announcing its financial results for the third quarter of 2003.

      On August 22, 2003, a current report on Form 8-K was furnished to the SEC to report that the initial purchasers for Cadence’s offering of $350.0 million senior convertible notes, have exercised their option to purchase an additional $70.0 million of such convertible notes.

      On August 13, 2003, a current report on Form 8-K was furnished to the SEC to report Cadence’s intention to commence, and announce the pricing of, an offering of $350.0 million in aggregate principal amount of senior convertible notes to be issued pursuant to Rule 144A.

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SIGNATURES

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

CADENCE DESIGN SYSTEMS, INC.

(Registrant)

DATE: November 6, 2003	By: /s/ H. Raymond Bingham
	H. Raymond Bingham President, Chief Executive Officer, and Director
DATE: November 6, 2003	By: /s/ William Porter
	William Porter Senior Vice President and Chief Financial Officer

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EXHIBIT INDEX

Exhibit
Number		Exhibit Title
	4.1	Indenture dated as of August 15, 2003 by and between Cadence Design Systems, Inc. and J.P. Morgan Trust Company, National Association as Trustee, including form of Zero Coupon Zero Yield Senior Convertible Notes due 2023.
	4.2	Registration Rights Agreement dated as of August 15, 2003 by and among Cadence Design Systems, Inc. and J.P. Morgan Securities Inc. and SG Cowen Securities Corporation as Initial Purchasers.
	31.1	Certification of the Registrant’s Chief Executive Officer, H. Raymond Bingham, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
	31.2	Certification of the Registrant’s Chief Financial Officer, William Porter, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
	32.1	Certification of the Registrant’s Chief Executive Officer, H. Raymond Bingham, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of the Registrant’s Chief Financial Officer, William Porter, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-4.1

                                                                     EXHIBIT 4.1
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                          CADENCE DESIGN SYSTEMS, INC.

                                    as Issuer

                                       AND

                 J.P. MORGAN TRUST COMPANY, National Association

                                   as Trustee

                              --------------------

                                    INDENTURE

                           Dated as of August 15, 2003

                               -------------------

            Zero Coupon Zero Yield Senior Convertible Notes Due 2023

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                                TABLE OF CONTENTS



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                                                  ARTICLE 1
                           DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

Section 1.01.  Definitions.....................................................................       1

Section 1.02.  Compliance Certificates and Opinions............................................      10

Section 1.03.  Form of Documents Delivered to Trustee..........................................      11

Section 1.04.  Acts of Holders; Record Dates...................................................      11

Section 1.05.  Notices, Etc., to Trustee and Company...........................................      12

Section 1.06.  Notice to Holders; Waiver.......................................................      13

Section 1.07.  Conflict with Trust Indenture Act...............................................      13

Section 1.08.  Effect of Headings and Table of Contents........................................      14

Section 1.09.  Successors and Assigns..........................................................      14

Section 1.10.  Severability Clause.............................................................      14

Section 1.11.  Benefits of Indenture...........................................................      14

Section 1.12.  Governing Law...................................................................      14

Section 1.13.  Legal Holiday...................................................................      14


                                                  ARTICLE 2
                                               SECURITY FORMS

Section 2.01.  Forms Generally.................................................................      14

Section 2.02. Form of Face of Security.........................................................      15

Section 2.03.  Form of Reverse of Security.....................................................      19

Section 2.04.  Form of Trustee's Certificate of Authentication.................................      30

Section 2.05.  Legend on Restricted Securities.................................................      30

                                                  ARTICLE 3
                                                THE SECURITIES

Section 3.01.  Title and Terms.................................................................      30

Section 3.02.  Denominations...................................................................      31

Section 3.03.  Execution, Authentication, Delivery and Dating..................................      31

Section 3.04.  Temporary Securities............................................................      31

Section 3.05.  Registration; Registration of Transfer and Exchange; Restrictions on Transfer...      32

Section 3.06.  Mutilated, Destroyed, Lost and Stolen Securities................................      34

Section 3.07.  Persons Deemed Owners...........................................................      35

Section 3.08.  Book-Entry Provisions for Global Securities.....................................      35

Section 3.09.  Cancellation and Transfer Provisions............................................      37

Section 3.10.  CUSIP Numbers...................................................................      38


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                                                   ARTICLE 4
                                          SATISFACTION AND DISCHARGE

Section 4.01.  Satisfaction and Discharge of Indenture.........................................      39

Section 4.02.  Application of Trust Money......................................................      39


                                                  ARTICLE 5
                                                   REMEDIES

Section 5.01.  Events of Default...............................................................      40

Section 5.02.  Acceleration of Maturity; Rescission and Annulment..............................      41

Section 5.03.  Collection of Indebtedness and Suits for Enforcement by Trustee.................      42

Section 5.04.  Trustee May File Proofs of Claim................................................      43

Section 5.05.  Application of Money Collected..................................................      43

Section 5.06.  Limitation on Suits.............................................................      44

Section 5.07.  Unconditional Right of Holders to Receive Payment...............................      44

Section 5.08.  Restoration of Rights and Remedies..............................................      45

Section 5.09.  Rights and Remedies Cumulative..................................................      45

Section 5.10.  Delay or Omission Not Waiver....................................................      45

Section 5.11.  Control by Holders..............................................................      45

Section 5.12.  Waiver of Past Defaults.........................................................      45

Section 5.13.  Undertaking for Costs...........................................................      46

Section 5.14.  Waiver of Stay or Extension Laws................................................      46


                                                  ARTICLE 6
                                                 THE TRUSTEE

Section 6.01.  Certain Duties and Responsibilities.............................................      46

Section 6.02.  Notice of Defaults..............................................................      47

Section 6.03.  Certain Rights Of Trustee.......................................................      47

Section 6.04.  Not Responsible for Recitals....................................................      49

Section 6.05.  May Hold Securities.............................................................      49

Section 6.06.  Money Held in Trust.............................................................      49

Section 6.07.  Compensation and Reimbursement..................................................      49

Section 6.08.  Disqualification; Conflicting Interests.........................................      50

Section 6.09.  Corporate Trustee Required; Eligibility.........................................      50

Section 6.10.  Resignation and Removal; Appointment of Successor...............................      50

Section 6.11.  Acceptance of Appointment by Successor..........................................      52

Section 6.12.  Merger, Conversion, Consolidation or Succession to Business.....................      52

Section 6.13.  Preferential Collection of Claims Against.......................................      53



                                       ii


                                                                                                 

                                                  ARTICLE 7
                                    HOLDERS' LISTS AND REPORTS BY TRUSTEE

Section 7.01.  Company to Furnish Trustee Names and Addresses of Holders.......................      53

Section 7.02.  Preservation of Information; Communications to Holders..........................      53

Section 7.03.  Reports By Trustee..............................................................      54

Section 7.04.  Reports by Company..............................................................      54


                                                  ARTICLE 8
                             CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

Section 8.01.  Company May Consolidate, etc., Only on Certain Terms............................      54

Section 8.02.  Successor Substituted...........................................................      55


                                                  ARTICLE 9
                                           SUPPLEMENTAL INDENTURES

Section 9.01.  Supplemental Indentures Without Consent of Holders..............................      55

Section 9.02.  Supplemental Indentures With Consent of Holders.................................      57

Section 9.03.  Execution of Supplemental Indentures............................................      58

Section 9.04.  Effect of Supplemental Indentures...............................................      58

Section 9.05.  Conformity with Trust Indenture Act.............................................      58

Section 9.06.  Reference in Securities to Supplemental Indentures..............................      58


                                                  ARTICLE 10
                                                  COVENANTS

Section 10.01.  Payments.......................................................................      59

Section 10.02.  Maintenance of Office or Agency................................................      59

Section 10.03.  Money for Security Payments to be Held in Trust................................      60

Section 10.04.  Statement by Officers as to Default............................................      61

Section 10.05.  Existence......................................................................      61

Section 10.06.  Reports and Delivery of Certain Information....................................      61

Section 10.07.  Resale of Certain Securities...................................................      62

Section 10.08.  Book-Entry System..............................................................      62

Section 10.09.  Liquidated Damages Under the Registration Rights Agreement.....................      62

Section 10.10.  Information for IRS Filings....................................................      63

Section 10.11.  Calculation Of Original Issue Discount.........................................      63


                                                  ARTICLE 11
                                          REDEMPTION AND REPURCHASES

Section 11.01.  Right to Redeem; Notices to Trustee............................................      63

Section 11.02.  Selection of Securities to be Redeemed.........................................      63



                                      iii


                                                                                                 
Section 11.03.  Notice of Redemption...........................................................      64

Section 11.04.  Effect of Notice of Redemption.................................................      65

Section 11.05.  Deposit of Redemption Price....................................................      65

Section 11.06.  Securities Redeemed in Part....................................................      65

Section 11.07.  Conversion Arrangement on Call for Redemption..................................      65

Section 11.08.  Repurchase of Securities at Option of the Holder...............................      66

Section 11.09.  Repurchase of Securities at Option of the Holder Upon Fundamental Change.......      69

Section 11.10.  Effect of Repurchase Notice or Fundamental Change Repurchase Notice............      75

Section 11.11.  Deposit of Repurchase Price or Fundamental Change Repurchase Price.............      76

Section 11.12.  Securities Repurchased in Whole or in Part.....................................      76

Section 11.13.  Covenant to Comply With Securities Laws Upon Repurchase of Securities..........      77

Section 11.14.  Repayment to the Company.......................................................      77


                                                  ARTICLE 12
                                                  [RESERVED]

                                                  ARTICLE 13
                                                  CONVERSION

Section 13.01.  Conversion Privilege...........................................................      77

Section 13.02.  Conversion Procedure...........................................................      81

Section 13.03.  Fractional Shares..............................................................      82

Section 13.04.  Taxes on Conversion............................................................      82

Section 13.05.  Company to Provide Stock.......................................................      83

Section 13.06.  Adjustment of Conversion Rate..................................................      83

Section 13.07.  No Adjustment..................................................................      89

Section 13.08.  Adjustment for Tax Purposes....................................................      89

Section 13.09.  Notice of Conversion Rate Adjustment...........................................      89

Section 13.10.  Notice of Certain Transactions.................................................      89

Section 13.11.  Effect of Reclassification, Consolidation, Merger or Sale on Conversion
                 Privilege                                                                           90

Section 13.12.  Trustee's Disclaimer...........................................................      91

Section 13.13.  Voluntary Increase.............................................................      91

Section 13.14.  Company Determination Final....................................................      91



                                       iv


         INDENTURE, dated as of August 15, 2003, between Cadence Design Systems,
Inc., a corporation duly organized and existing under the laws of the State of
Delaware, as Issuer (the "COMPANY"), having its principal office at 2655 Seely
Avenue, San Jose, California 95134 and J.P. Morgan Trust Company, National
Association, a national banking association duly organized under the laws of the
United States of America, as Trustee (the "TRUSTEE").

                             RECITALS OF THE COMPANY

         The Company has duly authorized the creation of an issue of Zero Coupon
Zero Yield Senior Convertible Notes Due 2023 (each a "SECURITY" and
collectively, the "SECURITIES") of substantially the tenor and amount
hereinafter set forth, and to provide therefor the Company has duly authorized
the execution and delivery of this Indenture.

         All things necessary to make the Securities, when executed by the
Company and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid agreement of the Company, in accordance with the terms of the Securities
and the Indenture, have been done.

         NOW, THEREFORE, THIS INDENTURE WITNESSETH:

         For and in consideration of the premises and the purchases of the
Securities by the Holders thereof, it is mutually agreed, for the benefit of the
Company and the equal and proportionate benefit of all Holders of the
Securities, as follows:

                                   ARTICLE 1
             DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

         Section 1.01 Definitions. For all purposes of this Indenture, except as
otherwise expressly provided or unless the context otherwise requires:

                  (i)      the terms defined in this Article 1 have the meanings
         assigned to them in this Article and include the plural as well as the
         singular;

                  (ii)     all other terms used herein that are defined in the
         Trust Indenture Act, either directly or by reference therein, have the
         meanings assigned to them therein;

                  (iii)    all accounting terms not otherwise defined herein
         have the meanings assigned to them in accordance with GAAP; and



                  (iv)     the words "herein," "hereof' and "hereunder" and
         other words of similar import refer to this Indenture as a whole and
         not to any particular Article, Section or other subdivision.

         "ACT," when used with respect to any Holder, has the meaning specified
in Section 1.04.

         "AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

         "AGENT MEMBERS" has the meaning specified in Section 3.08.

         "BID SOLICITATION AGENT" means an independent nationally recognized
securities dealer selected by the Company to solicit market bid quotations for
the Securities, which initially shall be the Trustee and in no event shall it be
an Affiliate of the Company.

         "BOARD OF DIRECTORS" means, with respect to any Person, either the
board of directors of such Person or any duly authorized committee of that
board.

         "BOARD RESOLUTION" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors and to be in full force and
effect on the date of such certification, and delivered to the Trustee.

         "BUSINESS DAY" means any day other than a Saturday, a Sunday or a day
on which banking institutions in The City of New York or San Francisco are
authorized or obligated by law, or executive order or governmental decree to be
closed.

         "CAPITAL STOCK" means any and all shares, interests, participations,
rights or other equivalents (however designated) of corporate stock, including,
without limitation, with respect to partnerships, partnership interests (whether
general or limited) and any other interest or participation that confers on a
Person the right to receive a share of the profits and losses of, or
distributions of assets of, such partnership.

         "CHANGE OF CONTROL EVENT" means any transaction or event (whether by
means of an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization or sale of all or substantially
all of

                                       2


the Company's assets or otherwise) in connection with which all or substantially
all of the Common Stock is exchanged for, converted into, acquired for or
constitutes solely the right to receive, consideration which is not all or
substantially all common stock or American Depositary Shares that (i) is listed
on, or immediately after the transaction or event will be listed on, a United
States national securities exchange, or (ii) is approved, or immediately after
the transaction or event will be approved, for quotation on the NASDAQ National
Market or any similar United States system of automated dissemination of
quotations of securities prices.

         "CLOSING PRICE" with respect to the Company's Common Stock on any date
means the closing price on such date as reported by the New York Stock Exchange
or such other principal U.S. securities exchange on which the Company's Common
Stock is then listed, or if the Company's Common Stock is not listed on a U.S.
national or regional exchange, as reported on the National Association of
Securities Dealers Automated Quotation System, or if the Company's Common Stock
is not quoted on the National Association of Securities Dealers Automated
Quotation System, as reported on the principal other market on which the
Company's Common Stock is then traded. In the absence of such quotations, the
Board of Directors of the Company will make a good faith determination of the
sale price.

         "COMMISSION" means the Securities and Exchange Commission, as from time
to time constituted, created under the Exchange Act, or, if at any time after
the execution of this instrument such Commission is not existing and performing
the duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.

         "COMMON STOCK" means the shares of Common Stock, par value $0.01 per
share, of the Company as it exists on the date of this Indenture or any other
shares of Capital Stock of the Company into which the Common Stock shall be
reclassified or changed or, in the event of a merger, consolidation or other
similar transaction involving the Company that is otherwise permitted hereunder
in which the Company is not the surviving corporation, the common stock, common
equity interests, ordinary shares or depositary shares or other certificates
representing common equity interests of such surviving corporation or its direct
or indirect parent corporation.

         "COMPANY" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.

         "COMPANY NOTICE" has the meaning specified in Section 11.08.

                                       3


         "COMPANY NOTICE DATE" has the meaning specified in Section 11.08.

         "COMPANY REQUEST" or "COMPANY ORDER" means a written request or order
signed in the name of the Company by its Chairman of the Board, its Vice
Chairman of the Board, its President or any Vice President, and by its Chief
Financial Officer, its Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary, and delivered to the Trustee.

         "CONTINUING DIRECTOR" means, at any date, a member of the Company's
Board of Directors (i) who was a member of such board on the date hereof or (ii)
who was nominated or elected by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or whose
election to the Company's Board of Directors was recommended or endorsed by at
least a majority of the directors who were Continuing Directors at the time of
such nomination or election or such lesser number comprising a majority of a
nominating committee comprised of independent directors if authority for such
nominations or elections has been delegated to a nominating committee whose
authority and composition have been approved by at least a majority of the
directors who were Continuing Directors at the time such committee was formed.
(Under this definition, if the Board of Directors of the Company as of the date
of this Indenture were to approve a new director or directors and then resign,
no Fundamental Change would occur even though the current Board of Directors
would thereafter cease to be in office).

         "CONVERSION AGENT" means the Trustee or such other office or agency
designated by the Company where Securities may be presented for conversion.

         "CONVERSION DATE" has the meaning specified in Section 13.02(a).

         "CONVERSION PERIOD" means the period from and including the eleventh
trading day in any of the Company's fiscal quarters (beginning with the quarter
ending January 3, 2004) up to but not including the eleventh trading day of the
following fiscal quarter.

         "CONVERSION PRICE" has the meaning specified in Section 13.01(c).

         "CONVERSION RATE" has the meaning specified in Section 13.01(c).

         "CORPORATE TRUST OFFICE" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date of this Indenture,
located at 560 Mission Street, 13th Floor, San Francisco, California, Attention:
Institutional Trust Services, and shall mean for purposes of Section 10.02, c/o
J.P. Morgan Chase Bank, Institutional Trust Services Window, 4 New York Plaza,
1st Floor, New York, New York 10004-2413.

                                       4


         "CORPORATION" means a corporation, association, company, joint-stock
company or business trust.

         "CURRENT MARKET PRICE" has the meaning specified in Section 13.06(f).

         "DEFAULT" means any event that is or with the passage of time or the
giving of notice or both would become an Event of Default.

         "DEPOSITARY" means The Depository Trust Company until a successor
Depositary shall have become such pursuant to the applicable provisions of this
Indenture, and thereafter "Depositary" shall mean such successor Depositary.

         "EVENT OF DEFAULT" has the meaning specified in Section 5.01.

         "EXCHANGE ACT" means the U.S. Securities Exchange Act of 1934, as
amended.

         "FUNDAMENTAL CHANGE" means any transaction or event resulting in either
a Change of Control Event or a Termination of Trading.

         "FUNDAMENTAL CHANGE COMPANY NOTICE" has the meaning specified in
Section 11.09.

         "FUNDAMENTAL CHANGE REPURCHASE DATE" has the meaning specified in
Section 11.09.

         "FUNDAMENTAL CHANGE REPURCHASE NOTICE" has the meaning specified in
Section 11.09.

         "FUNDAMENTAL CHANGE REPURCHASE PRICE" has the meaning specified in the
Securities.

         "GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, in each case, as in effect in the United States on the date hereof.

         "GLOBAL SECURITY" means a Security in global form registered in the
Security Register in the name of a Depositary or a nominee thereof.

         "HOLDER" or "SECURITYHOLDER" means a Person in whose name a Security is
registered in the Security Register.

                                       5


         "INDENTURE" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument and any such supplemental indenture,
respectively.

         "INITIAL PURCHASERS" means J.P. Morgan Securities Inc. and SG Cowen
Securities Corporation.

         "INVESTMENT COMPANY ACT" means the Investment Company Act of 1940 and
any statute successor thereto, in each case as amended from time to time.

         "ISSUE DATE" means the date the Securities are originally issued as set
forth on the face of the Security under this Indenture.

         "LIQUIDATED DAMAGES" shall mean the Liquidated Damages as defined in
the Registration Rights Agreement.

         "MATURITY", when used with respect to any Security, means the date on
which the principal, Repurchase Price or Fundamental Change Repurchase Price of
such Security becomes due and payable as therein or herein provided, whether at
the Stated Maturity, on a Redemption Date, Repurchase Date or Fundamental Change
Repurchase Date, or by declaration of acceleration or otherwise.

         "NOTICE OF DEFAULT" has the meaning specified in Section 5.01.

         "OFFICERS' CERTIFICATE" means a certificate signed by the Chairman of
the Board, the President or any Vice President, and by the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company,
and delivered to the Trustee. One of the officers signing an Officers'
Certificate given pursuant to Section 10.04 shall be the principal executive,
financial or accounting officer of the Company.

         "OPINION OF COUNSEL" means a written opinion of counsel, who may be
external or in-house counsel for the Company, and who shall be reasonably
acceptable to the Trustee.

         "OUTSTANDING," when used with respect to Securities, means, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:

                  (i)      Securities theretofore cancelled by the Trustee or
         delivered to the Trustee for cancellation;

                                       6


                  (ii)     Securities, or portions thereof, for whose payment or
         redemption money in the necessary amount has been theretofore deposited
         with the Trustee or any Paying Agent (other than the Company) in trust
         or set aside and segregated in trust by the Company (if the Company
         shall act as its own Paying Agent) for the Holders of such Securities;
         provided that if such Securities are to be redeemed prior to the
         maturity thereof, notice of such redemption shall have been given to
         the Holders as herein provided, or provision satisfactory to a
         Responsible Officer of the Trustee shall have been made for giving such
         notice; and

                  (iii)    Securities that have been paid or in exchange for or
         in lieu of which other Securities have been authenticated and delivered
         pursuant to this Indenture;

provided, however, that, in determining whether the Holders of the requisite
Principal Amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities which a Responsible Officer of the Trustee
actually knows to be so owned shall be so disregarded. Securities so owned which
have been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Company or any
other obligor upon the Securities or any Affiliate of the Company or of such
other obligor.

         "PAYING AGENT" means any Person (including the Company) authorized by
the Company to pay the principal of, Liquidated Damages on, Redemption Price,
Repurchase Price or Fundamental Change Repurchase Price of, any Securities on
behalf of the Company. The Trustee shall initially be the Paying Agent.

         "PERSON" means any individual, corporation, partnership, limited
liability company, joint venture, trust, unincorporated organization or
government or any agency or political subdivision thereof.

         "PHYSICAL SECURITIES" means permanent certificated Securities in
registered form issued in denomination of $1,000 Principal Amount and integral
multiples thereof.

         "PRINCIPAL AMOUNT" of a Security means the Principal Amount as set
forth on the face of the Security.

                                       7


         "PRINCIPAL VALUE CONVERSION" has the meaning specified in Section
13.01(a)(ii).

         "PURCHASE AGREEMENT" means the Purchase Agreement, dated August 11,
2003, entered into by the Company and the Initial Purchasers in connection with
the sale of the Securities.

         "QUALIFIED INSTITUTIONAL BUYER" or "QIB" shall have the meaning
specified in Rule 144A.

         "RECORD DATE" means each February 1 and August 1 (whether or not a
Business Day).

         "REDEMPTION DATE" shall mean the date specified for redemption of the
Securities in accordance with the terms of the Securities and Article 11 hereof.

         "REDEMPTION PRICE" has the meaning specified in the Securities.

         "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of August 15, 2003, between the Company and the Initial
Purchasers, for the benefit of themselves and the Holders, as the same may be
amended or modified from time to time in accordance with the terms thereof.

         "REPURCHASE DATE" has the meaning specified in Section 11.08.

         "REPURCHASE NOTICE" has the meaning specified in Section 11.08.

         "REPURCHASE PRICE" has the meaning specified in the Securities.

         "RESALE REGISTRATION STATEMENT" means a registration statement under
the Securities Act registering the Securities for resale pursuant to the terms
of the Registration Rights Agreement.

         "RESPONSIBLE OFFICER" means any officer of the Trustee within the
Corporate Trust Office of the Trustee with direct responsibility for the
administration of this Indenture and also, with respect to a particular matter,
any other officer of the Trustee to whom such matter is referred because of such
officer's knowledge and familiarity with the particular subject.

         "RESTRICTED GLOBAL SECURITY" means a Global Security representing
Restricted Securities.

         "RESTRICTED SECURITY" or "RESTRICTED SECURITIES" has the meaning
specified in Section 2.05.

                                       8


         "RULE 144" means Rule 144 under the Securities Act (including any
successor rule thereto), as the same may be amended from time to time.

         "RULE 144A" means Rule 144A under the Securities Act (including any
successor rule thereto), as the same may be amended from time to time.

         "RULE 144A INFORMATION" has the meaning specified in the Securities.

         "SECURITIES ACT" means the U.S. Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.

         "SECURITY" or "SECURITIES" has the meaning specified in the first
paragraph of the Recitals of the Company.

         "SECURITY REGISTER" and "SECURITY REGISTRAR" have the respective
meanings specified in Section 3.05.

         "SIGNIFICANT SUBSIDIARY" means Cadence Technology Inc. and Cadence
Design Systems (Ireland) Limited.

         "STATED MATURITY," when used with respect to any Security, means the
date specified in such Security as the fixed date on which an amount equal to
the principal amount of such Security together with accrued and unpaid
Liquidated Damages, if any, is due and payable.

         "STOCK TRANSFER AGENT" means Mellon Investor Services LLC (formerly
ChaseMellon Shareholder Services LLC) or such other Person designated by the
Company as the transfer agent for the Common Stock.

         "SUBSIDIARY" means a corporation more than 50% of the outstanding
voting stock of which is owned, directly or indirectly, by the Company or by one
or more other Subsidiaries, or by the Company and one or more other
Subsidiaries. For the purposes of this definition, "voting stock" means stock
which ordinarily has voting power for the election of directors, whether at all
times or only so long as no senior class of stock has such voting power by
reason of any contingency.

         "SURVIVING ENTITY" has the meaning specified in Section 8.01.

         "TERMINATION OF TRADING" means that the Company's Common Stock or other
common stock into which the Securities are convertible is neither listed for
trading on a United States national securities exchange nor approved for listing
on the NASDAQ National Market or any similar United States system of automated
dissemination of quotations of securities prices, and no America depositary
shares or similar instruments for such common stock are so listed or approved
for listing in the United States.

                                       9


         "TRADING DAY" means (x) if the applicable security is quoted on the
Nasdaq National Market System or Nasdaq SmallCap Market, a day on which trades
may be made on thereon or (y) if the applicable security is listed or admitted
for trading on the New York Stock Exchange or another national security
exchange, a day on which the New York Stock Exchange or such other national
security exchange is open for business or (z) if the applicable security is not
so listed, admitted for trading or quoted, any Business Day.

         "TRADING PRICE" has the meaning specified in Section 13.01(a)(ii).

         "TRADING PRICE CONDITION" has the meaning set forth in Section
13.01(a)(ii).

         "TRANSFER RESTRICTED SECURITY" means a Security required to bear the
restricted legend set forth in the form of Security in Section 2.02.

         "TRUST INDENTURE ACT" means the Trust Indenture Act of 1939 as in
effect on the date as of which this Indenture was executed; provided, however,
that in the event the Trust Indenture Act of 1939 is amended after such date,
"Trust Indenture Act" means, to the extent required by any such amendment, the
Trust Indenture Act of 1939 as so amended.

         "TRUSTEE" means the Person named as the "TRUSTEE" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"TRUSTEE" shall mean such successor Trustee.

         "VICE PRESIDENT," when used with respect to the Company or the Trustee,
means any vice president, whether or not designated by a number or a word or
words added before or after the title "vice president".

         Section 1.02 . Compliance Certificates and Opinions. Upon any
application or request by the Company to the Trustee to take any action under
any provision of this Indenture, the Company shall furnish to the Trustee such
certificates and opinions as may be required under the Trust Indenture Act. Each
such certificate or opinion shall be given in the form of an Officers'
Certificate, if to be given by an officer of the Company, or an Opinion of
Counsel, if to be given by counsel, and shall comply with the requirements of
the Trust Indenture Act and any other requirement set forth in this Indenture.

         Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:

         (a)      a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein relating
thereto;

                                       10


         (b)      a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;

         (c)      a statement that, in the opinion of each such individual, such
individual has made such examination or investigation as is necessary to enable
such individual to express an informed opinion as to whether or not such
covenant or condition has been complied with; and

         (d)      a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.

         Section 1.03. Form of Documents Delivered to Trustee. In any case
where several matters are required to be certified by, or covered by an opinion
of, any specified Person, it is not necessary that all such matters be certified
by, or covered by the opinion of, only one such Person, or that they be so
certified or covered by only one document, but one such Person may certify or
give an opinion with respect to some matters and one or more other such Persons
as to other matters, and any such Person may certify or give an opinion as to
such matters in one or several documents.

         Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.

         Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.

         Section 1.04. Acts of Holders; Record Dates. (a) Any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be given or taken by Holders may be embodied in and evidenced
by one or more instruments of substantially similar tenor signed by such Holders
in person or by agent duly appointed in writing and, except as herein otherwise
expressly provided, such action shall become effective when such instrument or
instruments are delivered to the Trustee and, where it is hereby expressly

                                       11


required, to the Company. Such instrument or instruments (and the action
embodied therein and evidenced thereby) are herein sometimes referred to as an
"ACT" of the Holders signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Indenture and (subject to Section 6.01)
conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Section.

         (b)      The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee reasonably deems sufficient.

         (c)      The Company may, in the circumstances permitted by the Trust
Indenture Act, fix any day as the record date for the purpose of determining the
Holders entitled to give or take any request, demand, authorization, direction,
notice, consent, waiver or other action, or to vote on any action, authorized or
permitted to be given or taken by Holders. If not set by the Company prior to
the first solicitation of a Holder made by any Person in respect of any such
action, or, in the case of any such vote, prior to such vote, the record date
for any such action or vote shall be the 30th day (or, if later, the date of the
most recent list of Holders required to be provided pursuant to Section 7.01)
prior to such first solicitation or vote, as the case may be. With regard to any
record date, only the Holders on such date (or their duly designated proxies)
shall be entitled to give or take, or vote on, the relevant action.

         (d)      The ownership of Securities shall be proved by the Security
Register.

         (e)      Any request, demand, authorization, direction, notice,
consent, waiver or other Act of the Holder of any Security shall bind every
future Holder of the same Security and the Holder of every Security issued upon
the registration of transfer thereof or in exchange therefor or in lieu thereof
in respect of anything done, omitted or suffered to be done by the Trustee or
the Company in reliance thereon, whether or not notation of such action is made
upon such Security.

         Section 1.05. Notices, Etc., to Trustee and Company. Any request,
demand, authorization, direction, notice, consent, waiver or Act of Holders or

                                       12


other document provided or permitted by this Indenture to be made upon, given or
furnished to, or filed with:

                  (i)      the Trustee by any Holder or by the Company shall be
         sufficient for every purpose hereunder if made, given, furnished or
         filed in writing to or with the Trustee at its Corporate Trust Office;
         or

                  (ii)     the Company by the Trustee or by any Holder shall be
         sufficient for every purpose hereunder (unless otherwise herein
         expressly provided) if in writing and mailed, first-class postage
         prepaid, to the Company addressed to it at the address of its principal
         office specified in the first paragraph of this instrument or at any
         other address previously furnished in writing to the Trustee by the
         Company, Attention: Secretary.

         Section 1.06. Notice to Holders; Waiver. Where this Indenture provides
for notice to Holders of any event, such notice shall be sufficiently given
(unless otherwise herein expressly provided) if in writing and mailed,
first-class postage prepaid, to each Holder affected by such event, at such
Holder's address as it appears in the Security Register, not later than the
latest date (if any), and not earlier than the earliest date (if any),
prescribed for the giving of such notice. In any case where notice to Holders is
given by mail, neither the failure to mail such notice, nor any defect in any
notice so mailed, to any particular Holder shall affect the sufficiency of such
notice with respect to other Holders. Where this Indenture provides for notice
in any manner, such notice may be waived in writing by the Person entitled to
receive such notice, either before or after the event, and such waiver shall be
the equivalent of such notice. Waivers of notice by Holders shall be filed with
the Trustee, but such filing shall not be a condition precedent to the validity
of any action taken in reliance upon such waiver.

         In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.

         Whenever under this Indenture the Trustee is required to provide any
notice by mail, in all cases the Trustee may alternatively provide notice by
overnight courier or by telefacsimile, with confirmation of transmission.

         Section 1.07. Conflict with Trust Indenture Act. If any provision
hereof limits, qualifies or conflicts with a provision of the Trust Indenture
Act that is required hereunder to be a part of and govern this Indenture, the
latter provision shall control. If any provision of this Indenture modifies or
excludes any provision of the Trust Indenture Act that may be so modified or
excluded, the latter provision shall be deemed to apply to this Indenture as so
modified or to be excluded, as the case may be.

                                       13


         Section 1.08. Effect of Headings and Table of Contents. The Article and
Section headings herein and the Table of Contents are for convenience only and
shall not affect the construction hereof, and all Article and Section references
are to Articles and Sections, respectively, of this Indenture unless otherwise
expressly stated.

         Section 1.09. Successors and Assigns. All covenants and agreements in
this Indenture by the Company shall bind its successors and assigns, whether so
expressed or not.

         Section 1.10. Severability Clause. In case any provision in this
Indenture or in the Securities shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.

         Section 1.11. Benefits of Indenture. Nothing in this Indenture or in
the Securities, express or implied, shall give to any Person, other than the
parties hereto and their respective successors hereunder and the Holders of
Securities, any benefit or any legal or equitable right, remedy or claim under
this Indenture.

         Section 1.12. Governing Law. This Indenture and the Securities shall
be governed by and construed in accordance with the laws of the State of New
York.

         Section 1.13. Legal Holiday. In any case where the Stated Maturity of
any Security shall not be a Business Day, then (notwithstanding any other
provision of this Indenture or of the Securities) payment of principal need not
be made on such date, but may be made on the next succeeding Business Day with
the same force and effect as if made on at the Stated Maturity.

                                   ARTICLE 2
                                 SECURITY FORMS

         Section 2.01. Forms Generally. The Securities and the Trustee's
certificates of authentication shall be in substantially the forms set forth in
this Article, with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by this Indenture, and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange or Depositary therefor, the Internal Revenue Code of 1986,
as amended, and regulations thereunder, or as may, consistently herewith, be
determined by the officers executing such Securities, as evidenced by their
execution thereof.

                                       14


         The Securities shall initially be issued in the form of permanent
Global Securities in registered form in substantially the form set forth in this
Article. The aggregate Principal Amount of the Global Securities may from time
to time be increased or decreased by adjustments made on the records of the
Trustee, as custodian for the Depositary, as hereinafter provided.

         Section 2.02. Form of Face of Security. [INCLUDE IF SECURITY IS A
RESTRICTED SECURITY -- THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED
IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THIS SECURITY AND THE COMMON
STOCK ISSUABLE UPON CONVERSION HEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF
THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5
OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.

         THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF CADENCE DESIGN
SYSTEMS, INC. THAT (A) PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE
TO SALES OF THIS SECURITY UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY
SUCCESSOR PROVISION), THIS SECURITY AND THE SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION HEREOF MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY
TO (I) CADENCE DESIGN SYSTEMS, INC. OR ANY SUBSIDIARY THEREOF, (II) TO A PERSON
WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV)
PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT
HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY OF THE RESALE
RESTRICTIONS REFERRED TO IN CLAUSE (A) ABOVE. THIS LEGEND WILL BE REMOVED UPON
THE EARLIER OF THE TRANSFER OF THIS SECURITY PURSUANT TO CLAUSE (A)(IV) ABOVE OR
UPON ANY TRANSFER OF THIS SECURITY UNDER RULE 144(K) UNDER THE SECURITIES ACT
(OR ANY SUCCESSOR PROVISION). THE INDENTURE CONTAINS A

                                       15


PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER THE TRANSFER OF THIS
SECURITY IN VIOLATION OF THE FOREGOING RESTRICTION. IN ADDITION, THE HOLDER
HEREOF WILL NOT, DIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTIONS WITH
REGARD TO THIS SECURITY OR THE COMMON STOCK ISSUABLE UPON THE CONVERSION HEREOF
EXCEPT AS PERMITTED UNDER THE SECURITIES ACT (OR ANY SUCCESSOR ACT).

         [INCLUDE IF SECURITY IS A GLOBAL SECURITY -- THIS SECURITY IS A GLOBAL
SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS
REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY
NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER
OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY
PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE.

         UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY ("DTC"), A NEW YORK CORPORATION, TO THE COMPANY OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL IN AS MUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]

         THIS SECURITY WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR U.S. FEDERAL
INCOME TAX PURPOSES. FOR PURPOSES OF SECTIONS 1273 AND 1275 OF THE INTERNAL
REVENUE CODE, THE ISSUE PRICE OF EACH SECURITY IS $[ ] PER $1,000 OF PRINCIPAL
AMOUNT, THE ISSUE DATE IS AUGUST 15, 2003 AND THE YIELD TO MATURITY IS [ ]%,
COMPOUNDED [SEMI-ANNUALLY].

                                       16


                          CADENCE DESIGN SYSTEMS, INC.

            ZERO COUPON ZERO YIELD SENIOR CONVERTIBLE NOTES DUE 2023

No. [    ]                  CUSIP NO. 127387 AA 6        U.S. $[               ]

         Cadence Design Systems, Inc., a corporation duly organized and validly
existing under the laws of the State of Delaware (herein called the "COMPANY"),
which term includes any successor corporation under the Indenture referred to on
the reverse hereof), for value received hereby promises to pay to [     ], or
registered assigns, the principal sum of [    ] United States Dollars ($ )
[INCLUDE IF SECURITY IS A GLOBAL SECURITY -- (which amount may from time to time
be increased or decreased by adjustments made on the records of the Trustee, as
custodian for the Depositary, in accordance with the rules and procedures of the
Depositary)] on August 15, 2023. Payment of the principal of this Security shall
be made by check mailed to the address of the Holder of this Security specified
in the register of Securities, or, at the option of the Company, by wire
transfer in immediately available funds, in such lawful money of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts.

         The Issue Date of this Security is August 15, 2003.

         Reference is made to the further provisions of this Security set forth
on the reverse hereof, including, without limitation, provisions giving the
Company the right to repurchase this Security commencing August 15, 2008, the
right to convert this Security into Common Stock of the Company subject to the
occurrence of certain events and the right of the Holder of this Security to
require the Company to repurchase this Security on certain dates and upon
certain events, in each case, on the terms and subject to the limitations
referred to on the reverse hereof and as more fully specified in the Indenture.
Such further provisions shall for all purposes have the same effect as though
fully set forth at this place. Capitalized terms used but not defined herein
shall have such meanings as are ascribed to such terms in the Indenture.

         This Security shall be deemed to be a contract made under the laws of
the State of New York, and for all purposes shall be construed in accordance
with and governed by the laws of said State.

         This Security shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been manually signed
by the Trustee or a duly authorized authenticating agent under the Indenture.

                                       17


         IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.

                                            CADENCE DESIGN SYSTEMS, INC.

                                            By:  _________________________
                                                  Authorized Signatory


                                       18


         Section 2.03. Form of Reverse of Security. This Security is one of a
duly authorized issue of Securities of the Company, designated as its Zero
Coupon Zero Yield Senior Convertible Notes Due 2023 (the "SECURITIES"), all
issued or to be issued under and pursuant to an Indenture, dated as of August
15, 2003 (the "INDENTURE"), between the Company and J.P. Morgan Trust Company,
National Association (the "TRUSTEE"), to which Indenture and all indentures
supplemental thereto reference is hereby made for a description of the rights,
limitations of rights, obligations, duties and immunities thereunder of the
Trustee, the Company and the Holders of the Securities.

         The indebtedness evidenced by the Securities is unsecured and
unsubordinated senior indebtedness of the Company and ranks equally with the
Company's other unsecured and unsubordinated senior indebtedness.

         Redemption at the Option of the Company. No sinking fund is provided
for the Securities. The Securities are redeemable as a whole, or from time to
time in part, at any time commencing on August 15, 2008 at the option of the
Company at a redemption price (the "REDEMPTION PRICE") equal to 100%, expressed
as a percentage of the Principal Amount of Securities to be redeemed, together
with accrued and unpaid Liquidated Damages, if any, to, but excluding, the
Redemption Date.

         Repurchase by the Company at the Option of the Holder. Subject to the
terms and conditions of the Indenture, the Company shall become obligated to
repurchase, at the option of the Holder, on each Repurchase Date, the Securities
held by such Holder as follows:



Repurchase Date                    % of Principal Amount
- ---------------                    ---------------------
                                
August 15, 2008                           100.25
August 15, 2013                           100.00
August 15, 2018                           100.00


plus accrued and unpaid Liquidated Damages, if any, to, but excluding, the
Repurchase Date (the "REPURCHASE PRICE"), upon delivery of a Repurchase Notice
containing the information set forth in the Indenture, at any time from the
opening of business on the date that is 30 days prior to such Repurchase Date
until the close of business on the Business Day prior to such Repurchase Date
and upon delivery of the Securities to the Paying Agent by the Holder as set
forth in the Indenture. The Repurchase Price will be paid in cash.

         Repurchase by the Company at the Option of the Holder Upon a
Fundamental Change. Subject to the terms and conditions of the Indenture, the
Company shall become obligated, at the option of the Holder, to repurchase the
Securities if a Fundamental Change occurs at any time prior to the Stated
Maturity at 100% of the Principal Amount plus accrued and unpaid Liquidated

                                       19


Damages, if any, to, but excluding, the Fundamental Change Repurchase Date (the
"FUNDAMENTAL CHANGE REPURCHASE PRICE"), which Fundamental Change Repurchase
Price will be paid in cash; provided that if a Fundamental Change results from a
Change of Control Event, the Company may elect, subject to the satisfaction of
certain conditions described in the Indenture, to pay all or a portion of the
Fundamental Change Repurchase Price in Common Stock or a combination of cash and
Common Stock. The number of shares of Common Stock a Holder will receive will
equal the quotient obtained by dividing (i) the portion of the Fundamental
Change Repurchase Price to be paid in shares of Common Stock by (ii) 95% of the
average Closing Price of the shares of Common Stock for the five Trading Day
period immediately preceding but ending on the second Business Day immediately
preceding the Fundamental Change Repurchase Date, subject to adjusted as
described in the Indenture. Notwithstanding the foregoing, a Holder will not
have the right to require the Company to repurchase the Securities upon a Change
of Control Event constituting a Fundamental Change if the Closing Price per
share of the Company's Common Stock for any five Trading Days within the period
of 10 consecutive Trading Days ending immediately after the later of the Change
of Control Event and the public announcement of the Change of Control Event
exceeds 105% of the Conversion Price of the Securities in effect on each of
those five Trading Days.

         Withdrawal of Repurchase Notice and Fundamental Change Repurchase
Notice. Holders have the right to withdraw, in whole or in part, any Repurchase
Notice or Fundamental Change Repurchase Notice, as the case may be, by
delivering to the Paying Agent a written notice of withdrawal in accordance with
the provisions of the Indenture.

         Payment of Redemption Price, Repurchase Price and Fundamental Change
Repurchase Price. If cash and/or Common Stock, if permitted under the Indenture,
sufficient to pay the Redemption Price, Repurchase Price or Fundamental Change
Repurchase Price, as the case may be, of all Securities or portions thereof to
be redeemed or repurchased on a Redemption Date, Repurchase Date or on a
Fundamental Change Repurchase Date, as the case may be, is deposited with the
Paying Agent on the Business Day following the Redemption Date, Repurchase Date
or the Fundamental Change Repurchase Date, as the case may be, such Securities
will cease to be outstanding and Liquidated Damages, if any, will cease to
accrue on such Securities (or portions thereof) immediately after such
Redemption Date, Repurchase Date or Fundamental Change Repurchase Date, as the
case may be, and the Holder thereof shall have no other rights as such (other
than the right to receive the Redemption Price, Repurchase Price or Fundamental
Change Repurchase Price, as the case may be, upon surrender of such Security).

         Conversion. Subject to the terms and conditions of the Indenture, a
Holder may convert each of its Securities into shares of the Company's common

                                       20


stock at an initial conversion rate of $63.8790 shares per $1,000 Principal
Amount of Securities (the "CONVERSION RATE"), at any time prior to the close of
business on August 15, 2023. The Conversion Rate in effect at any given time is
subject to adjustment. A Holder may convert fewer than all of such Holder's
Securities so long as the Securities converted are an integral multiple of
$1,000 principal amount. Holders will not receive any cash payment representing
accrued and unpaid Liquidated Damages, if any, upon conversion of a Security.
Accrued and unpaid Liquidated Damages, if any, will be deemed paid in full
rather than canceled, extinguished or forfeited.

         Holders may surrender their Securities for conversion, in whole or in
part, into shares of the Company's Common Stock upon the occurrence of the
following circumstances (in each case, as more fully described in the
Indenture): (A) if (i) during any Conversion Period prior to August 15, 2018 the
Closing Price of the Company's Common Stock for at least 20 Trading Days in the
30 Trading Day period ending on the first day of such Conversion Period exceeds
145% of the Conversion Price of the Securities on the first day of such
Conversion Period or (ii) during anytime on or after August 15, 2018 through the
close of business on the Business Day prior to the Stated Maturity, the Closing
Price of the Company's Common Stock is more than 145% of the Conversion Price of
the Company's Common Stock; (B) if during the five consecutive Business Day
period following any five consecutive Trading Day period in which the average
Trading Price for the Securities was less than 98% of the product of the average
Closing Price of the Company's Common Stock during such five Trading Day period
and the Conversion Rate; provided that if on the date of any conversion pursuant
to a Trading Price Condition that is on or after August 15, 2018, the Closing
Price of the Company's Common Stock on the Trading Day prior to the Conversion
Date is greater than 100% of the Conversion Price, Holders surrendering
Securities for conversion will receive, in lieu of shares of Common Stock based
on the Conversion Rate, shares of Common Stock with a value equal to the
Principal Value Conversion; (C) if a Security is called for redemption, at any
time prior to the close of business on the Business Day prior to the Redemption
Date, even if the Securities are not otherwise convertible at such time; or (D)
if the Company elects to (i) distribute to all or substantially all holders of
the Company's Common Stock certain rights entitling them to purchase shares of
the Company's Common Stock at less than the Closing Price of a share of the
Company's Common Stock on the trading day preceding the declaration date for
such distribution or (ii) distribute to all or substantially all holders of the
Company's common stock its assets, debt securities or certain rights to purchase
its securities, which distribution has a per share value as determined by the
Company's Board of Directors exceeding 5% of the Closing Price of the Company's
Common Stock on the Trading Day preceding the declaration date for such
distribution.

                                       21


         [INCLUDE IF SECURITY IS A GLOBAL SECURITY -- In the event of a deposit
or withdrawal of an interest in this Security, including an exchange, transfer,
repurchase or conversion of this Security in part only, the Trustee, as
custodian of the Depositary, shall make an adjustment on its records to reflect
such deposit or withdrawal in accordance with the rules and procedures of the
Depositary.]

         [INCLUDE IF SECURITY IS A RESTRICTED SECURITY -- Subject to certain
limitations in the Indenture, at any time when the Company is not subject to
Section 13 or 15(d) of the United States Securities Exchange Act of 1934, as
amended, upon the request of a Holder of a Restricted Security, the Company will
promptly furnish or cause to be furnished Rule 144A Information (as defined
below) to such Holder of Restricted Securities, or to a prospective purchaser of
any such security designated by any such Holder, to the extent required to
permit compliance by any such Holder with Rule 144A under the Securities Act of
1933, as amended (the "SECURITIES ACT"). "Rule 144A Information" shall be such
information as is specified pursuant to Rule 144A(d)(4) under the Securities Act
(or any successor provision thereto).]

         If an Event of Default shall occur and be continuing, the Principal
Amount plus Liquidated Damages, if any, through such date on all the Securities
may be declared due and payable in the manner and with the effect provided in
the Indenture.

         The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities under the Indenture at
any time by the Company and the Trustee with the consent of the Holders of not
less than a majority in aggregate Principal Amount of the Outstanding
Securities. The Indenture also contains provisions permitting the Holders of
specified percentages in aggregate Principal Amount of the Outstanding
Securities, on behalf of the Holders of all the Securities, to waive compliance
by the Company with certain provisions of the Indenture and certain past
defaults under the Indenture and their consequences. Any such consent or waiver
by the Holder of any provision of or applicable to this Security shall be
conclusive and binding upon such Holder and upon all future Holders of this
Security and of any Security issued upon the registration of transfer hereof or
in exchange herefor or in lieu hereof, whether or not notation of such consent
or waiver is made upon this Security.

         As provided in and subject to the provisions of the Indenture, the
Holder of this Security shall not have the right to institute any proceeding
with respect to the Indenture or for the appointment of a receiver or trustee or
for any other remedy thereunder, unless such Holder shall have previously given
the Trustee written notice of a continuing Event of Default with respect to the
Securities, the

                                       22


Holders of not less than 25% in aggregate Principal Amount of the Outstanding
Securities shall have made written request to the Trustee to institute
proceedings in respect of such Event of Default as Trustee and offered the
Trustee reasonable indemnity satisfactory to it, the Trustee shall not have
received from the Holders of a majority in Principal Amount of Outstanding
Securities a direction inconsistent with such request, and the Trustee shall
have failed to institute any such proceeding, for 60 days after receipt of such
notice, request and offer of indemnity. The foregoing shall not apply to any
suit instituted by the Holder of this Security for the enforcement of any
payment of said principal hereof on or after the respective due dates expressed
herein or for the enforcement of any conversion right.

         No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the Principal Amount, Repurchase Price or
Fundamental Change Repurchase Price of, and Liquidated Damages, if any, on, this
Security at the times, place and rate, and in the coin or currency, herein
prescribed.

         As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in The City of New York, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities,
of authorized denominations and for the same aggregate Principal Amount, will be
issued to the designated transferee or transferees.

         The Securities are issuable only in registered form in denominations of
$1,000 and any integral multiple of $1,000 above that amount, as provided in the
Indenture and subject to certain limitations therein set forth. Securities are
exchangeable for a like aggregate Principal Amount of Securities of a different
authorized denomination, as requested by the Holder surrendering the same.

         No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.

         Prior to due presentment of this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.

                                       23


         THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.

         All terms used in this Security that are defined in the Indenture shall
have the meanings assigned to them in the Indenture.

                                       24


                                 ASSIGNMENT FORM

         If you want to assign this Security, fill in the form below and have
your signature guaranteed:

         I or we assign and transfer this Security to:

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

(Print or type name, address and zip code and social security or tax ID number
of assignee)

         and irrevocably appoint _____________________________________ agent to
transfer this Security on the books of the Company. The agent may substitute
another to act for him.

         Date: _________________            Signed:________________

         (Sign exactly as your name appears on the other side of this Security)

         Signature Guarantee:___________________________________________________

Note: Signatures must be guaranteed by an "eligible guarantor institution"
meeting the requirements of the Security Registrar, which requirements include
membership or participation in the Security Transfer Agent Medallion Program
("STAMP") or such other "signature guarantee program" as may be determined by
the Security Registrar in addition to, or in substitution for, STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.

                                       25


         In connection with any transfer of this Security occurring prior to the
date which is the earlier of (i) the date of the declaration by the Commission
of the effectiveness of a registration statement under the Securities Act, as
amended (the "SECURITIES ACT"), covering resales of this Security (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) the second anniversary of the Issue Date set forth on the
face of this Security, the undersigned confirms that it has not utilized any
general solicitation or general advertising in connection with the transfer and
that this Security is being transferred:

                                   [Check One]

                  (1)      [ ]        to the Company or a subsidiary thereof; or

                  (2)      [ ]        to a "Qualified Institutional Buyer"
                                      pursuant to and in compliance with Rule
                                      144A under the Securities Act; or

                  (3)      [ ]        pursuant to the exemption from
                                      registration provided by Rule 144 under
                                      the Securities Act.

Unless one of the above boxes is checked, the Trustee will refuse to register
any of the Securities evidenced by this certificate in the name of any Person
other than the registered Holder thereof, provided that if box (3) is checked,
the Company may require, prior to registering any such transfer of the
Securities, in its sole discretion, such legal opinions, certifications and
other information as the Company may reasonably request to confirm that such
transfer is being made pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act.

         If none of the foregoing boxes is checked, the Trustee or Security
Registrar shall not be obligated to register this Security in the name of any
Person other than the Holder hereof unless and until the conditions to any such
transfer of registration set forth herein and in Section 3.09 of the Indenture
shall have been satisfied.

         Date:___________________     Signed:___________________________________

                                             (Sign exactly as your name appears
                                             on the other side of this Security)

         Signature Guarantee:___________________________________________________

                                       26


Note: Signatures must be guaranteed by an "eligible guarantor institution"
meeting the requirements of the Security Registrar, which requirements include
membership or participation in the Security Transfer Agent Medallion Program
("STAMP") or such other "signature guarantee program" as may be determined by
the Security Registrar in addition to, or in substitution for, STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.

                                       27


              TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED

         The undersigned represents and warrants that it is purchasing this
Security for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "QUALIFIED
INSTITUTIONAL BUYER" within the meaning of Rule 144A under the Securities Act
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as the
undersigned has requested pursuant to Rule 144A or has determined not to request
such information and that it is aware that the transferor is relying upon the
undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.

         Date:_________________________         Signed:________________________

         NOTICE: To be executed by an executive officer.

                                       28


                               CONVERSION NOTICE

         If you want to convert this Security into Common Stock of the Company,
check the box: ?

         To convert only part of this Security, state the Principal Amount to be
converted (which must be $1,000 or an integral multiple of $1,000):

         $_______________________________

         If you want the stock certificate made out in another person's name,
fill in the form below:

________________________________________________________________________________
             (Insert other person's social security or tax ID no.)

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________
           (Print or type other person's name, address and zip code)

         Date: __________________           Signed: ____________________

         (Sign exactly as your name appears on the other side of this Security)

         Signature Guarantee:___________________________________________________

Note: Signatures must be guaranteed by an "eligible guarantor institution"
meeting the requirements of the Security Registrar, which requirements include
membership or participation in the Security Transfer Agent Medallion Program
("STAMP") or such other "signature guarantee program" as may be determined by
the Security Registrar in addition to, or in substitution for, STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.

                                       29


                                       90


         Section 2.04. Form of Trustee's Certificate of Authentication. This is
one of the Securities referred to in the within-mentioned Indenture.

Dated:  __________                          J.P. MORGAN TRUST COMPANY,
                                            NATIONAL ASSOCIATION, as Trustee

                                            By__________________________________
                                              Authorized Signatory

         Section 2.05. Legend on Restricted Securities. During the period
beginning on the Issue Date and ending on the date two years from such date, any
Security, including any Security issued in exchange therefor or in lieu thereof,
shall be deemed a "RESTRICTED SECURITY" and shall be subject to the restrictions
on transfer provided in the legends set forth on the face of the form of
Security in Section 2.02; provided, however, that the term "RESTRICTED SECURITY"
shall not include any Securities as to which restrictions have been terminated
in accordance with Section 3.05. All Securities shall bear the applicable
legends set forth on the face of the form of Security in Section 2.02. Except as
provided in Section 3.05 and Section 3.09, the Trustee shall not issue any
unlegended Security until it has received an Officers' Certificate from the
Company directing it to do so.

                                   ARTICLE 3
                                 THE SECURITIES

         Section 3.01. Title and Terms. The aggregate Principal Amount of
Securities that may be authenticated and delivered under this Indenture is
initially limited to $350,000,000 (subject to increase by up to $70,000,000 in
the event the Initial Purchasers exercise the option granted to them in the
Purchase Agreement), except for Securities authenticated and delivered upon
registration or transfer of, or in exchange for, or in lieu of, other Securities
pursuant to Section 3.04, 3.05, 3.06, 9.06, 11.06 or 11.12.

         The Securities shall be known and designated as the "Zero Coupon Zero
Yield Senior Convertible Notes Due 2023" of the Company. The Principal Amount
shall be payable at the Stated Maturity.

         The Principal Amount and accrued Liquidated Damages, if any, on the
Securities shall be payable at the office or agency of the Company in The City
of New York maintained for such purpose and at any other office or agency
maintained by the Company for such purpose; provided, however, that at the
option of the Company payments may be made by wire transfer or by check

                                       30


mailed to the address of the Person entitled thereto as such address shall
appear in the Security Register.

         The Securities shall not have the benefit of a sinking fund.

         The Securities shall not be superior in right of payment to, and shall
rank pari passu with, all other unsecured and unsubordinated indebtedness of the
Company.

         Section 3.02. Denominations. The Securities shall be issuable only in
registered form without coupons and in denominations of $1,000 and any integral
multiple of $1,000 above that amount.

         Section 3.03. Execution, Authentication, Delivery and Dating. The
Securities shall be executed on behalf of the Company by its Chairman of the
Board, its President or one of its Vice Presidents.

         Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.

         At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities executed by the Company to
the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Securities. The Company Order shall specify
the amount of Securities to be authenticated, and shall further specify the
amount of such Securities to be issued as a Global Security or as Physical
Securities. The Trustee in accordance with such Company Order shall authenticate
and deliver such Securities as in this Indenture provided and not otherwise.

         Each Security shall be dated the date of its authentication.

         No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any
Security shall be conclusive evidence, and the only evidence, that such Security
has been duly authenticated and delivered hereunder.

         Section 3.04. Temporary Securities. Pending the preparation of
definitive Securities, the Company may execute, and upon Company Order the
Trustee shall authenticate and deliver, temporary Securities which are printed,
lithographed, typewritten, mimeographed or otherwise produced, in any authorized

                                       31


denomination, substantially of the tenor of the definitive Securities in lieu of
which they are issued and with such appropriate insertions, omissions,
substitutions and other variations as the officers executing such Securities may
determine, as evidenced by their execution of such Securities.

         If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at any office
or agency of the Company designated pursuant to Section 10.02, without charge to
the Holder. Upon surrender for cancellation of any one or more temporary
Securities the Company shall execute and the Trustee shall authenticate and
deliver in exchange therefor a like Principal Amount of definitive Securities of
authorized denominations. Until so exchanged, the temporary Securities shall in
all respects be entitled to the same benefits under this Indenture as definitive
Securities.

         Section 3.05. Registration; Registration of Transfer and Exchange;
Restrictions on Transfer. (a) The Company shall cause to be kept at the
Corporate Trust Office of the Trustee a register (the register maintained in
such office and in any other office or agency designated pursuant to Section
10.02 being herein sometimes collectively referred to as the "SECURITY
REGISTER") in which, subject to such reasonable regulations as it may prescribe,
the Company shall provide for the registration of Securities and of transfers of
Securities. The Trustee is hereby appointed "Security Registrar" (the "SECURITY
REGISTRAR") for the purpose of registering Securities and transfers of
Securities as herein provided.

         Upon surrender for registration of transfer of any Security at an
office or agency of the Company designated pursuant to Section 10.02 for such
purpose, the Company shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Securities of any authorized denominations and of a like aggregate Principal
Amount and tenor, each such Security bearing such restrictive legends as may be
required by this Indenture (including Sections 2.02, 2.05 and 3.09).

         At the option of the Holder and subject to the other provisions of this
Section 3.05 and to Section 3.09, Securities may be exchanged for other
Securities of any authorized denominations and of a like aggregate Principal
Amount and tenor, upon surrender of the Securities to be exchanged at such
office or agency. Whenever any Securities are so surrendered for exchange, the
Company shall execute, and the Trustee shall authenticate and deliver, the
Securities which the Holder making the exchange is entitled to receive.

         All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same

                                       32


debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.

         Every Security presented or surrendered for registration of transfer or
for exchange shall (if so required by the Company or the Trustee) be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing. As a condition to the
registration of transfer of any Restricted Securities, the Company or the
Trustee may require evidence satisfactory to them as to the compliance with the
restrictions set forth in the legend on such securities.

         Except as provided in the following sentence and in Section 3.09, all
Securities originally issued hereunder and all Securities issued upon
registration of transfer or exchange or replacement thereof shall be Restricted
Securities and shall bear the legend required by Sections 2.02 and 2.05, unless
the Company shall have delivered to the Trustee (and the Security Registrar, if
other than the Trustee) a Company Order stating that the Security is not a
Restricted Security and may be issued without such legend thereon. Securities
which are issued upon registration of transfer of, or in exchange for,
Securities which are not Restricted Securities shall not be Restricted
Securities and shall not bear such legend.

         No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Securities, other than
exchanges pursuant to Section 3.04 not involving any transfer.

         The Company shall not be required to exchange or register a transfer of
any Security (i) during the 15-day period immediately preceding the mailing of
any notice of redemption of any Security, (ii) after any notice of redemption
has been given to Holders, except, where such notice provides that such Security
is to be redeemed only in part, the Company shall be required to exchange or
register a transfer of the portion thereof not to be redeemed, (iii) that has
been surrendered for conversion or (iv) as to which a Repurchase Notice or
Fundamental Change Repurchase Notice has been delivered and not withdrawn,
except, where such Repurchase Notice or Fundamental Change Repurchase Notice
provides that such Security is to be purchased only in part, the Company shall
be required to exchange or register a transfer of the portion thereof not to be
purchased.

         (b)      Beneficial ownership of every Restricted Security shall be
subject to the restrictions on transfer provided in the legends required to be
set forth on the face of each Restricted Security pursuant to Sections 2.02 and
2.05, unless such restrictions on transfer shall be terminated in accordance
with this Section 3.05(b)

                                       33


or Section 3.09. The Holder of each Restricted Security, by such Holder's
acceptance thereof, agrees to be bound by such restrictions on transfer.

         The restrictions imposed by this Section 3.05 and by Sections 2.02,
2.05 and 3.09 upon the transferability of any particular Restricted Security
shall cease and terminate upon delivery by the Company to the Trustee of an
Officers' Certificate stating that such Restricted Security has been sold
pursuant to an effective Resale Registration Statement under the Securities Act
or transferred in compliance with Rule 144 under the Securities Act (or any
successor provision thereto). Any Restricted Security as to which the Company
has delivered to the Trustee an Officers' Certificate that such restrictions on
transfer shall have expired in accordance with their terms or shall have
terminated may, upon surrender of such Restricted Security for exchange to the
Security Registrar in accordance with the provisions of this Section 3.05, be
exchanged for a new Security, of like tenor and aggregate Principal Amount,
which shall not bear the restrictive legends required by Sections 2.02 and 2.05.
The Company shall inform the Trustee in writing of the effective date of any
Resale Registration Statement registering the Securities under the Securities
Act. The Trustee shall not be liable for any action taken or omitted to be taken
by it in good faith in accordance with the aforementioned Resale Registration
Statement.

         As used in the preceding two paragraphs of this Section 3.05, the term
"TRANSFER" encompasses any sale, pledge, transfer or other disposition of any
Restricted Security.

         (c)      Neither the Trustee nor any of its agents shall (i) have any
duty to monitor compliance with or with respect to any federal or state or other
securities or tax laws or (ii) have any duty to obtain documentation relating to
any transfers or exchanges other than as specifically required hereunder.

         Section 3.06. Mutilated, Destroyed, Lost and Stolen Securities. If any
mutilated Security is surrendered to the Trustee, the Company shall execute and
the Trustee shall authenticate and deliver in exchange therefor a new Security
of like tenor and Principal Amount and bearing a number not contemporaneously
outstanding.

         If there shall be delivered to the Company and the Trustee (i) evidence
to their satisfaction of the destruction, loss or theft of any Security and (ii)
such security or indemnity as may be required by them to save each of them and
any agent of either of them harmless, then, in the absence of notice to the
Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of like tenor and Principal Amount and bearing a number not contemporaneously
outstanding.

                                       34


         In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable or has been called for redemption
in full, the Company in its discretion may, instead of issuing a new Security,
pay such Security.

         Upon the issuance of any new Security under this Section 3.06, the
Company may require payment by the Holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in relation thereto and any
other expenses (including the fees and expenses of the Trustee) connected
therewith.

         Every new Security issued pursuant to this Section 3.06 in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.

         The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.

         Section 3.07. Persons Deemed Owners. Prior to due presentment of a
Security for registration of transfer, the Company, the Trustee and any agent of
the Company or the Trustee may treat the Person in whose name such Security is
registered as the owner of such Security for the purpose of receiving payment of
the principal of such Security and for all other purposes whatsoever, whether or
not such Security be overdue, and neither the Company, the Trustee nor any agent
of the Company or the Trustee shall be affected by notice to the contrary.

         Section 3.08. Book-Entry Provisions for Global Securities. (a) The
Global Securities initially shall (i) be registered in the name of the
Depositary or the nominee of such Depositary, (ii) be delivered to the Trustee
as custodian for the Depositary and (iii) bear legends as set forth on the face
of the form of Security in Section 2.02.

         Members of, or participants in, the Depositary ("AGENT MEMBERS") shall
have no rights under this Indenture with respect to any Global Security held on
their behalf by the Depositary, or the Trustee as its custodian, or under the
Global Security, and the Depositary may be treated by the Company, the Trustee
and any agent of the Company or the Trustee as the absolute owner of the Global
Security for all purposes whatsoever. Notwithstanding the foregoing, nothing
herein shall prevent the Company, the Trustee or any agent of the Company or the
Trustee from giving effect to any written certification, proxy or other
authorization furnished by the Depositary or impair, as between the Depositary
and its Agent

                                       35


Members, the operation of customary practices governing the exercise of the
rights of any Holder.

         (b)      Transfers of the Global Securities shall be limited to
transfers in whole, but not in part, to the Depositary, its successors or their
respective nominees. Interests of beneficial owners in a Global Security may be
transferred or exchanged, in whole or in part, for Physical Securities in
accordance with the rules and procedures of the Depositary and the provisions of
Section 3.09. In addition, Physical Securities shall be transferred to all
beneficial owners in exchange for their beneficial interests in the Global
Securities if (A) such Depositary has notified the Company (or the Company
becomes aware) that the Depositary (i) is unwilling or unable to continue as
Depositary for such Global Security or (ii) has ceased to be a clearing agency
registered under the Exchange Act when the Depositary is required to be so
registered to act as such Depositary and, in either such case, no successor
Depositary shall have been appointed within 90 days of such notification or of
the Company becoming aware of such event; or (B) there shall have occurred and
be continuing an Event of Default with respect to such Global Security and the
Outstanding Securities shall have become due and payable pursuant to Section
5.02 and the Trustee requests that Physical Securities be issued; provided that
Holders of Physical Securities offered and sold in reliance on Rule 144A shall
have the right, subject to applicable law, to request that such Securities be
exchanged for interests in the applicable Global Security.

         (c)      In connection with any transfer or exchange of a portion of
the beneficial interest in the Global Security to beneficial owners pursuant to
paragraph (b) above, the Security Registrar shall (if one or more Physical
Securities are to be issued) reflect on its books and records the date and a
decrease in the Principal Amount of the Global Security in an amount equal to
the Principal Amount of the beneficial interest in the Global Security to be
transferred, and the Company shall execute, and the Trustee shall authenticate
and deliver, one or more Physical Securities of like tenor and amount.

         (d)      In connection with the transfer of the entire Global Security
to beneficial owners pursuant to paragraph (b) above, the Global Security shall
be deemed to be surrendered to the Trustee for cancellation, and the Company
shall execute, and the Trustee shall authenticate and deliver, to each
beneficial owner identified by the Depositary in exchange for its beneficial
interest in the Global Security, an equal aggregate Principal Amount of Physical
Securities of authorized denominations and the same tenor.

         (e)      Any Physical Security constituting a Restricted Security
delivered in exchange for an interest in the Global Security pursuant to
paragraph (c) or (d) above shall, except as otherwise provided by paragraph (c)
of Section 3.09, bear the legend regarding transfer restrictions applicable to
the Physical Securities set forth on the face of the form of Security in Section
2.02.

                                       36


         (f)      The Holder of the Global Securities may grant proxies and
otherwise authorize any Person, including Agent Members and Persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Securities.

         Section 3.09. Cancellation and Transfer Provisions. The Company at any
time may deliver to the Trustee for cancellation any Securities previously
authenticated and delivered hereunder which the Company may have acquired in any
manner whatsoever, and may deliver to the Trustee for cancellation any
Securities previously authenticated hereunder which the Company has not issued
and sold. The Trustee shall cancel and dispose of all Securities surrendered for
registration of transfer, exchange, payment, purchase, repurchase, redemption,
conversion (pursuant to Article 13 hereof) or cancellation in accordance with
its customary practices. If the Company shall acquire any of the Securities,
such acquisition shall not operate as a redemption or satisfaction of the
indebtedness represented by such Securities unless and until the same are
delivered to the Trustee for cancellation. The Company may not issue new
Securities to replace Securities it has paid in full or delivered to the Trustee
for cancellation.

         (a)      Transfers to QIBs. The following provisions shall apply with
respect to the registration of any proposed transfer of a Security constituting
a Restricted Security to a QIB:

                  (i)      the Security Registrar shall register the transfer if
         such transfer is being made by a proposed transferor who has checked
         the box provided for on the form of Security stating, or has otherwise
         advised the Company and the Security Registrar in writing, that the
         sale has been made in compliance with the provisions of Rule 144A to a
         transferee who has signed the certification provided for on the form of
         Security stating, or has otherwise advised the Company and the Security
         Registrar in writing, that it is purchasing the Security for its own
         account or an account with respect to which it exercises sole
         investment discretion and that it and any such account is a QIB within
         the meaning of Rule 144A, and is aware that the sale to it is being
         made in reliance on Rule 144A and acknowledges that it has received
         such information regarding the Company as it has requested pursuant to
         Rule 144A or has determined not to request such information and that it
         is aware that the transferor is relying upon its foregoing
         representations in order to claim the exemption from registration
         provided by Rule 144A; and

                  (ii)     if the proposed transferee is an Agent Member, and
         the Securities to be transferred consist of Physical Securities which
         after transfer are to be evidenced by an interest in the Global
         Security, upon receipt by the Security Registrar of instructions given
         in accordance with

                                       37


         the Depositary's and the Security Registrar's procedures, the Security
         Registrar shall reflect on its books and records the date and an
         increase in the Principal Amount of the Global Security in an amount
         equal to the Principal Amount of the Physical Securities to be
         transferred, and the Trustee shall cancel the Physical Securities so
         transferred.

         (b)      Private Placement Legend. Upon the registration of transfer,
exchange or replacement of Securities not bearing the legends required by
Sections 2.02 and 2.05, the Security Registrar shall deliver Securities that do
not bear such legends. Upon the registration of transfer, exchange or
replacement of Securities bearing the legends required by Sections 2.02 and
2.05, the Security Registrar shall deliver only Securities that bear such
legends unless there is delivered to the Security Registrar an Opinion of
Counsel reasonably satisfactory to the Company and the Trustee to the effect
that neither such legend nor the related restrictions on transfer are required
in order to maintain compliance with the provisions of the Securities Act.

         (c)      General. By its acceptance of any Security bearing the legends
required by Sections 2.02 and 2.05, each Holder of such a Security acknowledges
the restrictions on transfer of such Security set forth in this Indenture and in
such legends and agrees that it will transfer such Security only as provided in
this Indenture.

         The Security Registrar shall retain, in accordance with its customary
procedures, copies of all letters, notices and other written communications
received pursuant to this Section 3.09. The Company shall have the right to
inspect and make copies of all such letters, notices or other written
communications at any reasonable time upon the giving of reasonable written
notice to the Security Registrar.

         Section 3.10. CUSIP Numbers. In issuing the Securities, the Company may
use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall
use "CUSIP" numbers in notices of redemption as a convenience to Holders;
provided that any such notice may state that no representation is made as to the
correctness of such numbers either as printed on the Securities or as contained
in any notice of a redemption and that reliance may be placed only on the other
identification numbers printed on the Securities, and any such redemption shall
not be affected by any defect in or omission of such numbers. The Company will
promptly notify the Trustee of any change in the "CUSIP" numbers.

                                       38


                                   ARTICLE 4
                           SATISFACTION AND DISCHARGE

         Section 4.01. Satisfaction and Discharge of Indenture. This Indenture
shall cease to be of further effect (except as to any surviving rights of
registration of transfer or exchange of Securities herein expressly provided
for), and the Trustee, on demand of and at the expense of the Company, shall
execute proper instruments acknowledging satisfaction and discharge of this
Indenture, when

         (a)      either

                  (i)      all Securities theretofore authenticated and
         delivered (other than (A) Securities which have been destroyed, lost or
         stolen and which have been replaced or paid as provided in Section 3.06
         and (B) Securities for whose payment money has theretofore been
         deposited with the Trustee in trust or segregated and held in trust by
         the Company and thereafter repaid to the Company or discharged from
         such trust as provided in Section 10.03) have been delivered to the
         Trustee for cancellation; or

                  (ii)     all such Securities not theretofore delivered to the
         Trustee for cancellation have become due and payable and the Company
         has deposited or caused to be deposited with the Trustee as trust funds
         in trust for the purpose an amount sufficient to pay and discharge the
         entire indebtedness evidenced by such Securities not theretofore
         delivered to the Trustee for cancellation;

         (b)      the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and

         (c)      the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of this
Indenture have been complied with.

         Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 6.07 and, if money shall
have been deposited with the Trustee pursuant to Section 4.01(a)(ii), the
obligations of the Trustee under Section 4.02 and the last paragraph of Section
10.03 shall survive.

         Section 4.02. Application of Trust Money. Subject to the provisions of
the last paragraph of Section 10.03, all money deposited with the Trustee
pursuant to Section 4.01 shall be held in trust and applied by it, in accordance
with the provisions of the Securities and this Indenture, to the payment, either
directly or through any Paying Agent (including the Company acting as its own
Paying

                                       39


Agent) as the Trustee may determine, to the Persons entitled thereto, of the
principal and Liquidated Damages, if any, for whose payment such money has been
deposited with the Trustee.

                                   ARTICLE 5
                                    REMEDIES

         Section 5.01. Events of Default. "EVENT OF DEFAULT", wherever used
herein, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):

         (a)      default in the payment of Liquidated Damages, if any, on any
Securities when due and payable and such default continues for a period of 30
days; or

         (b)      default in the payment of the Principal Amount, Redemption
Price, Repurchase Price or Fundamental Change Repurchase Price on any Security
when it becomes due and payable; or

         (c)      default in the performance of any covenant, agreement or
condition of the Company in this Indenture or the Securities (other than a
default specified in paragraph (a) or (b) above), and such default continues for
a period of 60 days after there has been given, by registered or certified mail,
to the Company by the Trustee or to the Company and the Trustee by the Holders
of at least 25% in aggregate Principal Amount of the Outstanding Securities a
written notice specifying such default and requiring it to be remedied and
stating that such notice is a "NOTICE OF DEFAULT" hereunder; or

         (d)      default in the Company's obligation to convert the Securities
into shares of its Common Stock upon exercise of a Holder's conversion rights in
accordance with Article 13 hereof and such default continues for a period of 10
days; or

         (e)      default by the Company or any Significant Subsidiary in the
payment of the principal or interest on any loan agreement or other loan
instrument under which there may be outstanding, or by which there may be
evidenced, any debt for money borrowed in excess of $25.0 million in the
aggregate of the Company and/or any Significant Subsidiary (other than
indebtedness for borrowed money secured only by the real property to which the
indebtedness relates and which is non-recourse to the Company or to such
Significant Subsidiary), whether such debt now exists or shall hereafter be
created, resulting in such debt becoming or being declared due and payable prior

                                       40


to its stated maturity, and such acceleration shall not have been rescinded or
annulled within 30 days after written notice has been received by the Company or
such Significant Subsidiary from the Trustee; provided that if any time before a
judgment or decree has been obtained by the Trustee as hereinafter provided,
such default is remedied or cured by the Company within the applicable cure
period, or is waived by the holders of such indebtedness, default under this
paragraph (e) shall be deemed to have been remedied, cured or waived, as the
case may be; or

         (f)      failure by the Company to give the Fundamental Change Company
Notice; or

         (g)      the entry by a court having jurisdiction in the premises of
(i) a decree or order for relief in respect of the Company of a voluntary case
or proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or (ii) a decree or order adjudging the
Company as bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in respect
of the Company under any applicable Federal or State law or (iii) appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the continuance of
any such decree or order for relief or any such other decree or order unstayed
and in effect for a period of 60 consecutive days; or

         (h)      the commencement by the Company of a voluntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the consent by it to the entry of a
decree or order for relief in respect of the Company in an involuntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any bankruptcy or
insolvency case or proceeding against it, or the filing by it of a petition or
answer or consent seeking reorganization or relief under any applicable Federal
or State law, or the consent by it to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the Company or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability to
pay its debts generally as they become due, or the taking of corporate action by
the Company in furtherance of any such action.

         Section 5.02. Acceleration of Maturity; Rescission and Annulment. (a)
If an Event of Default (other than those specified in 5.01(g) and 5.01(h))
occurs and is continuing, then and in every such case the Trustee or the Holders
of not less than 25% in aggregate Principal Amount of the Outstanding Securities
may declare the Principal Amount plus accrued and unpaid Liquidated Damages, if

                                       41


any, on all the Outstanding Securities to be due and payable immediately, by a
notice in writing to the Company (and to the Trustee if given by Holders), and
upon any such declaration such Principal Amount plus accrued and unpaid
Liquidated Damages, if any, shall become immediately due and payable.

         Notwithstanding the foregoing, in the case of an Event of Default
specified in Section 5.01(g) or 5.01(h), the Principal Amount plus accrued and
unpaid Liquidated Damages, if any, on all Outstanding Securities will ipso facto
become due and payable without any declaration or other Act on the part of the
Trustee or any Holder.

         (a)      At any time after such a declaration of acceleration has been
made and before a judgment or decree for payment of the money due has been
obtained by the Trustee as hereinafter in this Article 5 provided, the Holders
of a majority in aggregate Principal Amount of the Outstanding Securities, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if

                  (i)      such rescission and annulment will not conflict with
         any judgment or decree of a court of competent jurisdiction; and

                  (ii)     all Events of Default, other than the non-payment of
         the Principal Amount plus accrued and unpaid Liquidated Damages, if
         any, on Securities which have become due solely by such declaration of
         acceleration, have been cured or waived as provided in Section 5.12.

         No such rescission shall affect any subsequent default or impair any
right consequent thereon.

         Section 5.03. Collection of Indebtedness and Suits for Enforcement by
Trustee. The Company covenants that if a default is made in the payment of the
Principal Amount plus accrued and unpaid Liquidated Damages, if any, at the
Maturity thereof or in the payment of the Redemption Price, the Repurchase Price
or the Fundamental Change Repurchase Price in respect of any Security, the
Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities, the whole amount then due and payable on such
Securities, and, in addition thereto, such further amount as shall be sufficient
to cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel.

         If an Event of Default occurs and is continuing, the Trustee may, but
shall not be obligated to, pursue any available remedy to collect the payment of
the principal amount plus accrued but unpaid Liquidated Damages, if any, on the
Securities or to enforce the performance of any provision of the Securities or
this

                                       42


Indenture. The Trustee may maintain a proceeding even if the Trustee does not
possess any of the Securities or does not produce any of the Securities in the
proceeding. A delay or omission by the Trustee or any Holder in exercising any
right or remedy accruing upon an Event of Default shall not impair the right or
remedy or constitute a waiver of, or acquiescence in, the Event of Default. No
remedy is exclusive of any other remedy. All available remedies are cumulative.

         Section 5.04. Trustee May File Proofs of Claim. In case of any judicial
proceeding relative to the Company (or any other obligor upon the Securities),
its property or its creditors, the Trustee shall be entitled and empowered, by
intervention in such proceeding or otherwise, to take any and all actions
authorized under the Trust Indenture Act in order to have claims of the Holders
and the Trustee allowed in any such proceeding. In particular, the Trustee shall
be authorized to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or other similar official
in any such judicial proceeding is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee shall consent to the
making of such payments directly to the Holders, to pay to the Trustee any
amount due it for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel and any other amounts due the
Trustee under Section 6.07.

         No provision of this Indenture shall be deemed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding.

         Section 5.05. Application of Money Collected. Any money collected by
the Trustee pursuant to this Article shall be applied in the following order, at
the date or dates fixed by the Trustee and, in case of the distribution of such
money to Holders, upon presentation of the Securities and the notation thereon
of the payment if only partially paid and upon surrender thereof if fully paid:

                  FIRST: To the payment of all amounts due the Trustee under
         Section 6.07; and

                  SECOND: To the payment of the amounts then due and unpaid on
         the Securities for the Principal Amount, Redemption Price, Repurchase
         Price, Fundamental Change Repurchase Price or Liquidated Damages, if
         any, as the case may be, in respect of which or for the benefit of
         which such money has been collected, ratably, without preference or
         priority of any kind, according to the amounts due and payable on such
         Securities.

                                       43


         Section 5.06. Limitation on Suits. No Holder of any Security shall have
any right to institute any proceeding, judicial or otherwise, with respect to
this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder (other than in the case of an Event of Default specified
in Section 5.01(a) or 5.01(b)), unless:

                  (i)      such Holder has previously given written notice to
         the Trustee of a continuing Event of Default;

                  (ii)     the Holders of not less than 25% in aggregate
         Principal Amount of the Outstanding Securities shall have made written
         request to the Trustee to institute proceedings in respect of such
         Event of Default in its own name as Trustee hereunder;

                  (iii)    such Holder or Holders have offered to the Trustee
         indemnity reasonably satisfactory to it against the costs, expenses and
         liabilities to be incurred in compliance with such request;

                  (iv)     the Trustee for 60 days after its receipt of such
         notice, request and offer of security or indemnity has failed to
         institute any such proceeding; and

                  (v)      no direction, in the opinion of the Trustee,
         inconsistent with such written request has been given to the Trustee
         during such 60-day period by the Holders of a majority in aggregate
         Principal Amount of the Outstanding Securities;

it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing itself of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other Holders, or to obtain or to seek to obtain priority or preference over any
other Holders or to enforce any right under this Indenture, except in the manner
herein provided and for the equal and ratable benefit of all the Holders.

         Section 5.07. Unconditional Right of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder
to receive payment of the Principal Amount, Redemption Price, Repurchase Price,
Fundamental Change Repurchase Price or Liquidated Damages, if any, in respect of
the Securities held by such Holder, on or after the respective due dates
expressed in the Securities or any Redemption Date, Repurchase Date or
Fundamental Change Purchase Date, as applicable, and to convert the Securities
in accordance with Article 13, or to bring suit for the enforcement of any such
payment on or after such respective dates or the right to convert, shall not be
impaired or affected adversely without the consent of such Holder.

                                       44


         Section 5.08. Restoration of Rights and Remedies. If the Trustee or any
Holder has instituted any proceeding to enforce any right or remedy under this
Indenture and such proceeding has been discontinued or abandoned for any reason,
or has been determined adversely to the Trustee or to such Holder, then and in
every such case, subject to any determination in such proceeding, the Company,
the Trustee and the Holders shall be restored severally and respectively to
their former positions hereunder and thereafter all rights and remedies of the
Trustee and the Holders shall continue as though no such proceeding had been
instituted.

         Section 5.09. Rights and Remedies Cumulative. Except as otherwise
provided with respect to the replacement or payment of mutilated, destroyed,
lost or stolen Securities in the last paragraph of Section 3.06, no right or
remedy herein conferred upon or reserved to the Trustee or to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.

         Section 5.10. Delay or Omission Not Waiver. No delay or omission of the
Trustee or of any Holder of any Security to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article or by law to the Trustee or to the
Holders may be exercised from time to time, and as often as may be deemed
expedient, by the Trustee or by the Holders, as the case may be.

         Section 5.11. Control by Holders. The Holders of a majority in
Principal Amount of the Outstanding Securities shall have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee,
provided that:

                  (i)      such direction shall not be in conflict with any rule
         of law or with this Indenture; and

                  (ii)     the Trustee may take any other action deemed proper
         by the Trustee which is not inconsistent with such direction.

         Section 5.12. Waiver of Past Defaults. The Holders of not less than a
majority in Principal Amount of the Outstanding Securities may on behalf of the
Holders of all the Securities waive any past Default hereunder and its
consequences, except a Default:

                                       45


                  (i)      Described in Section 5.01(a) or (b); or

                  (ii)     in respect of a covenant or provision hereof which
         under Article 9 cannot be modified or amended without the consent of
         the Holder of each Outstanding Security affected.

         Upon any such waiver, such Default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereon.

         Section 5.13. Undertaking for Costs. In any suit for the enforcement of
any right or remedy under this Indenture or in any suit against the Trustee for
any action taken or omitted by it as Trustee, in either case in respect of the
Securities, a court may require any party litigant in such suit to file an
undertaking to pay the costs of the suit, and the court may assess reasonable
costs, including reasonable attorney's fees, against any party litigant in the
suit having due regard to the merits and good faith of the claims or defenses
made by the party litigant; but the provisions of this Section 5.13 shall not
apply to any suit instituted by the Company, to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in Principal Amount of the Outstanding Securities,
or to any suit instituted by any Holder for the enforcement of the payment of
the Principal Amount on any Security on or after Maturity of such Security, the
Redemption Price, the Repurchase Price or the Fundamental Change Repurchase
Price.

         Section 5.14. Waiver of Stay or Extension Laws. The Company covenants
(to the extent that it may lawfully do so) that it will not at any time insist
upon, or plead, or in any manner whatsoever claim or take the benefit or
advantage of, any stay, or extension law wherever enacted, now or at any time
hereafter in force, which may affect the covenants or the performance of this
Indenture; and the Company (to the extent that it may lawfully do so) hereby
expressly waives all benefit or advantage of any such law and covenants that it
will not hinder, delay or impede the execution of any power herein granted to
the Trustee, but will suffer and permit the execution of every such power as
though no such law had been enacted.

                                   ARTICLE 6
                                  THE TRUSTEE

         Section 6.01. Certain Duties and Responsibilities. The duties and
responsibilities of the Trustee shall be as provided by the Trust Indenture Act.
Except during the continuance of an Event of Default, the Trustee undertakes to
perform such duties and only such duties as are specifically set forth in this

                                       46


Indenture, and no implied covenants or obligations shall be read into this
Indenture against the Trustee. In case an Event of Default with respect to the
Securities has occurred (which has not been cured or waived), the Trustee shall
exercise the rights and powers vested in it by this Indenture, and use the same
degree of care and skill in their exercise, as a prudent person would exercise
or use under the circumstances in the conduct of such person's own affairs.
Notwithstanding the foregoing, no provision of this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the exercise
of any of its rights or powers. Whether or not therein expressly so provided,
every provision of this Indenture relating to the conduct or affecting the
liability of or affording protection to the Trustee shall be subject to the
provisions of this Section.

         Section 6.02. Notice of Defaults. The Trustee shall give the Holders
notice of any Default hereunder within 60 days after the occurrence thereof;
provided, that (except in the case of any Default in the payment of Principal
Amount or Liquidated Damages, if any, on any of the Securities, Redemption
Price, Repurchase Price or Fundamental Change Repurchase Price), the Trustee
shall be protected in withholding such notice if and so long as a trust
committee of directors or trustees and/or a Responsible Officer of the Trustee
in good faith determines that the withholding of such notice is in the interest
of the holders of Securities.

         Section 6.03. Certain Rights Of Trustee. Subject to the provisions of
Section 6.01:

         (a)      the Trustee may conclusively rely and shall be protected in
acting or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the proper
party or parties;

         (b)      any request or direction of the Company mentioned herein shall
be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors of the Company may be sufficiently
evidenced by a Board Resolution;

         (c)      whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
request and rely upon an Officers' Certificate;

         (d)      the Trustee may consult with counsel of its selection and the
advice of such counsel or any Opinion of Counsel shall be full and complete

                                       47


authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon;

         (e)      the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request or direction
of any of the Holders pursuant to this Indenture, unless such Holders shall have
offered to the Trustee security or indemnity reasonably satisfactory to it
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction;

         (f)      the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document, but
the Trustee, in its discretion, may make such further inquiry or investigation
into such facts or matters as it may see fit; and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be entitled to
examine the books, records and premises of the Company, personally or by agent
or attorney at the sole cost of the Company and shall incur no liability or
additional liability of any kind by reason of such inquiry or investigation.

         (g)      the Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder;

         (h)      the Trustee shall not be charged with knowledge of any Default
or Event of Default with respect to the Securities unless either (i) a
Responsible Officer shall have actual knowledge of such Default or Event of
Default or (ii) written notice of such Default or Event of Default shall have
been given to the Trustee by the Company or any other obligor on such Securities
or by any Holder of such Securities;

         (i)      the Trustee shall not be liable for any action taken, suffered
or omitted by it in good faith and reasonably believed by it to be authorized or
within the discretion or rights or powers conferred upon it by this Indenture;

         (j)      the rights, privileges, protections, immunities and benefits
given to the Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Trustee in each
of its capacities hereunder, and each agent, custodian, director, officer,
employee and other Person employed to act hereunder; and

         (k)      the Trustee may request that the Company deliver an Officers'
Certificate setting forth the names of individuals and/or titles of officers

                                       48


authorized at such time to take specified actions pursuant to this Indenture,
which Officers' Certificate may be signed by any person authorized to sign an
Officers' Certificate, including any person specified as so authorized in any
such certificate previously delivered and not superseded.

         (l)      The permissive rights of the Trustee to take certain actions
under this Indenture shall not be construed as a duty unless so specified
herein.

         Section 6.04. Not Responsible for Recitals. The recitals contained
herein and in the Securities, except the Trustee's certificates of
authentication, shall be taken as the statements of the Company, and the Trustee
assumes no responsibility for their correctness. The Trustee makes no
representations as to the validity, sufficiency or priority of this Indenture or
of the Securities. The Trustee shall not be accountable for the use or
application by the Company of Securities or the proceeds thereof.

         Section 6.05. May Hold Securities. The Trustee, any Paying Agent, any
Security Registrar or any other agent of the Company, in its individual or any
other capacity, may become the owner or pledgee of Securities and, subject to
Section 6.08 and 6.13, may otherwise deal with the Company with the same rights
it would have if it were not Trustee, Paying Agent, Security Registrar or such
other agent.

         Section 6.06. Money Held in Trust. Money held by the Trustee in trust
hereunder need not be segregated from other funds except to the extent required
by law. The Trustee shall be under no liability for interest on any money
received by it hereunder except as otherwise agreed in writing with the Company.

         Section 6.07. Compensation and Reimbursement. The Company agrees:

                  (i)      to pay to the Trustee from time to time such
         compensation for all services rendered by it hereunder as the Company
         and the Trustee shall from time to time agree in writing (which
         compensation shall not be limited by any provision of law in regard to
         the compensation of a trustee of an express trust);

                  (ii)     except as otherwise expressly provided herein, to
         reimburse the Trustee upon its request for all reasonable expenses,
         disbursements and advances incurred or made by the Trustee in
         accordance with any provision of this Indenture (including the
         reasonable compensation and the expenses and disbursements of its
         agents and counsel), except any such expense, disbursement or advance
         as may be attributable to its negligence or willful misconduct; and

                                       49


                  (iii)    to indemnify the Trustee and any predecessor Trustee
         for, and to hold it harmless against, any loss, liability or expense
         including taxes (other than taxes based upon, measured by or determined
         by the income of the Trustee) incurred without negligence or willful
         misconduct on its part, arising out of or in connection with the
         acceptance or administration of this trust, including the reasonable
         costs and expenses of defending itself against any claim (whether
         assessed by the Company, by any Holder or any other Person) or
         liability in connection with the exercise or performance of any of its
         powers or duties hereunder.

         The obligations of the Company under this Section 6.07 shall survive
the resignation or removal of the Trustee and the satisfaction and discharge of
this Indenture. To secure the Company's payment obligations in this Section
6.07, the Trustee shall have a lien prior to the Securities on all money or
property held or collected by the Trustee, except that held in trust to pay
principal on the Securities. Such lien shall survive the resignation or removal
of the Trustee and the satisfaction and discharge of this Indenture. When the
Trustee incurs expenses or renders services after a Default or an Event of
Default specified in Sections 5.01(g) or 5.01(h) hereof occurs, the expenses and
the compensation for the services (including the fees and expenses of its agents
and counsel) are intended to constitute expenses of administration under U.S.
Code, Title 11 or any other similar foreign, federal or state law for the relief
of debtors.

         Section 6.08. Disqualification; Conflicting Interests. If the Trustee
has or shall acquire a conflicting interest within the meaning of the Trust
Indenture Act, the Trustee shall either eliminate such interest or resign, to
the extent and in the manner provided by, and subject to the provisions of, the
Trust Indenture Act and this Indenture.

         Section 6.09. Corporate Trustee Required; Eligibility. There shall at
all times be a Trustee hereunder which shall be a Person that is eligible
pursuant to the Trust Indenture Act to act as such and has, or whose parent
banking company has, a combined capital and surplus of at least $50,000,000. If
such Person publishes reports of condition at least annually, pursuant to law or
to the requirements of said supervising or examining authority, then for the
purposes of this Section 6.09, the combined capital and surplus of such Person
shall be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. If at any time the Trustee shall cease
to be eligible in accordance with the provisions of this Section 6.09, it shall
resign immediately in the manner and with the effect hereinafter specified in
this Article.

         Section 6.10. Resignation and Removal; Appointment of Successor. (a)No
resignation or removal of the Trustee and no appointment of a successor Trustee
pursuant to this Article 6 shall become effective until the acceptance of
appointment by the successor Trustee under Section 6.11.

                                       50


         (b)      The Trustee may resign at any time by giving written notice
thereof to the Company. If an instrument of acceptance by a successor Trustee
shall not have been delivered to the Trustee within 30 days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction at the expense of the Trustee for the appointment of a
successor Trustee.

         (c)      The Trustee may be removed at any time by Act of the Holders
of majority in Principal Amount of the Outstanding Securities, delivered to the
Trustee and to the Company. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 days after the
notice of removal, the Trustee being removed may petition, at the expense of the
Company, any court of competent jurisdiction for the appointment of a successor
Trustee with respect to the Securities.

         (d)      If at any time:

                  (i)      the Trustee shall fail to comply with Section 6.08
         after written request therefor by the Company or by any Holder who has
         been a bona fide Holder of a Security for at least six months, or

                  (ii)     the Trustee shall cease to be eligible under Section
         6.09 and shall fail to resign after written request therefor by the
         Company or by any such Holder, or

                  (iii)    the Trustee shall become incapable of acting or shall
         be adjudged a bankrupt or insolvent, or

                  (iv)     a receiver of the Trustee or of its property shall be
         appointed or any public officer shall take charge or control of the
         Trustee or of its property or affairs for the purpose of
         rehabilitation, conservation or liquidation,

then, in any such case, (A) the Company by a Company Order may remove the
Trustee, or (B) subject to Section 5.13, any Holder who has been a bona fide
Holder of a Security for at least six months may, on behalf of such Holder and
all others similarly situated, petition any court of competent jurisdiction for
the removal of the Trustee and the appointment of a successor Trustee.

         (e)      If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Company Order, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of the
Holders of a majority in Principal Amount of the Outstanding Securities
delivered to the

                                       51


Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment, become the successor Trustee
and supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Holders and accepted
appointment in the manner hereinafter provided, any Holder who has been a bona
fide Holder of a Security for at least six months may, on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee.

         (f)      The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to all
Holders in the manner provided in Section 1.06. Each notice shall include the
name of the successor Trustee and the address of its Corporate Trust Office.

         Section 6.11. Acceptance of Appointment by Successor. Every successor
Trustee appointed hereunder shall execute, acknowledge and deliver to the
Company and to the retiring Trustee an instrument accepting such appointment,
and thereupon the resignation or removal of the retiring Trustee shall become
effective and such successor Trustee, without any further act, deed or
conveyance, shall become vested with all the rights, powers, trusts and duties
of the retiring Trustee; but, on request of the Company or the successor
Trustee, such retiring Trustee shall, upon payment of its charges, execute and
deliver an instrument transferring to such successor Trustee all the rights,
powers and trusts of the retiring Trustee and shall duly assign, transfer and
deliver to such successor Trustee all property and money held by such retiring
Trustee hereunder. Upon request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts.

         No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article 6.

         Section 6.12. Merger, Conversion, Consolidation or Succession to
Business. Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee by sale or otherwise, shall be the successor of the Trustee
hereunder, provided such corporation shall be otherwise qualified and eligible
under this Article 6, without the execution or filing of any paper or any
further act on the part of any of the parties hereto. In case any Securities
shall have been authenticated, but not delivered, by the Trustee then in office,
any successor by merger, conversion or consolidation to such authenticating
Trustee may adopt

                                       52


such authentication and deliver the Securities so authenticated with the same
effect as if such successor Trustee had itself authenticated such Securities.

         Section 6.13. Preferential Collection of Claims Against. If and when
the Trustee shall be or become a creditor of the Company (or any other obligor
upon the Securities), the Trustee shall be subject to the provisions of the
Trust Indenture Act regarding the collection of claims against the Company (or
any such other obligor).

                                   ARTICLE 7
                     HOLDERS' LISTS AND REPORTS BY TRUSTEE

         Section 7.01. Company to Furnish Trustee Names and Addresses of
Holders. The Company will furnish or cause to be furnished to the Trustee:

                  (i)      semi-annually, not more than 15 days after each
         Record Date, a list, in such form as the Trustee may reasonably
         require, of the names and addresses of the Holders as of such Record
         Date; and

                  (ii)     at such other times as the Trustee may request in
         writing, within 30 days after the receipt by the Company of any such
         request, a list of similar form and content as of a date not more than
         15 days prior to the time such list is furnished;

excluding from any such list names and addresses received by the Trustee in its
capacity as Security Registrar; provided, however, that no such list need be
furnished so long as the Trustee is acting as Security Registrar.

         Section 7.02. Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 7.01 and the names and
addresses of Holders received by the Trustee in its capacity as Security
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 7.01 upon receipt of a new list so furnished.

         (b)      The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights and duties of the Trustee, shall be as provided by the
Trust Indenture Act.

         (c)      Every Holder of Securities, by receiving and holding the same,
agrees with the Company and the Trustee that neither the Company nor the Trustee
nor any agent of either of them shall be held accountable by reason of any

                                       53


disclosure of information as to names and addresses of Holders made pursuant to
the Trust Indenture Act.

         Section 7.03. Reports By Trustee. (a) The Trustee shall transmit to
Holders such reports concerning the Trustee and its actions under this Indenture
as may be required pursuant to the Trust Indenture Act at the times and in the
manner provided pursuant thereto. Reports so required to be transmitted at
stated intervals of not more than 12 months shall be transmitted no later than
July 15 in each calendar year, commencing in July 15, 2004. Each such report
shall be dated as of a date not more than 60 days prior to the date of
transmission.

         (b)      A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange, if
any, upon which the Securities are listed, with the Commission and with the
Company. The Company will notify the Trustee when the Securities are listed on
any stock exchange or of any delisting thereof.

         Section 7.04. Reports by Company. The Company shall file with the
Trustee and the Commission, and transmit to Holders, such information, documents
and other reports, and such summaries thereof, as may be required pursuant to
the Trust Indenture Act at the times and in the manner provided pursuant to such
Act; provided that any such information, documents or reports required to be
filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act
shall be filed with the Trustee within 15 days after the same is so required to
be filed with the Commission. In the event the Company is not subject to Section
13 or 15(d) of the Exchange Act, it shall file with the Trustee upon request the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act. Delivery of such reports, information and documents to the
Trustee is for informational purposes only and the Trustee's receipt of such
shall not constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates). It is expressly
understood that materials transmitted electronically by the Company to the
Trustee shall be deemed filed with the Trustee for purposes of this Section
7.04.

                                   ARTICLE 8
              CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

         Section 8.01. Company May Consolidate, etc., Only on Certain Terms. The
Company shall not consolidate with or merge into any other Person or convey,
transfer or lease its properties and assets substantially as an entirety to any
Person, and the Company shall not permit any Person to consolidate with or

                                       54


merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless:

         (a)      either (i) the Company shall be the continuing Person or (ii)
the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or the Person which acquires by conveyance or
transfer, or which leases, the properties and assets of the Company
substantially as an entirety (the "SURVIVING ENTITY"), (1) shall be organized
and validly existing under the laws of the United States of America, any State
thereof or the District of Columbia and (2) the Surviving Entity shall expressly
assume, by an indenture supplemental hereto, executed and delivered to the
Trustee, all of the obligations of the Company under the Securities and this
Indenture;

         (b)      immediately after giving effect to such transaction, no Event
of Default, and no event which, after notice or lapse of time or both, would
become an Event of Default, shall have occurred and be continuing; and

         (c)      the Company or the Surviving Entity has delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger, conveyance, transfer or lease and, if a supplemental
indenture is required in connection with such transaction, such supplemental
indenture comply with this Article 8 and Article 9, respectively.

         Section 8.02. Successor Substituted. Upon any consolidation of the
Company with, or merger of the Company into, any other Person or any conveyance,
transfer or lease of the properties and assets of the Company substantially as
an entirety in accordance with Section 8.01, the successor Person formed by such
consolidation or into which the Company is merged or to which such conveyance,
transfer or lease is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture with the
same effect as if such successor Person had been named as the Company herein,
and thereafter, except in the case of a lease, the predecessor Person shall be
relieved of all obligations and covenants under this Indenture and the
Securities.

                                   ARTICLE 9
                            SUPPLEMENTAL INDENTURES

         Section 9.01. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter into
one or more indentures supplemental hereto, in form satisfactory to the Trustee,
for any of the following purposes:

                                       55


                  (i)      to evidence the succession of another Person to the
         Company and the assumption by any such successor of the covenants of
         the Company herein and in the Securities; or

                  (ii)     to add to the covenants of the Company for the
         benefit of the Holders, or to surrender any right or power herein
         conferred upon the Company; or

                  (iii)    to provide for a successor Trustee with respect to
         the Securities; or

                  (iv)     to cure any ambiguity or defect, to correct or
         supplement any provision herein which may be inconsistent with any
         other provision herein, or to make any other provisions with respect to
         matters or questions arising under this Indenture which shall not be
         inconsistent with the provisions of this Indenture, provided that such
         action pursuant to this clause (iv) shall not adversely affect the
         interests of the Holders in any material respect; or

                  (v)      to add any additional Events of Default for the
         benefit of the Holders; or

                  (vi)     to convey, transfer, assign, mortgage or pledge to
         the Trustee as security for the Securities any property or assets; or

                  (vii)    to increase the Conversion Rate of the Securities;
         provided, however, that such increase shall be in accordance with the
         terms of this Indenture or shall not adversely affect the interests of
         the Holders of the Securities; or

                  (viii)   to supplement any provision of this Indenture to such
         extent as shall be necessary to permit or facilitate the discharge of
         the Securities; provided that such change or modification does not
         adversely affect the interests of the Holders of the Securities; or

                  (ix)     to make any change or modification necessary in
         connection with the registration of the Securities under the Securities
         Act as contemplated in the Registration Rights Agreement; provided that
         such change or modification does not adversely affect the interests of
         the Holders of Securities; or

                  (x)      to add or modify any other provision herein with
         respect to matters or questions arising hereunder which the Company and
         the Trustee may deem necessary or desirable and which would not
         reasonably be

                                       56


         expected to adversely affect the interests of the Holders of Securities
         in any material respect.

         Section 9.02. Supplemental Indentures With Consent of Holders. With the
consent of the Holders of not less than a majority in Principal Amount of the
Outstanding Securities, by Act of said Holders delivered to the Company and the
Trustee, the Company, when authorized by a Board Resolution, and the Trustee may
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders under this Indenture; provided, however, that no such supplemental
indenture shall, without the consent of the Holder of each Outstanding Security
affected thereby,

                  (i)      reduce the Principal Amount of, or extend the Stated
         Maturity of, any Security; or

                  (ii)     make any change that impairs or adversely affects the
         conversion rights of any Securities; or

                  (iii)    reduce the Redemption Price, the Repurchase Price or
         Fundamental Change Repurchase Price of any Security or amend or modify
         in any manner adverse to the Holders of Securities the Company's
         obligation to make such payments, whether through an amendment or
         waiver of provisions in the covenants, definitions or otherwise; or

                  (iv)     modify the provisions with respect to the right of
         Holders to cause the Company to repurchase Securities upon a
         Fundamental Change in a manner adverse to Holders of Securities; or

                  (v)      make any Security payable in money other than that
         stated in the Security or other than in accordance with the provisions
         of this Indenture; or

                  (vi)     impair the right of any Holder to receive payment of
         the Principal Amount of, or premium or Liquidated Damages, if any, on a
         Holder's Securities on or after the due dates therefor or to institute
         suit for the enforcement of any payment on or with respect to such
         Holder's Securities; or

                  (vii)    reduce the quorum or voting requirements under this
         Indenture; or

                  (viii)   change the ranking of the Securities in a manner
         adverse to the Holders of the Securities; or

                                       57


                  (ix)     make any change in the amendment provisions which
         require each Holder's consent or in the waiver provisions; or

                  (x)      reduce the percentage in Principal Amount of the
         Outstanding Securities, the consent of whose Holders is required for
         any such supplemental indenture, or the consent of whose Holders is
         required for any waiver (of compliance with certain provisions of this
         Indenture or certain defaults hereunder and their consequences)
         provided for in this Indenture; or

                  (xi)     modify any of the provisions of this Section 9.02 or
         Section 5.12, except to increase any such percentage or to provide that
         certain other provisions of this Indenture cannot be modified or waived
         without the consent of the Holder of each Outstanding Security affected
         thereby.

         It shall not be necessary for any Act of Holders under this Section
9.02 to approve the particular form of any proposed supplemental indenture, but
it shall be sufficient if such Act shall approve the substance thereof.

         Section 9.03. Execution of Supplemental Indentures. In executing, or
accepting the additional trusts created by, any supplemental indenture permitted
by this Article 9 or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and (subject to Section
6.01) shall be fully protected in relying upon, in addition to the documents
required by Section 1.02, an Opinion of Counsel stating that the execution of
such supplemental indenture is authorized or permitted by this Indenture.
Subject to the preceding sentence, the Trustee shall sign such supplemental
indenture if the same does not adversely affect the Trustee's own rights, duties
or immunities under this Indenture or otherwise. The Trustee may, but shall not
be obligated to, enter into any such supplemental indenture that adversely
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise.

         Section 9.04. Effect of Supplemental Indentures. Upon the execution of
any supplemental indenture under this Article 9, this Indenture shall be
modified in accordance therewith, and such supplemental indenture shall form a
part of this Indenture for all purposes; and every Holder of Securities
theretofore or thereafter authenticated and delivered hereunder shall be bound
thereby.

         Section 9.05. Conformity with Trust Indenture Act. Every supplemental
indenture executed pursuant to this Article shall conform to the requirements of
the Trust Indenture Act.

         Section 9.06. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any supplemental
indenture pursuant to this Article 9 shall bear a notation in form approved by
the

                                       58


Trustee as to any matter provided for in such supplemental indenture. If the
Company shall so determine, new Securities so modified as to conform, in the
opinion of the Trustee and the Company, to any such supplemental indenture may
be prepared and executed by the Company and authenticated and delivered by the
Trustee in exchange for Outstanding Securities.

                                   ARTICLE 10
                                   COVENANTS

         Section 10.01. Payments. The Company shall duly and punctually make all
payments in respect of the Securities in accordance with the terms of the
Securities and this Indenture.

         Any payments made or due pursuant to this Indenture shall be considered
paid on the applicable date due if by 10:00 a.m., New York City time, on such
date the Paying Agent holds, in accordance with this Indenture, cash sufficient
to pay all such amounts then due. Payment of the principal and Liquidated
Damages, if any, on the Securities shall be in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts.

         Section 10.02. Maintenance of Office or Agency. The Company shall
maintain in the Borough of Manhattan, The City of New York, an office or agency
where Securities may be presented or surrendered for payment, where Securities
may be surrendered for registration of transfer or exchange and where notices
and demands to or upon the Company in respect of the Securities and this
Indenture may be served, which shall initially be the Corporate Trust Office of
the Trustee. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee as its agent
to receive all such presentations, surrenders, notices and demands.

         The Company may also from time to time designate one or more other
offices or agencies (in or outside the Borough of Manhattan, The City of New
York) where the Securities may be presented or surrendered for any or all such
purposes and may from time to time rescind such designations; provided, however,
that no such designation or rescission shall in any manner relieve the Company
of its obligation to maintain an office or agency in the Borough of Manhattan,
The City of New York, for such purposes. The Company shall give prompt written
notice to the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.

                                       59


         Section 10.03. Money for Security Payments to be Held in Trust. If the
Company shall at any time act as its own Paying Agent, it shall, on or before
each due date of any payment in respect of any of the Securities, segregate and
hold in trust for the benefit of the Persons entitled thereto a sum sufficient
to make the payment so becoming due until such sums shall be paid to such
Persons or otherwise disposed of as herein provided and shall promptly notify
the Trustee of its action or failure so to act.

         Whenever the Company shall have one or more Paying Agents, it will,
prior to each due date of any payment in respect of any Securities, deposit with
a Paying Agent a sum sufficient to pay such amount, such sum to be held as
provided by the Trust Indenture Act, and (unless such Paying Agent is the
Trustee) the Company will promptly notify the Trustee of its action or failure
so to act.

         The Company shall cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section 10.03,
that such Paying Agent will (i) comply with the provisions of the Trust
Indenture Act applicable to it as a Paying Agent and (ii) during the continuance
of any default by the Company (or any other obligor upon the Securities) in the
making of any payment in respect of the Securities, upon the written request of
the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying
Agent as such.

         The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such money.

         Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the making of payments in respect of any Security
and remaining unclaimed for two years after such payment has become due shall be
paid to the Company on Company Request, or (if then held by the Company) shall
be discharged from such trust; and the Holder of such Security shall thereafter,
as an unsecured general creditor, look only to the Company for payment thereof,
and all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cease; provided, however, that the Trustee or such Paying Agent, before being
required to make any such repayment, may at the expense of the Company cause to
be published once, in a newspaper published in the English language, customarily
published on each Business Day and of general circulation

                                       60


in The City of New York or San Francisco, California, notice that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such publication, any unclaimed balance of
such money then remaining shall be repaid to the Company. In the absence of a
written request from the Company to return funds remaining unclaimed for two
years after such payment has become due to the Company, the Trustee shall from
time to time deliver all unclaimed payments to or as directed by applicable
escheat authorities, as determined by the Trustee in its sole discretion, in
accordance with the customary practices and procedures of the Trustee. Any such
unclaimed funds held by the Trustee pursuant to this Section 10.03 shall be held
uninvested and without any liability for interest.

         Section 10.04. Statement by Officers as to Default. The Company will
deliver to the Trustee, within 120 days after the end of each fiscal year of the
Company ending after the date hereof, an Officers' Certificate, stating whether
or not to the knowledge of the signers thereof the Company is in Default in the
performance and observance of any of the terms, provisions and conditions of
this Indenture (without regard to any period of grace or requirement of notice
provided hereunder) and, if the Company shall be in Default, specifying all such
Defaults and the nature and status thereof of which they may have knowledge.

         The Company shall deliver to the Trustee, as soon as possible and in
any event within 30 days after the Company becomes aware of the occurrence of
any Event of Default or an event which, with notice or the lapse of time or
both, would constitute an Event of Default, an Officers' Certificate setting
forth the details of such Event of Default or default and the action which the
Company is taking or proposes to take with respect thereto.

         Section 10.05. Existence. Subject to Article 8, the Company shall do or
cause to be done all things necessary to preserve and keep in full force and
effect its existence, rights (charter and statutory) and franchises; provided,
however, that the Company shall not be required to preserve any such right or
franchise if the Board of Directors of the Company shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company and that the loss thereof is not disadvantageous in any material
respect to the Holders.

         Section 10.06. Reports and Delivery of Certain Information. Whether or
not required by the rules and regulations of the Commission, so long as any
Securities are outstanding, the Company shall promptly furnish to the Trustee
(i) all quarterly and annual financial information that is substantially
equivalent to that which would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants and
(ii) all reports

                                       61


that are substantially equivalent to that which would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports; provided that in each case the delivery of materials to the Trustee by
electronic means shall be deemed to be "furnished" to the Trustee for purposes
of this Section 10.06. Delivery of such reports, information and documents to
the Trustee is for informational purposes only and the Trustee's receipt of such
shall not constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates). In addition, whether or
not required by the rules and regulations of the Commission, the Company shall
file a copy of all such information with the Commission for public availability
(unless the Commission will not accept such a filing) and make such information
available to investors who request it in writing. So long as any of the
Securities remain Outstanding, the Company shall make available to any
prospective purchaser of Securities or beneficial owner of Securities in
connection with any sale thereof the information required by Rule 144A(d)(4)
under the Securities Act, until the earlier of (a) such time as the Holders
thereof have disposed of such Securities pursuant to an effective Resale
Registration Statement or Rule 144 under the Securities Act and (b) the date
that is two years from the Issue Date.

         Section 10.07. Resale of Certain Securities. During the period
beginning on the Issue Date and ending on the date that is two years from the
Issue Date, the Company shall not, and shall not permit any of its "AFFILIATES"
(as defined under Rule 144 under the Securities Act or any successor provision
thereto) to, resell any Securities which constitute "RESTRICTED SECURITIES"
under Rule 144 that have been reacquired by any of them. The Trustee shall have
no responsibility in respect of the Company's performance of its agreement in
the preceding sentence.

         Section 10.08. Book-Entry System. If the Securities cease to trade in
the Depositary's book-entry settlement system, the Company covenants and agrees
that it shall use reasonable efforts to make such other book entry arrangements
that it determines are reasonable for the Securities.

         Section 10.09. Liquidated Damages Under the Registration Rights
Agreement. If at any time Liquidated Damages become payable by the Company
pursuant to the Registration Rights Agreement, the Company shall promptly
deliver to the Trustee a certificate to that effect and stating (i) the amount
of such Liquidated Damages that are payable and (ii) the date on which such
Liquidated Damages are payable pursuant to the terms of the Registration Rights
Agreement. Unless and until a Responsible Officer of the Trustee receives such a
certificate, the Trustee may assume without inquiry that no Liquidated Damages
are payable. If the Company has paid Liquidated Damages directly to the Persons
entitled to such Liquidated Damages, the Company shall deliver to the Trustee a
certificate setting forth the particulars of such payment.

                                       62


         Section 10.10. Information for IRS Filings. The Company shall provide
to the Trustee on a timely basis such information as the Trustee requires to
enable the Trustee to prepare and file any form required to be submitted by the
Company with the Internal Revenue Service and the Holders of the Securities.

         Section 10.11. Calculation Of Original Issue Discount. The Company
shall file with the Trustee promptly at the end of each calendar year (i) a
written notice specifying the amount of original issue discount (including daily
rates and accrual periods) accrued on outstanding Securities as of the end of
such year and (ii) such other specific information relating to such original
issue discount as may then be relevant under the Internal Revenue Code of 1986,
as amended from time to time.

                                   ARTICLE 11
                           REDEMPTION AND REPURCHASES

         Section 11.01. Right to Redeem; Notices to Trustee. Prior to August 15,
2008, the Securities are not redeemable. At any time commencing on August 15,
2008, the Securities are redeemable as a whole, or from time to time in part, at
the option of the Company at the Redemption Price equal to 100% expressed as a
percentage of the Principal Amount of Securities to be redeemed, together with
accrued and unpaid Liquidated Damages, if any, to, but excluding, the Redemption
Date.

         The Company shall give the notice to the Trustee provided for in this
Section 11.01 by a Company Order, at least 45 days but not more than 60 days
before the Redemption Date (unless a shorter notice shall be satisfactory to the
Trustee).

         Section 11.02. Selection of Securities to be Redeemed. If less than all
the Securities are to be redeemed, the Trustee shall select the Securities to be
redeemed pro rata or by lot or by any other method the Trustee considers fair
and appropriate (so long as such method is not prohibited by the rules of any
stock exchange on which the Securities are then listed). The Trustee shall make
the selection within 7 days from its receipt of the notice from the Company
delivered pursuant to the second paragraph of Section 11.01 from Outstanding
Securities not previously called for redemption.

         Securities and portions of them the Trustee selects shall be in
Principal Amounts of $1,000 or integral multiples of $1,000. Provisions of this
Indenture that apply to Securities called for redemption in whole also apply to
Securities called for redemption in part. The Trustee shall notify the Company
promptly of the Securities or portions of Securities to be redeemed.

                                       63


         If any Security selected for partial redemption is converted in part
before termination of the conversion right with respect to the portion of the
Security so selected, the converted portion of such Security shall be deemed (so
far as may be) to be the portion selected for redemption. Securities which have
been converted during a selection of Securities to be redeemed may be treated by
the Trustee as outstanding for the purpose of such selection.

         Section 11.03. Notice of Redemption. At least 30 days but not more than
60 days before a Redemption Date, the Company shall mail a notice of redemption
by first-class mail, postage prepaid, to each Holder of Securities to be
redeemed.

         The notice shall identify the Securities to be redeemed and shall
state:

                  (i)      the Redemption Date;

                  (ii)     the Redemption Price;

                  (iii)    the Conversion Price;

                  (iv)     the name and address of the Paying Agent and
         Conversion Agent;

                  (v)      that Securities called for redemption may be
         converted at any time before the close of business on the Business Day
         immediately preceding the Redemption Date;

                  (vi)     that Holders who want to convert Securities must
         satisfy the requirements set forth therein and in this Indenture;

                  (vii)    that Securities called for redemption must be
         surrendered to the Paying Agent for cancellation to collect the
         Redemption Price;

                  (viii)   if fewer than all the outstanding Securities are to
         be redeemed, the certificate number (if such Securities are held other
         than in global form) and Principal Amounts of the particular Securities
         to be redeemed;

                  (ix)     that, unless the Company defaults in making payment
         of such Redemption Price, Liquidated Damages, if any, will cease to
         accrue on and after the Redemption Date; and

                  (x)      the CUSIP number of the Securities.

         At the Company's written request delivered at least 30 days prior to
the date such notice is to be given (unless a shorter time period shall be
acceptable to

                                       64


the Trustee), the Trustee shall give the notice of redemption in the Company's
name and at the Company's expense.

         Section 11.04. Effect of Notice of Redemption. Once notice of
redemption is given, Securities called for redemption become due and payable on
the Redemption Date and at the Redemption Price stated in the notice except for
Securities which are converted in accordance with the terms of this Indenture.
Upon surrender to the Paying Agent, such Securities shall be paid at the
Redemption Price stated in the notice.

         Section 11.05. Deposit of Redemption Price. Prior to 10:00 a.m. (New
York City time) on a Redemption Date, the Company shall deposit with the Paying
Agent (or if the Company or a Subsidiary or an Affiliate of either of them is
the Paying Agent, shall segregate and hold in trust) money sufficient to pay the
Redemption Price of all Securities to be redeemed on that date other than
Securities or portions of Securities called for redemption which on or prior
thereto have been delivered by the Company to the Trustee for cancellation or
have been converted. The Paying Agent shall as promptly as practicable return to
the Company any money not required for that purpose because of conversion of
Securities pursuant to Article 13. If such money is then held by the Company in
trust and is not required for such purpose it shall be discharged from such
trust.

         Section 11.06. Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate and deliver to the Holder a new Security in an authorized
denomination equal in principal amount to the unredeemed portion of the Security
surrendered. The Company shall not be required to (i) issue, register the
transfer of, or exchange any Securities during a period of 15 days before the
Redemption Date or (ii) register the transfer of, or exchange any, Securities so
selected for redemption, in whole or in part, except the unredeemed portion of
any Security being redeemed in part.

         Section 11.07. Conversion Arrangement on Call for Redemption. In
connection with any redemption of Securities, the Company may arrange for the
purchase and conversion of any Securities called for redemption by an agreement
with one or more investment bankers or other purchasers to purchase such
Securities by paying to the Trustee in trust for the Securityholders, on or
prior to 10:00 a.m. New York City time on the Redemption Date, an amount that,
together with any amounts deposited with the Trustee by the Company for the
redemption of such Securities, is not less than the Redemption Price of such
Securities. Notwithstanding anything to the contrary contained in this Article
11, the obligation of the Company to pay the Redemption Price of such Securities
shall be deemed to be satisfied and discharged to the extent such amount is so
paid by such purchasers. If such an agreement is entered into, any Securities
not duly surrendered for conversion by the Holders thereof may, at the option of
the

                                       65


Company, be deemed, to the fullest extent permitted by law, acquired by such
purchasers from such Holders and (notwithstanding anything to the contrary
contained in Article 13) surrendered by such purchasers for conversion, all as
of immediately prior to the close of business on the Business Day prior to the
Redemption Date, subject to payment of the above amount as aforesaid. The
Trustee shall hold and pay to the Holders whose Securities are selected for
redemption any such amount paid to it for purchase and conversion in the same
manner as it would moneys deposited with it by the Company for the redemption of
Securities. Without the Trustee's prior written consent, no arrangement between
the Company and such purchasers for the purchase and conversion of any
Securities shall increase or otherwise affect any of the powers, duties,
responsibilities or obligations of the Trustee as set forth in this Indenture,
and the Company agrees to indemnify the Trustee from, and hold it harmless
against, any loss, liability or expense arising out of or in connection with any
such arrangement for the purchase and conversion of any Securities between the
Company and such purchasers, including the costs and expenses incurred by the
Trustee in the defense of any claim or liability arising out of or in connection
with the exercise or performance of any of its powers, duties, responsibilities
or obligations under this Indenture, except in the case of the Trustee's
negligence or willful misconduct.

         Section 11.08. Repurchase of Securities at Option of the Holder.

         (a)      General. Securities shall be repurchased by the Company
pursuant to the terms thereof on August 15, 2008, August 15, 2013 and August 15,
2018 (each, a "REPURCHASE DATE"), at the applicable Repurchase Price, at the
option of the Holder thereof, in accordance with the following procedures.

         (b)      Company Notice. The Company shall deliver a notice (the
"COMPANY NOTICE") to Holders (and to beneficial owners as required by applicable
law) not less than 30 days prior to such Repurchase Date (the "COMPANY NOTICE
DATE"). The Company Notice shall include a form of Repurchase Notice to be
completed by a Securityholder and shall state:

                  (i)      the Repurchase Price and the Conversion Price
         applicable on the Company Notice Date;

                  (ii)     the name and address of the Paying Agent and the
         Conversion Agent;

                  (iii)    that Securities as to which a Repurchase Notice has
         been given by the Holder may be converted pursuant to Article 13 only
         if the applicable Repurchase Notice has been withdrawn in accordance
         with the terms of this Indenture;

                                       66


                  (iv)     that Securities must be surrendered to the Paying
         Agent for cancellation to collect payment;

                  (v)      that the Repurchase Price for any security as to
         which a Repurchase Notice has been given and not withdrawn will be paid
         promptly following the later of the Repurchase Date and the time of
         surrender of such Security as described in clause (iv) above;

                  (vi)     the procedures the Holder must follow to exercise
         rights under this Section 11.08 and a brief description of those
         rights;

                  (vii)    the conversion rights of the Securities;

                  (viii)   the procedures for withdrawing a Repurchase Notice;

                  (ix)     that, unless the Company defaults in making payment
         of the Repurchase Price, Liquidated Damages, if any, on Securities
         covered by the Repurchase Notice, will cease to accrue on and after the
         Repurchase Date; and

                  (x)      the CUSIP number of the Securities.

         At least three Business Days before the Company Notice Date, the
Company shall deliver an Officers' Certificate to the Trustee specifying whether
the Company desires the Trustee to give the Company Notice. At the Company's
request, the Trustee shall give such Company Notice in the Company's name and at
the Company's expense; provided that in all cases the text of such Company
Notice shall be prepared by the Company. On or before the Company Notice Date,
the Company shall publish a notice containing substantially the same information
that is required in the Company Notice in a newspaper published in the English
language, customarily published each Business Day and of general circulation in
The City of New York, or publish such information on the Company's website or
through such other public medium as the Company may use at such time.

         (c)      Repurchase Notice. Holders must deliver to the Paying Agent:

                  (1)      a written notice of repurchase (a "REPURCHASE
         NOTICE"), substantially in the form of Exhibit A hereto, at any time
         from the opening of business on the date that is 30 days prior to a
         Repurchase Date until the close of business on the Business Day prior
         to such Repurchase Date stating:

                           (A)      the certificate number (if such Security is
                  held other than in global form) of the Security which the
                  Holder will deliver to be repurchased;

                                       67


                           (B)      the portion of the Principal Amount of the
                  Security which the Holder will deliver to be repurchased,
                  which portion must be in a Principal Amount of $1,000 or
                  integral multiples thereof; and

                           (C)      that such Security shall be repurchased as
                  of the Repurchase Date pursuant to the terms and conditions
                  specified in the Securities and in this Indenture; and

                  (2)      the Security (if such Security is held in other than
         global form) to the Paying Agent for cancellation prior to, on or after
         the Repurchase Date (together with all necessary endorsements) at the
         offices of the Paying Agent, such delivery being a condition to receipt
         by the Holder of the Repurchase Price therefor; provided that such
         Repurchase Price shall be so paid pursuant to this Section 11.08 only
         if the Security so delivered to the Paying Agent shall conform in all
         respects to the description thereof in the related Repurchase Notice.

         The Company shall purchase from the Holder thereof, pursuant to this
Section 11.08, a portion of a Security if the Principal Amount of such portion
is $1,000 or an integral multiple of $1,000 if so requested by the Holder.
Provisions of this Indenture that apply to the purchase of all of a Security
also apply to the purchase of such portion of such Security.

         Any repurchase by the Company contemplated pursuant to the provisions
of this Section 11.08 shall be consummated by the delivery to the Paying Agent
of the consideration to be received by the Holder promptly following the later
of the Repurchase Date and the time of delivery of the Security.

         Notwithstanding anything herein to the contrary, any Holder delivering
to the Paying Agent the Repurchase Notice contemplated by this Section 11.08(a)
shall have the right to withdraw such Repurchase Notice at any time prior to the
close of business on the Business Day prior to the Repurchase Date by delivery
of a written notice of withdrawal to the Paying Agent in accordance with Section
11.10.

         The Paying Agent shall promptly notify the Company of the receipt by it
of any Repurchase Notice or written notice of withdrawal thereof.

         (d)      Payment of Repurchase Price. The Securities to be repurchased
pursuant to Section 11.08(a) shall be paid for in cash.

         (e)      Procedures Upon Repurchase. The Company shall deposit cash at
the time and in the manner as provided in Section 11.11, sufficient to pay the

                                       68


aggregate Repurchase Price of all Securities to be purchased pursuant to this
Section 11.08.

         Section 11.09. Repurchase of Securities at Option of the Holder Upon
Fundamental Change.

         (a)      General. If prior to the Stated Maturity there shall have
occurred a Fundamental Change, Securities shall be repurchased by the Company at
the Fundamental Change Repurchase Price on or before a date that is 20 Business
Days after the occurrence of the Fundamental Change (the "FUNDAMENTAL CHANGE
REPURCHASE DATE"), at the option of the Holder thereof, in accordance with the
following procedures; provided that the Company shall not be required to
repurchase the Securities pursuant to this Section 11.09 if the Sale Price per
share of Common Stock for any five Trading Days within the period of 10
consecutive Trading Days ending immediately after the later of the Fundamental
Change and the public announcement of the Fundamental Change equals or exceeds
105% of the Conversion Price of the Securities in effect on each of those five
Trading Days.

         (b)      Company Notice of Fundamental Change. Within 15 days after the
occurrence of a Fundamental Change, the Company shall, if Holders have the right
to require the Company to repurchase Securities hereunder, deliver a written
notice of Fundamental Change (the "FUNDAMENTAL CHANGE COMPANY NOTICE") by
first-class mail or by overnight courier to the Trustee and to each Holder (and
to beneficial owners as required by applicable law). The notice shall include a
form of Fundamental Change Repurchase Notice to be completed by the
Securityholder and shall state:

                  (i)      the events causing a Fundamental Change and the date
         of such Fundamental Change;

                  (ii)     the date by which a Holder must deliver a Fundamental
         Change Repurchase Notice to elect the repurchase option pursuant to
         this Section 11.09;

                  (iii)    the Fundamental Change Repurchase Date;

                  (iv)     the Fundamental Change Repurchase Price;

                  (v)      whether the Fundamental Change Repurchase Price will
         be paid in cash, shares of Common Stock or a combination thereof,
         specifying the percentages of each;

                  (vi)     if shares of Common Stock will be used to pay all or
         part of the Fundamental Change Repurchase Price, state:

                                       69


                           (a)      the method for valuing the shares of Common
                  Stock to be delivered in connection with the repurchase; and

                           (b)      that holders of the Securities will bear the
                  market risk with respect to the value of the shares of Common
                  Stock to be delivered from the date the number of shares is
                  determined;

                  (vii)    the name and address of the Paying Agent and the
         Conversion Agent;

                  (viii)   the Conversion Rate applicable on the Fundamental
         Change Company Notice Date;

                  (ix)     that Securities as to which a Fundamental Change
         Repurchase Notice has been given may be converted pursuant to Article
         13 hereof only if the Fundamental Change Repurchase Notice has been
         withdrawn in accordance with the terms of this Indenture;

                  (x)      that Securities must be surrendered to the Paying
         Agent for cancellation to collect payment;

                  (xi)     that the Fundamental Change Repurchase Price for any
         Security as to which a Fundamental Change Repurchase Notice has been
         duly given and not withdrawn will be paid promptly following the later
         of the Fundamental Change Repurchase Date and the time of surrender of
         such Security as described in clause (viii) above;

                  (xii)    the procedures the Holder must follow to exercise
         rights under this Section 11.09;

                  (xiii)   the conversion rights of the Securities;

                  (xiv)    the procedures for withdrawing a Fundamental Change
         Repurchase Notice;

                  (xv)     that, unless the Company defaults in making payment
         of such Fundamental Change Repurchase Price, Securities covered by any
         Fundamental Change Repurchase Notice will cease to be outstanding and
         Liquidated Damages, if any, will cease to accrue on and after the
         Fundamental Change Repurchase Date; and

                  (xvi)    the CUSIP number of the Securities.

         At the Company's request, the Trustee shall give such Fundamental
Change Company Notice in the Company's name and at the Company's expense;
provided that, in all cases, the text of such Fundamental Change Company Notice

                                       70


shall be prepared by the Company. In connection with delivery of the Fundamental
Change Company Notice to the Holders, the Company shall publish a notice
containing substantially the same information that is required in the
Fundamental Change Company Notice in a newspaper published in the English
language, customarily published each Business Day and of general circulation in
The City of New York, or publish such information on the Company's website or
through such other public medium as the Company may use at such time.

         (c)      Fundamental Change Repurchase Notice. Holders must deliver to
the Paying Agent:

                  (1)      a written notice of repurchase (a "FUNDAMENTAL CHANGE
         REPURCHASE NOTICE"), substantially in the form of Exhibit B hereto, at
         any time from the opening of business on the date of the Fundamental
         Change Company Notice until the close of business on the Fundamental
         Change Repurchase Date stating:

                           (A)      the certificate number (if such Security is
                  held other than in global form) of the Security which the
                  Holder will deliver to be purchased;

                           (B)      the portion of the Principal Amount of the
                  Security which the Holder will deliver to be purchased, which
                  portion must be in a Principal Amount of $1,000 or integral
                  multiples thereof; and

                           (C)      that such Security shall be purchased as of
                  the Fundamental Change Repurchase Date pursuant to the terms
                  and conditions specified in the Securities and in this
                  Indenture; and

                  (2)      the Security (if such Security is held other than in
         global form) to the Paying Agent for cancellation prior to, on or after
         the Fundamental Change Repurchase Date (together with all necessary
         endorsements) at the offices of the Paying Agent, such delivery being a
         condition to receipt by the Holder of the Fundamental Change Repurchase
         Price therefor; provided that such Fundamental Change Repurchase Price
         shall be so paid pursuant to this Section 11.09 only if the Security so
         delivered to the Paying Agent shall conform in all respects to the
         description thereof in the related Fundamental Change Repurchase
         Notice.

         The Company shall purchase from the Holder thereof, pursuant to this
Section 11.09, a portion of a Security if the Principal Amount of such portion
is $1,000 or an integral multiple of $1,000 if so requested by the Holder.
Provisions of this Indenture that apply to the repurchase of all of a Security
also apply to the repurchase of such portion of such Security.

                                       71


         Any repurchase by the Company contemplated pursuant to the provisions
of this Section 11.09 shall be consummated by the delivery to the Paying Agent
of the consideration to be received by the Holder promptly following the later
of the Fundamental Change Repurchase Date and the time of delivery of the
Security.

         Notwithstanding anything herein to the contrary, any Holder delivering
to the Paying Agent the Fundamental Change Repurchase Notice contemplated by
this Section 11.09(c) shall have the right to withdraw such Fundamental Change
Repurchase Notice at any time prior to the close of business on the Business Day
prior to the Fundamental Change Repurchase Date by delivery of a written notice
of withdrawal to the Paying Agent in accordance with Section 11.10.

         The Paying Agent shall promptly notify the Company of the receipt by it
of any Fundamental Change Repurchase Notice or written notice of withdrawal
thereof.

         (d)      Payment of Fundamental Change Repurchase Price. The Securities
to be repurchased pursuant to this Section 11.09 shall be paid for in cash;
provided that if a Fundamental Change occurs as a result of a Change of Control
Event, the Securities to be repurchased may be paid for, in whole or in part, at
the election of the Company, in cash or Common Stock or any combination of cash
and Common Stock, subject to the conditions set forth in paragraph (e) below.

         (e)      Conditions for Election to Pay Fundamental Change Repurchase
Price in Common Stock. If the Company elects to pay all or any portion of the
Fundamental Change Repurchase Price in Common Stock, the number of shares of
Common Stock to be paid will equal the quotient obtained by dividing (i) the
portion of the Fundamental Change Repurchase Price to be paid in shares of
Common Stock by (ii) 95% of the average Closing Price of the shares of Common
Stock for the five Trading Day period immediately preceding but ending on the
second Business Day immediately preceding the Fundamental Change Repurchase
Date, appropriately adjusted to take into account the occurrence, during the
period commencing on the first of the Trading Days during the five Trading Day
period and ending on the Fundamental Change Repurchase Date, of any event
described in Section 13.06, subject to the next succeeding paragraph. The
Company shall designate, in the Fundamental Change Company Notice delivered
pursuant to Section 11.09(b) above, whether it will repurchase the Securities
for cash or shares of Common Stock, or, if a combination thereof, the
percentages of the Fundamental Change Repurchase Price of Securities in respect
of which it will pay in cash or shares of Common Stock; provided that the
Company will pay cash for fractional interests in shares of Common Stock. For
purposes of determining the existence of potential fractional interests, all
Securities subject to repurchase by the Company held by a Holder shall be
considered together (no matter how many separate certificates are to be
presented). Each holder whose Securities are repurchased pursuant to this
Section

                                       72


11.09 shall receive the same percentage of cash or shares of Common Stock in
payment of the Fundamental Change Repurchase Price for such Securities, except
with regard to the payment of cash in lieu of fractional shares of Common Stock.
The Company may not change its election with respect to the consideration (or
components or percentages of components thereof) to be paid once the Company has
given its Fundamental Change Company Notice to holders except as set forth in
the next succeeding paragraph in the event of a failure to satisfy, prior to the
close of business on the Business Day prior to the Fundamental Change Repurchase
Date, any condition to the payment of the Fundamental Change Repurchase Price,
in whole or in part, in shares of Common Stock.

         The Company shall, at least three Business Days prior to delivering the
Fundamental Change Company Notice, deliver an Officers' Certificate to the
Trustee specifying:

                  (i)      the manner of payment selected by the Company,

                  (ii)     the information required by the Company Repurchase
         Notice pursuant to Section 11.09(b),

                  (iii)    if the Company elects to pay the Fundamental Change
         Repurchase Price, or a specified percentage thereof, in shares of
         Common Stock, that the conditions to such manner of payment set forth
         in this Section 11.09(e) have been or will be complied with, and

                  (iv)     whether the Company desires the Trustee to give the
         Fundamental Change Company Notice required by Section 11.09(b).

         The Company's right to exercise its election to repurchase Securities
through the issuance of shares of Common Stock shall be conditioned upon:

                  (v)      the Company's giving a timely Fundamental Change
         Company Notice containing an election to purchase all or a specified
         percentage of the Securities with shares of Common Stock as provided
         herein;

                  (vi)     the registration of such shares of Common Stock under
         the Securities Act and, if required, the Exchange Act;

                  (vii)    the listing of such shares of Common Stock on a
         United States national securities exchange or the quotation of such
         shares of Common Stock in an inter-dealer quotation system of any
         registered United States national securities association, in each case,
         if the Common Stock is then listed on a national securities exchange or
         quoted in an inter-dealer quotation system;

                                       73


                  (viii)   any necessary qualification or registration of such
         shares of Common Stock under applicable state securities laws or the
         availability of an exemption from such qualification and registration;
         and

                  (ix)     the receipt by the Trustee of an (A) Officers'
         Certificate stating that the terms of the issuance of the shares of
         Common Stock are in conformity with this Indenture, (B) an Opinion of
         Counsel to the effect that the shares of Common Stock to be issued by
         the Company in payment of the Fundamental Change Repurchase Price in
         respect of the Securities have been duly authorized and, when issued
         and delivered pursuant to the terms of this Indenture in payment of the
         Fundamental Change Repurchase Price in respect of the Securities, will
         be validly issued, fully paid and non-assessable and (c) an Officer's
         Certificate, stating that the conditions to the issuance of the shares
         of Common Stock have been satisfied.

         Such Officers' Certificate shall also set forth the number of shares of
Common Stock to be issued for each $1,000 principal amount of Securities upon
their Stated Maturity and the Closing Price of a share of Common Stock on each
Trading Day during the period commencing on the fifth Trading Day immediately
preceding but ending on the third Business Day prior to the applicable
Fundamental Change Repurchase Date. If the foregoing conditions are not
satisfied prior to the close of business on the Business Day immediately
preceding the Fundamental Change Repurchase Date and the Company has elected to
repurchase the Securities through the issuance of shares of Common Stock, the
Company shall pay the entire Fundamental Change Repurchase Price of the
Securities in cash.

         Promptly after determination of the actual number of shares of Common
Stock to be issued upon repurchase of Securities, the Company shall be required
to disseminate a press release through Dow Jones & Company, Inc. or Bloomberg
Business News containing this information or publish the information on the
Company's web site or through such other public medium as the Company may use at
that time.

         All shares of Common Stock delivered upon repurchase of the Securities
shall be duly authorized, validly issued, fully paid and nonassessable.

         If a holder of a repurchased Security is paid in shares of Common
Stock, the Company shall pay any documentary, stamp or similar issue or transfer
tax due on such issue of Common Stock. However, the holder shall pay any such
tax which is due because the holder requests the Common Stock to be issued in a
name other than the holder's name. The Trustee (or other paying agent appointed
by the Company) may refuse to deliver the certificates representing the shares
of Common Stock being issued in a name other than the holder's name until the

                                       74


Trustee (or other paying agent appointed by the Company) receives a sum
sufficient to pay any tax which will be due because the shares of Common Stock
are to be issued in a name other than the holder's name. Nothing herein shall
preclude any income tax withholding required by law or regulations.

         (f)      Procedure Upon Repurchase. The Company shall deposit cash or
Common Stock, if permitted hereunder, at the time and in the manner as provided
in Section 11.11, sufficient to pay the aggregate Fundamental Change Repurchase
Price of all Securities to be purchased pursuant to this Section 11.09.

         Section 11.10. Effect of Repurchase Notice or Fundamental Change
Repurchase Notice. Upon receipt by the Paying Agent of the Repurchase Notice or
Fundamental Change Repurchase Notice specified in Section 11.08(b) or Section
11.09(b), as applicable, the Holder of the Security in respect of which such
Repurchase Notice or Fundamental Change Repurchase Notice, as the case may be,
was given shall (unless such Repurchase Notice or Fundamental Change Repurchase
Notice is withdrawn as specified in the following two paragraphs) thereafter be
entitled to receive solely the Repurchase Price or Fundamental Change Repurchase
Price, as the case may be, with respect to such Security. Such Repurchase Price
or Fundamental Change Repurchase Price shall be paid to such Holder, subject to
receipt of funds by the Paying Agent, promptly following the later of (x) the
Repurchase Date or the Fundamental Change Repurchase Date, as the case may be,
with respect to such Security (provided the conditions in Section 11.08(b) or
Section 11.09(b), as applicable, have been satisfied) and (y) the time of
delivery of such Security to the Paying Agent by the Holder thereof in the
manner required by Section 11.08(b) or Section 11.09(b), as applicable.
Securities in respect of which a Repurchase Notice or Fundamental Change
Repurchase Notice, as the case may be, has been given by the Holder thereof may
not be converted pursuant to Article 13 on or after the date of the delivery of
such Repurchase Notice or Fundamental Change Repurchase Notice, as the case may
be, unless such Repurchase Notice or Fundamental Change Repurchase Notice, as
the case may be, has first been validly withdrawn as specified in the following
two paragraphs.

         A Repurchase Notice or Fundamental Change Repurchase Notice, as the
case may be, may be withdrawn only by means of a written notice of withdrawal
delivered to the office of the Paying Agent in accordance with the procedures
set forth in the Company Notice or Fundamental Change Company Notice, as the
case may be, at any time prior to the close of business on the Business Day
prior to the Repurchase Date or the Fundamental Change Repurchase Date, as the
case may be, specifying:

                  (i)      the Principal Amount of the Security with respect to
         which such notice of withdrawal is being submitted; and

                                       75


                  (ii)     the certificate number (if such Security is held in
         other than global form) of the Security in respect of which such notice
         of withdrawal is being submitted; and

                  (iii)    the Principal Amount, if any, of such Security which
         remains subject to the original Repurchase Notice or Fundamental Change
         Repurchase Notice, as the case may be, and which has been or will be
         delivered for purchase or repurchase by the Company.

         There shall be no repurchase of any Securities pursuant to Section
11.08 or 11.09 if there has occurred (prior to, on or after, as the case may be,
the giving, by the Holders of such Securities, of the required Repurchase Notice
or Fundamental Change Repurchase Notice, as the case may be) and is continuing
an Event of Default (other than a default in the payment of the Repurchase Price
or Fundamental Change Repurchase Price, as the case may be, with respect to such
Securities). The Paying Agent will promptly return to the respective Holders
thereof any Securities (x) with respect to which a Repurchase Notice or
Fundamental Change Repurchase Notice, as the case may be, has been withdrawn in
compliance with this Indenture, or (y) held by it during the continuance of an
Event of Default (other than a default in the payment of the Repurchase Price or
Fundamental Change Repurchase Price, as the case may be, with respect to such
Securities) in which case, upon such return, the Repurchase Notice or
Fundamental Change Repurchase Notice with respect thereto shall be deemed to
have been withdrawn.

         Section 11.11. Deposit of Repurchase Price or Fundamental Change
Repurchase Price. Prior to 10:00 a.m. (local time in The City of New York) on
the Business Day following the Repurchase Date or the Fundamental Change
Repurchase Date, as the case may be, the Company shall deposit with the Trustee
or with the Paying Agent (or, if the Company or a Subsidiary or an Affiliate of
either of them is acting as the Paying Agent, shall segregate and hold in trust
as provided herein) an amount of money (in immediately available funds if
deposited on such Business Day) or Common Stock, if permitted hereunder,
sufficient to pay the Repurchase Price or the Fundamental Change Repurchase
Price, as the case may be, of all the Securities or portions thereof which are
to be repurchased as of the Repurchase Date or the Fundamental Change Repurchase
Date, as applicable. The Company shall promptly notify the Trustee in writing of
the amount of any deposits of cash or Common Stock made pursuant to Section
11.11

         Section 11.12. Securities Repurchased in Whole or in Part. Any Security
which is to be repurchased, whether in whole or in part, shall be surrendered at
the office of the Paying Agent (with, if the Company or the Trustee so requires,
due endorsement by, or a written instrument of transfer in form satisfactory to
the Company and the Trustee duly executed by, the Holder thereof or such
Holder's

                                       76


attorney duly authorized in writing) and the Company shall execute and the
Trustee shall authenticate and deliver to the Holder of such Security, without
service charge, a new Security or Securities, of any authorized denomination as
requested by such Holder in aggregate Principal Amount equal to, and in exchange
for, the portion of the Principal Amount of the Security so surrendered which is
not repurchased.

         Section 11.13. Covenant to Comply With Securities Laws Upon Repurchase
of Securities. In connection with any offer to repurchase Securities under
Section 11.08 or 11.09 (provided that such offer or repurchase constitutes an
"issuer tender offer" for purposes of Rule 13e-4 (which term, as used herein,
includes any successor provision thereto) under the Exchange Act at the time of
such offer or repurchase), the Company shall (i) comply with Rule 13e-4 and Rule
14e-1 under the Exchange Act, (ii) file the related Schedule TO (or any
successor schedule, form or report) under the Exchange Act, and (iii) otherwise
comply with all Federal and state securities laws so as to permit the rights and
obligations under Section 11.08 or 11.09 to be exercised in the time and in the
manner specified in Section 11.08 or 11.09, as applicable.

         Section 11.14. Repayment to the Company. The Trustee and the Paying
Agent shall return to the Company any cash that remains unclaimed, together with
interest or dividends, if any, thereon, held by them for the payment of the
Repurchase Price or Fundamental Change Repurchase Price, as the case may be;
provided that to the extent that the aggregate amount of cash or Common Stock
deposited by the Company pursuant to Section 11.11 exceeds the aggregate
Repurchase Price or Fundamental Change Repurchase Price, as the case may be, of
the Securities or portions thereof which the Company is obligated to repurchase
as of the Repurchase Date or Fundamental Change Repurchase Date, as the case may
be, then as soon as practicable following the Repurchase Date or Fundamental
Change Repurchase Date, as the case may be, the Trustee or the Paying Agent, as
the case may be, shall return any such excess to the Company.

                                   ARTICLE 12
                                   [RESERVED]

                                   ARTICLE 13
                                   CONVERSION

         Section 13.01. Conversion Privilege. (a) Subject to the further
provisions of this Article 13, a Holder of a Security may convert the Principal
Amount of

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such Security (or a portion thereof equal to $1,000 or any integral multiple of
$1,000 in excess thereof) into Common Stock at any time prior to the close of
business at the Stated Maturity only as follows:

                  (i)      if (A) during any Conversion Period prior to August
         15, 2018 if the Closing Price of the Company's Common Stock for at
         least twenty (20) Trading Days in a period of thirty (30) consecutive
         Trading Days ending on the first day of such Conversion Period was more
         than 145% of the applicable Conversion Price on the first day of the
         Conversion Period or (B) at any time on or after August 15, 2018
         through the close of business on the Business Day prior to Stated
         Maturity if the Closing Price of the Company's Common Stock is more
         than 145% of the applicable Conversion Price;

                  (ii)     if during the five (5) consecutive Business Day
         period following any five (5) consecutive Trading Day period in which
         the average Trading Price for the Securities for such five (5) Trading
         Day period was less than 98% of the average Closing Price of the
         Company's Common Stock during that five (5) Trading Day period
         multiplied by the Conversion Rate (the "TRADING PRICE CONDITION");
         provided, however, that if on the date of any conversion pursuant to
         the Trading Price Condition that is on or after August 15, 2018, the
         Closing Price of the Company's Common Stock on the Trading Day
         immediately prior to the Conversion Date is greater than 100% of the
         Conversion Price, Holders surrendering Securities for conversion will
         receive, in lieu of shares of the Company's Common Stock based on the
         Conversion Rate, shares of the Company's Common Stock with a value
         equal to the Principal Amount of Securities being converted (a
         "PRINCIPAL VALUE CONVERSION"). Shares of the Company's Common Stock
         delivered upon a Principal Value Conversion will be valued at the
         greater of the effective Conversion Price as of the date eight Trading
         Days prior to the Conversion Date and the Closing Price as of the
         Conversion Date and will be delivered no later than the third Business
         Day following the determination of the Closing Price;

         "TRADING PRICE" of the Securities on any date of determination means
the average of the secondary market bid quotations per Security obtained by the
Trustee for $10,000,000 Principal Amount of Securities at approximately 3:30
p.m., New York City time, on such determination date from two Bid Solicitation
Agents; provided that if at least two such bids cannot reasonably be obtained by
the Trustee, but one such bid can reasonably be obtained, this one bid will be
used. If the Trustee cannot reasonably obtain at least one bid for $10,000,000
Principal Amount of Securities from a Bid Solicitation Agent or, in the
reasonable judgment of the Company, the bid quotations are not indicative of the
secondary market value of the Securities, the trading price of the Securities
will be deemed to be less than 98% of the product of the applicable Conversion

                                       78


Rate of the Securities and the Closing Price of the Company's Common Stock on
such date of determination.

                  (iii)    in the event that the Company calls the Securities
         for redemption, at any time prior to the close of business on the
         Business Day immediately preceding the Redemption Date;

                  (iv)     if the Company becomes a party to a consolidation,
         merger or binding share exchange pursuant to which all or substantially
         all of the Common Stock would be converted into cash, securities or
         other property, in which case a Holder may surrender Securities for
         conversion at any time from and after the date which is 15 days prior
         to the anticipated effective date for the transaction until 15 days
         after the actual effective date of such transaction; provided, however,
         that on the effective date of such transaction, the right of a Holder
         to convert a Security into Common Stock will change into a right to
         convert such Security into the kind and amount of cash, securities or
         other property that such Holder would have received if such Holder had
         converted such Security immediately prior to the transaction; or

                  (v)      if the Company elects to (i) distribute to all or
         substantially all holders of Common Stock assets, debt securities or
         Capital Stock of the Company, which distribution has a per share value
         as determined by the Board of Directors exceeding 5% of the Closing
         Price of a share of Common Stock on the Trading Day immediately
         preceding the declaration date for such distribution or (ii) distribute
         to all or substantially all holders of Common Stock rights, options or
         warrants entitling them to purchase shares of Common Stock at less than
         the Closing Price of Common Stock on the Trading Day immediately
         preceding the declaration date of the distribution. In the case of the
         foregoing clauses (i) and (ii), the Company must notify the Holders at
         least 20 days immediately prior to the ex-dividend date for such
         distribution. Once the Company has given such notice, Holders may
         surrender their Securities for conversion at any time thereafter until
         the earlier of the close of business on the Business Day immediately
         prior to the ex-dividend date or the Company's announcement that such
         distribution will not take place even if the Securities are not
         convertible at such time; provided however, that a Holder may not
         exercise this right to convert if the Holder may participate in the
         distribution without conversion. As used herein, the term "EX DIVIDEND
         DATE" or "EX-DATE" when used with respect to any issuance or
         distribution, shall mean the first date upon which a sale of shares of
         Common Stock does not automatically transfer the right to receive the
         relevant dividend from the seller of such Common Stock to its buyer.

                                       79


         The Conversion Agent shall, on behalf of the Company, determine on a
daily basis whether the Securities shall be convertible as a result of the
occurrence of an event specified in clause (i) above and, if the Securities
shall be so convertible, the Conversion Agent shall promptly deliver to the
Company and the Trustee written notice thereof. Whenever the Securities shall
become convertible pursuant to this Section 13.01, the Company or, at the
Company's request, the Trustee in the name and at the expense of the Company,
shall notify the Holders of the event triggering such convertibility in the
manner provided in Section 1.06. In addition, the Company shall publish a notice
containing substantially the same information in a newspaper published in the
English language, customarily published each Business Day and of general
circulation in The City of New York, or publish such information on the
Company's website or through such other public medium as the Company may use at
such time.

         The Conversion Agent shall have no obligation to determine the Trading
Price under this Section 13.01 unless the Company has requested such a
determination; and the Company shall have no obligation to make such request
unless a Holder provides the Company with reasonable evidence that the Trading
Price per $1,000 Principal Amount of Securities would be less than 98% of the
product of the Closing Price of the Common Stock and the number of shares of
Common Stock issuable upon conversion of $1,000 Principal Amount of Securities.
If such evidence is provided, the Company shall instruct the Conversion Agent to
determine the Trading Price of the Securities beginning on the next Trading Day
and on each successive Trading Day until the Trading Price per $1,000 Principal
Amount of Debentures is greater than or equal to 98% of the product of the
Closing Price and the number of shares issuable upon conversion of $1,000
Principal Amount of Securities.

         (b)      Conversion Period. Notwithstanding the foregoing, if such
Security is submitted or presented for repurchase pursuant to Article 11, such
conversion right shall terminate at the close of business on the Business Day
prior to the Repurchase Date or Fundamental Change Repurchase Date, as the case
may be, for such Security or such earlier date as the Holder presents such
Security for repurchase (unless the Company shall default when due, in which
case the conversion right shall terminate at the close of business on the date
such default is cured and such Security is repurchased).

         (c)      Conversion Rate; Conversion Price. The conversion rate per
Security (the "CONVERSION RATE") shall be that set forth in paragraph 8 in the
Securities, subject to adjustment as herein set forth. The initial Conversion
Rate is 63.8790 shares of Common Stock per $1,000 principal amount of
Securities. The "CONVERSION PRICE" at any particular time is determined by
dividing $1,000 by the then-applicable Conversion Rate.

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         (d)      Delivery of Officers' Certificate. If any of the Securities is
convertible by the Holders into Common Stock, the Company shall deliver to the
Trustee an Officers' Certificate to that effect stating (i) the fact that such
Securities are so convertible, (ii) the date as of which the Securities are
convertible, (iii) the reason why the Securities are convertible and (iv) the
Conversion Rate at which the Securities are convertible. Unless and until a
Trust Officer of the Trustee receives such Officers' Certificate, the Trustee
may assume without inquiry that the Securities are not convertible. Whenever any
fact set forth in an Officers' Certificate delivered pursuant to this Section
13.01 changes, the Company shall deliver to the Trustee a new Officers'
Certificate setting forth the correct information. Unless and until a Trust
Officer receives such a correcting Officers' Certificate, the Trustee may assume
without inquiry that the last Officers' Certificate delivered to it remains in
full force and effect and is correct is every respect.

         (e)      Securities Converted in Whole or in Part. Provisions of this
Indenture that apply to conversion of all of a Security also apply to conversion
of a portion of a Security.

         (f)      Rights of Holders. A Holder of Securities is not entitled to
any rights of a holder of Common Stock until such Holder has converted its
Securities to Common Stock, and only to the extent such Securities are deemed to
have been converted into Common Stock pursuant to this Article 13.

         Section 13.02. Conversion Procedure.

         (a)      To convert a Security, a Holder must (i) complete and manually
sign the conversion notice on the back of the Security or facsimile of the
conversion notice and deliver such notice to a Conversion Agent, (ii) surrender
the Security to a Conversion Agent, (iii) furnish appropriate endorsements and
transfer documents if required by a Registrar or a Conversion Agent and (iv) pay
any transfer or similar tax, if required. Such notice is hereinafter referred to
as a "NOTICE OF CONVERSION." A Security shall be deemed to have been converted
as of the close of business on the date (the "CONVERSION DATE") on which the
Holder has complied with the immediately preceding sentence of this Section
13.02(a). Anything herein to the contrary notwithstanding, in the case of Global
Securities, a Notice of Conversion shall be delivered and such Securities shall
be surrendered for conversion in accordance with the rules and procedures of DTC
as in effect from time to time.

         (b)      The Company will, as soon as practicable after the Conversion
Date, issue, or cause to be issued, and deliver to the Conversion Agent or to
such Holder, or such Holder's nominee or nominees, certificates for the number
of full shares of Common Stock, if any, to which such Holder shall be entitled.
The Person or Persons entitled to receive such Common Stock upon such conversion


                                       81


shall be treated for all purposes as the record holder or holders of such Common
Stock, as of the close of business on the applicable Conversion Date; provided,
however, that no surrender of a Security on any date when the stock transfer
books of the Company shall be closed shall be effective to constitute the Person
or Persons entitled to receive the shares of Common Stock upon such conversion
as the record holder or holders of such shares of Common Stock on such date, but
such surrender shall be effective to constitute the Person or Persons entitled
to receive such shares of Common Stock as the record holder or holders thereof
for all purposes at the close of business on the next succeeding day on which
such stock transfer books are open; provided further that such conversion shall
be at the Conversion Rate in effect on the Conversion Date as if the stock
transfer books of the Company had not been closed. Upon conversion of a
Security, such Person shall no longer be a Holder of such Security. Except as
otherwise provided in Section 13.06, no payment or adjustment will be made for
dividends or distributions on shares of Common Stock issued upon conversion of a
Security.

         (c)      If a Holder converts more than one Security at the same time,
the number of shares of Common Stock issuable upon the conversion shall be based
on the aggregate Principal Amount of Securities converted.

         (d)      Upon surrender of a Security that is converted in part, the
Company shall execute, and the Trustee shall authenticate and deliver to the
Holder, a new Security equal in principal amount to the unconverted portion of
the Security surrendered.

         (e)      If the last day on which Security may be converted is not a
Business Day in a place where a Conversion Agent is located, the Securities may
be surrendered to that Conversion Agent on the next succeeding Business Day.

         (f)      Holders that have already delivered a Repurchase Notice or
Fundamental Change Repurchase Notice with respect to a Security may not
surrender such Security for conversion until the Repurchase Notice or
Fundamental Change Repurchase Notice, as the case may be, has been withdrawn in
accordance with the procedures set forth in Section 11.10.

         Section 13.03. Fractional Shares. The Company will not issue
fractional shares of Common Stock upon conversion of Securities. In lieu
thereof, the Company will pay an amount in cash for the current market value of
the fractional shares. The current market value of a fractional share shall be
determined, (calculated to the nearest 1/1000th of a share) by multiplying the
Closing Price of the Common Stock on the Trading Day immediately prior to the
Conversion Date by such fractional share and rounding the product to the nearest
whole cent.

         Section 13.04.  Taxes on Conversion. If a Holder converts a Security,
the Company shall pay any documentary, stamp or similar issue or transfer tax
due on

                                       82


the issuance of shares of Common Stock upon such conversion. However, the Holder
shall pay any such tax which is due because the Holder requests the shares to be
issued in a name other than the Holder's name. The Conversion Agent may refuse
to deliver the certificate representing the Common Stock being issued in a name
other than the Holder's name until the Conversion Agent receives a sum
sufficient to pay any tax which will be due because the shares are to be issued
in a name other than the Holder's name. Nothing herein shall preclude any tax
withholding required by law or regulation.

         Section 13.05. Company to Provide Stock.

         (a)      The Company shall, prior to issuance of any Securities
hereunder, and from time to time as may be necessary, reserve, out of its
authorized but unissued Common Stock, a sufficient number of shares of Common
Stock to permit the conversion of all outstanding Securities into shares of
Common Stock (including after taking into account any adjustments to the
Conversion Rate pursuant to Section 13.06).

         All shares of Common Stock delivered upon conversion of the Securities
shall be newly issued shares, shall be duly authorized, validly issued, fully
paid and nonassessable and shall be free from preemptive rights and free of any
lien or adverse claim.

         The Company will endeavor promptly to comply with all federal and state
securities laws regulating the offer and delivery of shares of Common Stock upon
conversion of Securities, if any, and will list or cause to have quoted such
shares of Common Stock on each national securities exchange or on the New York
Stock Exchange, the Nasdaq National Market or other over-the-counter market or
such other market on which the Common Stock is then listed or quoted; provided,
however, that if rules of such automated quotation system or exchange permit the
Company to defer the listing of such Common Stock until the first conversion of
the Securities into Common Stock in accordance with the provisions of this
Indenture, the Company covenants to list such Common Stock issuable upon
conversion of the Notes in accordance with the requirements of such automated
quotation system or exchange at such time. Any Common Stock issued upon
conversion of a Security hereunder which at the time of conversion was a
Transfer Restricted Security will also be a Transfer Restricted Security.

         Section 13.06. Adjustment of Conversion Rate. The Conversion Rate shall
be adjusted from time to time by the Company as follows:

         (a)      In case the Company shall (i) pay a dividend on its Common
Stock in shares of Common Stock, (ii) make a distribution on its Common Stock in
shares of Common Stock, (iii) subdivide its outstanding Common Stock into a
greater number of shares, or (iv) combine its outstanding Common Stock into a

                                       83


smaller number of shares, the Conversion Rate in effect immediately prior
thereto shall be adjusted so that the Holder of any Security thereafter
surrendered for conversion shall be entitled to receive that number of shares of
Common Stock which it would have owned had such Security been converted
immediately prior to the happening of such event. An adjustment made pursuant to
this subsection (a) shall become effective immediately after the record date in
the case of a dividend or distribution and shall become effective immediately
after the effective date in the case of subdivision or combination.

         (b)      In case the Company shall issue rights or warrants (other than
pursuant to a stockholder rights plan) to all or substantially all holders of
its Common Stock entitling them (for a period commencing no earlier than the
record date described below and expiring not more than 60 days after such record
date) to subscribe for or purchase shares of Common Stock (or securities
convertible into Common Stock) at a price per share (or having a conversion
price per share) less than the Closing Price per share of Common Stock on the
Business Day immediately prior to the date of announcement of such issuance, the
Conversion Rate in effect shall be adjusted so that the same shall equal the
rate determined by multiplying the Conversion Rate in effect immediately prior
to such announcement by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding at the close of business on the date of
announcement plus the number of additional shares of Common Stock offered (or
into which the convertible securities so offered are convertible), and the
denominator of which shall be the number of shares of Common Stock outstanding
at the close of business on the date of announcement plus the number of shares
which the aggregate offering price of the total number of shares of Common Stock
so offered (or the aggregate conversion price of the convertible securities so
offered, which shall be determined by multiplying the number of shares of Common
Stock issuable upon conversion of such convertible securities by the conversion
price per share of Common Stock pursuant to the terms of such convertible
securities) would purchase at the Current Market Price per share of Common Stock
on the Business Day immediately preceding the date of announcement of such
issuance. Such adjustment shall be made successively whenever any such rights or
warrants are issued, and shall become effective on the day following the date of
announcement of such issuance. If at the end of the period during which such
rights or warrants are exercisable not all rights or warrants shall have been
exercised, the adjusted Conversion Rate shall be immediately readjusted to what
it would have been based upon the number of additional shares of Common Stock
actually issued (or the number of shares of Common Stock issuable upon
conversion of convertible securities actually issued).

         (c)      In case the Company shall distribute to all or substantially
all holders of its Common Stock any shares of capital stock of the Company
(other than Common Stock), evidences of indebtedness or other non-cash assets

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(including securities of any person other than the Company but excluding (1)
dividends or distributions paid exclusively in cash or (2) dividends or
distributions referred to in subsection (a) of this Section 13.06), or shall
distribute to all or substantially all holders of its Common Stock rights or
warrants to subscribe for or purchase any of its securities (excluding those
rights and warrants referred to in subsection (b) of this Section 13.06 and also
excluding the distribution of rights to all holders of Common Stock pursuant to
the adoption of a stockholders rights plan or the detachment of such rights
under the terms of such stockholder rights plan), then in each such case the
Conversion Rate shall be adjusted so that the same shall equal the rate
determined by multiplying the current Conversion Rate by a fraction of which the
numerator shall be the Current Market Price per share of the Common Stock on the
record date mentioned below and the denominator shall be the Current Market
Price per share of the Common Stock on such record date less the fair market
value on such record date (as determined by the Board of Directors, whose
determination shall be conclusive evidence of such fair market value and which
shall be evidenced by an Officers' Certificate delivered to the Trustee) of the
portion of the capital stock, evidences of indebtedness or other non-cash assets
so distributed or of such rights or warrants applicable to one share of Common
Stock (determined on the basis of the number of shares of Common Stock
outstanding on the record date). Such adjustment shall be made successively
whenever any such distribution is made and shall become effective immediately
after the record date for the determination of shareholders entitled to receive
such distribution.

         In the event the then fair market value (as so determined) of the
portion of the Capital Stock, evidences of indebtedness or other non-cash assets
so distributed or of such rights or warrants applicable to one share of Common
Stock is equal to or greater than the Current Market Price per share of the
Common Stock on such record date, in lieu of the foregoing adjustment, adequate
provision shall be made so that each holder of a Security shall have the right
to receive upon conversion the amount of Capital Stock, evidences of
indebtedness or other non-cash assets so distributed or of such rights or
warrants such holder would have received had such holder converted each Security
on such record date. In the event that such dividend or distribution is not so
paid or made, the Conversion Rate shall again be adjusted to be the Conversion
Rate which would then be in effect if such dividend or distribution had not been
declared. If the Board of Directors determines the fair market value of any
distribution for purposes of this Section 13.06 by reference to the actual or
when issued trading market for any securities, it must in doing so consider the
prices in such market over the same period used in computing the Current Market
Price of the Common Stock.

         In the event that the Company has in effect a preferred shares rights
plan ("RIGHTS PLAN"), upon conversion of the Securities into Common Stock, to
the extent that the Rights Plan is still in effect upon such conversion, the
holders of Securities will receive, in addition to the Common Stock, the rights
described

                                       85


therein (whether or not the rights have separated from the Common Stock at the
time of conversion), subject to the limitations set forth in the Rights Plan.
Any distribution of rights or warrants pursuant to a Rights Plan complying with
the requirements set forth in the immediately preceding sentence of this
paragraph shall not constitute a distribution of rights or warrants pursuant to
this Article 13.

         Rights or warrants distributed by the Company to all holders of Common
Stock entitling the holders thereof to subscribe for or purchase shares of the
Company's Capital Stock (either initially or under certain circumstances), which
rights or warrants, until the occurrence of a specified event or events
("TRIGGER EVENT"): (i) are deemed to be transferred with such shares of Common
Stock; (ii) are not exercisable; and (iii) are also issued in respect of future
issuances of Common Stock, shall be deemed not to have been distributed for
purposes of this Section 13.06 (and no adjustment to the Conversion Rate under
this Section 13.06 will be required) until the occurrence of the earliest
Trigger Event, whereupon such rights and warrants shall be deemed to have been
distributed and an appropriate adjustment (if any is required) to the Conversion
Rate shall be made under this Section 13.06(e). If any such right or warrant,
including any such existing rights or warrants distributed prior to the date of
this Indenture, are subject to events, upon the occurrence of which such rights
or warrants become exercisable to purchase different securities, evidences of
indebtedness or other assets, then the date of the occurrence of any and each
such event shall be deemed to be the date of distribution and record date with
respect to new rights or warrants with such rights (and a termination or
expiration of the existing rights or warrants without exercise by any of the
holders thereof). In addition, in the event of any distribution (or deemed
distribution) of rights or warrants, or any Trigger Event or other event (of the
type described in the preceding sentence) with respect thereto that was counted
for purposes of calculating a distribution amount for which an adjustment to the
Conversion Rate under this Section 13.06 was made, (1) in the case of any such
rights or warrants which shall all have been redeemed or repurchased without
exercise by any holders thereof, the Conversion Rate shall be readjusted upon
such final redemption or repurchase to give effect to such distribution or
Trigger Event, as the case may be, as though it were a cash distribution, equal
to the per share redemption or repurchase price received by a holder or holders
of Common Stock with respect to such rights or warrants (assuming such holder
had retained such rights or warrants), made to all holders of Common Stock as of
the date of such redemption or repurchase, and (2) in the case of such rights or
warrants which shall have expired or been terminated without exercise by any
holders thereof, the Conversion Rate shall be readjusted as if such rights and
warrants had not been issued.

         (d)      In case the Company shall, by dividend or otherwise, at any
time distribute (a "TRIGGERING DISTRIBUTION") to all or substantially all
holders of its Common Stock cash, the Conversion Rate shall be increased so that
the same shall equal the rate determined by multiplying such Conversion Rate in
effect on

                                       86


the Business Day (the "DETERMINATION DATE") immediately preceding the day on
which such Triggering Distribution is declared by the Company by a fraction of
which the numerator shall be the Current Market Price per share of the Common
Stock on the Determination Date, and the denominator shall be the Current Market
Price per share of the Common Stock on the Determination Date less the aggregate
amount of cash so distributed applicable to one share of Common Stock
(determined on the basis of the number of shares of Common Stock outstanding on
the Determination Date), such increase to become effective immediately prior to
the opening of business on the day following the date on which the Triggering
Distribution is paid. It is expressly understood that a stock buyback,
repurchase or similar transaction or program shall in no event be considered a
Triggering Distribution for purposes of this Section 13.06(d) or Section
13.06(e).

         (e)      In case the Company or any of its Subsidiaries shall purchase
any shares of the Company's Common Stock by means of a tender offer, then,
effective immediately prior to the opening of business on the day after the last
date (the "EXPIRATION DATE") tenders could have been made pursuant to such
tender offer (as it may be amended) (the last time at which such tenders could
have been made on the Expiration Date is hereinafter sometimes called the
"EXPIRATION TIME"), the Conversion Rate shall be increased so that the same
shall equal the rate determined by multiplying the Conversion Rate in effect
immediately prior to the close of business on the Expiration Date by a fraction
of which the numerator shall be the sum of (x) the aggregate consideration
(determined as set forth below) payable to stockholders of the Company based on
the acceptance (up to any maximum specified in the terms of the tender offer) of
all shares validly tendered and not withdrawn as of the Expiration Time (the
shares deemed so accepted, up to any such maximum, being referred to as the
"PURCHASED SHARES") and (y) the product of the number of shares of Common Stock
outstanding (less any Purchased Shares and excluding any shares held in the
treasury of the Company) immediately prior to the Expiration Time and the
Current Market Price per share of Common Stock (as determined in accordance with
subsection (f)of this Section 13.06), and the denominator shall be the product
of the number of shares of Common Stock outstanding (including Purchased Shares
but excluding any shares held in the treasury of the Company) immediately prior
to the Expiration Time multiplied by the Current Market Price per share of the
Common Stock (as determined in accordance with subsection (f)of this Section
13.06). For purposes of this Section 13.06(e), the aggregate consideration in
any such tender offer shall equal the sum of the aggregate amount of cash
consideration and the aggregate fair market value (as determined by the Board of
Directors, whose determination shall be conclusive evidence thereof and which
shall be evidenced by an Officers' Certificate delivered to the Trustee) of any
other consideration payable in such tender offer. In the event that the Company
is obligated to purchase shares pursuant to any such tender offer, but the
Company is permanently prevented by applicable law

                                       87


from effecting any or all such purchases or any or all such purchases are
rescinded, the Conversion Rate shall again be adjusted to be the Conversion Rate
which would have been in effect based upon the number of shares actually
purchased. If the application of this Section 13.06(e) to any tender offer would
result in a decrease in the Conversion Rate, no adjustment shall be made for
such tender offer under this Section 13.06(e). For purposes of this Section
13.06(e), the term "tender offer" shall mean and include both tender offers and
exchange offers, all references to "purchases" of shares in tender offers (and
all similar references) shall mean and include both the purchase of shares in
tender offers and the acquisition of shares pursuant to exchange offers, and all
references to "tendered shares" (and all similar references) shall mean and
include shares tendered in both tender offers and exchange offers.

         (f)      For the purpose of any computation under subsections (b), (c)
and (d) of this Section 13.06, the current market price (the "CURRENT MARKET
PRICE") per share of Common Stock on any date shall be deemed to be the average
of the daily Closing Prices for the ten (10) consecutive Trading Days commencing
eleven (11) Trading Days before (i) the Determination Date, with respect to
distributions under subsection (c) of this Section 13.06 or (ii) the record date
with respect to distributions, issuances or other events requiring such
computation under subsection (b) or (d) of this Section 13.06. For purposes of
any computation under subsection (e) of this Section 13.06, the Current Market
Price per share of Common Stock shall be deemed to be the average of the daily
Closing Prices for the ten (10) consecutive Trading Days commencing on the
Trading Day next succeeding the Expiration Date.

         (g)      In any case in which this Section 13.06 shall require that an
adjustment be made following a record date, an announcement date or a
Determination Date or Expiration Date, as the case may be, established for
purposes of this Section 13.06, the Company may elect to defer (but only until
five Business Days following the filing by the Company with the Trustee of the
certificate described in Section 13.09) issuing to the Holder of any Security
converted after such record date or announcement date or Determination Date or
Expiration Date the shares of Common Stock and other capital stock of the
Company issuable upon such conversion over and above the shares of Common Stock
and other capital stock of the Company issuable upon such conversion only on the
basis of the Conversion Rate prior to adjustment; and, in lieu of the shares the
issuance of which is so deferred, the Company shall issue or cause its transfer
agents to issue due bills or other appropriate evidence prepared by the Company
of the right to receive such shares. If any distribution in respect of which an
adjustment to the Conversion Rate is required to be made as of the record date
or announcement date or Determination Date or Expiration Date therefor is not
thereafter made or paid by the Company for any reason, the Conversion Rate shall
be readjusted to the Conversion Rate which would then be in effect if such
record

                                       88


date had not been fixed or such announcement date or effective date or
Determination Date or Expiration Date had not occurred.

         (h)      No adjustment shall be made pursuant to this Section 13.06 if
the Holders may participate in the transaction that would otherwise give rise to
an adjustment pursuant to this Section 13.06.

         Section 13.07. No Adjustment. No adjustment need be made for issuances
of Common Stock pursuant to a Company plan for reinvestment of dividends or
interest or for a change in the par value or a change to no par value of the
Common Stock.

         To the extent that the Securities become convertible into the right to
receive cash, no adjustment need be made thereafter as to the cash. Interest
will not accrue on the cash due.

         Section 13.08. Adjustment for Tax Purposes. The Company shall be
entitled to make such increases in the Conversion Rate, in addition to those
required by Section 13.06, as it in its discretion shall determine to be
advisable in order that any stock dividends, subdivisions of shares,
distributions of rights to purchase stock or securities or distributions of
securities convertible into or exchangeable for stock hereafter made by the
Company to its stockholders shall not be taxable.

         Section 13.09. Notice of Conversion Rate Adjustment. Whenever the
Conversion Rate or conversion privilege is adjusted, the Company shall promptly
mail to Securityholders a notice of the adjustment and file with the Trustee an
Officers' Certificate briefly stating the facts requiring the adjustment and the
manner of computing it. Unless and until the Trustee shall receive an Officers'
Certificate setting forth an adjustment of the Conversion Rate, the Trustee may
assume without inquiry that the Conversion Rate has not been adjusted and that
the last Conversion Rate of which it has knowledge remains in effect.

         Section 13.10. Notice of Certain Transactions. In the event that:

         (1)      the Company takes any action which would require an adjustment
in the Conversion Rate;

         (2)      the Company consolidates or merges with, or transfers all or
substantially all of its property and assets to, another corporation and
shareholders of the Company must approve the transaction; or

         (3)      there is a dissolution or liquidation of the Company,

the Company shall mail to Holders and file with the Trustee a notice stating the
proposed record or effective date, as the case may be. The Company shall mail

                                       89


the notice at least ten days before such date. Failure to mail such notice or
any defect therein shall not affect the validity of any transaction referred to
in clause (1), (2) or (3) of this Section 13.10.

         Section 13.11. Effect of Reclassification, Consolidation, Merger or
Sale on Conversion Privilege. If any of the following shall occur, namely: (a)
any reclassification or change of shares of Common Stock issuable upon
conversion of the Securities (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination, or any other change for which an adjustment is
provided in Section 13.06); (b) any consolidation or merger or combination to
which the Company is a party other than a merger in which the Company is the
continuing corporation and which does not result in any reclassification of, or
change (other than in par value, or from par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination) in,
outstanding shares of Common Stock; or (c) any sale or conveyance as an entirety
or substantially as an entirety of the property and assets of the Company,
directly or indirectly, to any Person, then the Company, or such successor,
purchasing or transferee corporation, as the case may be, shall, as a condition
precedent to such reclassification, change, combination, consolidation, merger,
sale or conveyance, execute and deliver to the Trustee a supplemental indenture
providing that the Holder of each Security then outstanding shall have the right
to convert such Security into the kind and amount of shares of stock and other
securities and property (including cash) receivable upon such reclassification,
change, combination, consolidation, merger, sale or conveyance by a holder of
the number of shares of Common Stock deliverable upon conversion of such
Security immediately prior to such reclassification, change, combination,
consolidation, merger, sale or conveyance. Such supplemental indenture shall
provide for adjustments of the Conversion Rate which shall be as nearly
equivalent as may be practicable to the adjustments of the Conversion Rate
provided for in this Article 13. If, in the case of any such consolidation,
merger, combination, sale or conveyance, the stock or other securities and
property (including cash) receivable thereupon by a holder of Common Stock
include shares of stock or other securities and property of a person other than
the successor, purchasing or transferee corporation, as the case may be, in such
consolidation, merger, combination, sale or conveyance, then such supplemental
indenture shall also be executed by such other person and shall contain such
additional provisions to protect the interests of the Holders of the Securities
as the Board of Directors shall reasonably consider necessary by reason of the
foregoing. The provisions of this Section 13.11 shall similarly apply to
successive reclassifications, changes, combinations, consolidations, mergers,
sales or conveyances.

         In the event the Company shall execute a supplemental indenture
pursuant to this Section 13.11, the Company shall promptly file with the Trustee
(x) an Officers' Certificate briefly stating the reasons therefor, the kind or
amount of

                                       90


shares of stock or other securities or property (including cash) receivable by
Holders of the Securities upon the conversion of their Securities after any such
reclassification, change, combination, consolidation, merger, sale or
conveyance, any adjustment to be made with respect thereto and that all
conditions precedent have been complied with and (y) an Opinion of Counsel that
all conditions precedent have been complied with, and shall promptly mail notice
thereof to all Holders.

         Section 13.12. Trustee's Disclaimer. The Trustee shall have no duty to
determine when an adjustment under this Article 13 should be made, how it should
be made or what such adjustment should be, but may accept as conclusive evidence
of that fact or the correctness of any such adjustment, and shall be protected
in relying upon, an Officers' Certificate including the Officers' Certificate
with respect thereto which the Company is obligated to file with the Trustee
pursuant to Section 13.09. The Trustee makes no representation as to the
validity or value of any securities or assets issued upon conversion of
Securities, and the Trustee shall not be responsible for the Company's failure
to comply with any provisions of this Article 13.

         The Trustee shall not be under any responsibility to determine the
correctness of any provisions contained in any supplemental indenture executed
pursuant to Section 13.11, but may accept as conclusive evidence of the
correctness thereof, and shall be fully protected in relying upon, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 13.11.

         Section 13.13. Voluntary Increase. The Company from time to time may
increase the Conversion Rate by any amount for any period of time if the period
is at least 20 days and if the increase is irrevocable during the period if the
Board of Directors determines that such increase would be in the best interest
of the Company or the Board of Directors deems it advisable to avoid or diminish
income tax to holders of shares of our Common Stock in connection with any stock
or rights dividend or distribution or similar event, and the Company provides 15
days prior notice of any increase in the Conversion Rate.

         Section 13.14. Company Determination Final. Any determination that the
Company or the Board of Directors must make pursuant to this Article 13 shall be
conclusive if made in good faith and in accordance with the provisions of this
Article 13, absent manifest error, and set forth in a resolution of the Board of
Directors.

                                       91


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

                                      CADENCE DESIGN SYSTEMS, INC.

                                      By: /s/ William Porter
                                          --------------------------------
                                          Name:  William Porter
                                          Title: Senior Vice President and Chief
                                                 Financial Officer

                           [Trustee Signature Follows]



                                            J.P. MORGAN TRUST COMPANY,
                                            National Association, as Trustee

                                            By: /s/ James Nagy
                                                --------------------------------


                                                                       EXHIBIT A

                           Form of Repurchase Notice

                                                           _______________, ____

J.P. Morgan Trust Company, National Association
4 New York Plaza, 1st Floor
New York, New York  10004-2413.

Attention: Institutional Trust Services

         Re: Cadence Design Systems, Inc. (the "COMPANY")
             Zero Coupon Zero Yield Senior Convertible Notes Due 2023

         This is a Repurchase Notice as defined in Section 11.08 of the
Indenture dated as of August 15, 2003 (the "INDENTURE") between the Company and
J.P. Morgan Trust Company, National Association, as Trustee. Terms used but not
defined herein shall have the meanings ascribed to them in the Indenture.

Certificate No(s). of Securities:   _____________________________

         I intend to deliver the following aggregate Principal Amount Securities
for purchase by the Company pursuant to Section 11.08 of the Indenture

(in multiples of $1,000):

$______________________________

         I hereby agree that the Securities will be purchased as of the
Repurchase Date pursuant to the terms and conditions thereof and of the
Indenture.

                                            Signed:  ________________________

                                      A-1


                                                                       EXHIBIT B

                  Form of Fundamental Change Repurchase Notice

                                                          _______________, ____

J.P. Morgan Trust Company, National Association
4 New York Plaza, 1st Floor
New York, New York  10004-2413.

Attention: Institutional Trust Services

         Re: Cadence Design Systems, Inc. (the "COMPANY")
             Zero Coupon Zero Yield Senior Convertible Notes Due 2023

         This is a Fundamental Change Repurchase Notice as defined in Section
11.09 of the Indenture dated as of August 15, 2003 (the "Indenture") between the
Company and J.P. Morgan Trust Company, National Association, as Trustee. Terms
used but not defined herein shall have the meanings ascribed to them in the
Indenture.

Certificate No(s). of Securities:   _____________________________

         I intend to deliver the following aggregate Principal Amount of
Securities for purchase by the Company pursuant to Section 11.09 of the
Indenture (in multiples of $1,000):

$__________________________________

         I hereby agree that the Securities will be purchased as of the
Fundamental Change Repurchase Date pursuant to the terms and conditions thereof
and of the Indenture.

                                            Signed:  ________________________

                                       1


Certain Sections of this Indenture relating to Sections 310 through 318 of the
Trust Indenture Act of 1939:



    Trust Indenture                                                                       Indenture
     Act Section                                                                           Section
     -----------                                                                           -------
                                                                                    
   Section 310(a)(1)    ...........................................................         6.09
              (a)(2)    ...........................................................         6.09
              (a)(3)    ...........................................................    Not Applicable
              (a)(4)    ...........................................................    Not Applicable
                 (b)    ...........................................................         6.08
                        ...........................................................         6.10
      Section 311(a)    ...........................................................         6.13
                 (b)    ...........................................................         6.13
      Section 312(a)    ...........................................................         7.01
                        ...........................................................        7.02(a)
                 (b)    ...........................................................        7.02(b)
                 (c)    ...........................................................        7.02(c)
      Section 313(a)    ...........................................................        7.03(a)
                 (b)    ...........................................................        7.03(a)
                 (c)    ...........................................................        7.03(a)
                 (d)    ...........................................................        7.03(b)
      Section 314(a)    ...........................................................         7.04
                 (b)    ...........................................................    Not Applicable
              (c)(1)    ...........................................................         1.02
              (c)(2)    ...........................................................         1.02
              (c)(3)    ...........................................................    Not Applicable
                 (d)    ...........................................................    Not Applicable
                 (e)    ...........................................................         1.02
      Section 315(a)    ...........................................................         6.01
                 (b)    ...........................................................         6.02
                 (c)    ...........................................................         6.01
                 (d)    ...........................................................         6.01
                 (e)    ...........................................................         5.14
Section 316(a)(1)(A)    ...........................................................         5.12
           (a)(1)(B)    ...........................................................         5.13
              (a)(2)    ...........................................................    Not Applicable
                 (b)    ...........................................................         5.08
                 (c)    ...........................................................        1.04(c)
    Section 317(a)(1)   ...........................................................         5.03
              (a)(2)    ...........................................................         5.04
                 (b)    ...........................................................         10.03
      Section 318(a)    ...........................................................         1.07


- --------------

Note:    This reconciliation and tie shall not, for any purpose, be deemed to be
         a part of this Indenture.

                                       i

EX-4.2

                                                                     EXHIBIT 4.2

                          CADENCE DESIGN SYSTEMS, INC.

            Zero Coupon Zero Yield Senior Convertible Notes due 2023

                          REGISTRATION RIGHTS AGREEMENT

                                                                 August 15, 2003

J.P. Morgan Securities Inc.
SG Cowen Securities Corporation

c/o      J.P. Morgan Securities Inc.
         277 Park Avenue
         New York, New York 10172

Ladies and Gentlemen:

         Cadence Design Systems, Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell (such issuance and sale, the "INITIAL PLACEMENT") to
the Initial Purchasers (as defined below), upon the terms set forth in a
purchase agreement, dated August 11, 2003 (the "PURCHASE AGREEMENT"),
$350,000,000 aggregate principal amount, plus an option (the "OPTION") to
purchase up to an additional $70,000,000 aggregate principal amount, of its Zero
Coupon Zero Yield Senior Convertible Notes due 2023 (the "SECURITIES"). The
Securities will be convertible into shares of Common Stock (as defined herein),
at the conversion price set forth in the Offering Memorandum (as defined
herein), as the same may be adjusted from time to time pursuant to the Indenture
(as defined herein). As an inducement to you to enter into the Purchase
Agreement and in satisfaction of a condition to your obligations thereunder, the
Company agrees with you, (i) for your benefit and (ii) for the benefit of the
Holders (as defined herein) from time to time of the Securities and the shares
of Common Stock issuable upon conversion of the Securities, as follows:

                  1.       Definitions. Capitalized terms used herein without
definition shall have the respective meanings set forth in the Purchase
Agreement. As used in this Agreement, the following capitalized terms shall have
the following meanings:

         "SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.

         "AFFILIATE" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such person
whether through the ownership of voting securities or by agreement or otherwise.



         "BUSINESS DAY" has the meaning set forth in the Indenture.

         "CLOSING DATE" means August 15, 2003.

         "COMMON STOCK" means the common stock, par value $0.01 per share, of
the Company, as it exists on the date of this Agreement and any other shares of
capital stock or other securities of the Company into which such Common Stock
may be reclassified or changed, together with any and all other securities which
may from time to time be issuable upon conversion of Securities.

         "COMPANY" has the meaning set forth in the preamble hereto.

         "DTC" has the meaning set forth in the Indenture.

         "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC promulgated thereunder.

         "HOLDER" means a person who is a holder or beneficial owner of any
Securities or shares of Common Stock issuable upon conversion of Securities;
provided that, unless otherwise expressly stated herein, only registered holders
of Securities or Common Stock issued on conversion thereof shall be counted for
purposes of calculating any proportion of holders entitled to take any action or
give notice pursuant to this Agreement.

         "HOLDER INFORMATION" with respect to any Holder means information with
respect to such Holder required to be included in any Shelf Registration
Statement or the related Prospectus pursuant to the Securities Act and which
information is included therein in reliance upon and in conformity with
information furnished to the Company in writing by such Holder for inclusion
therein.

         "INDENTURE" means the Indenture relating to the Securities, dated
August 15, 2003, between the Company and J.P. Morgan Trust Company, N.A., as
trustee, as the same may be amended from time to time in accordance with the
terms thereof.

         "INITIAL PLACEMENT" has the meaning set forth in the preamble hereto.

         "INITIAL PURCHASERS" mean J.P. Morgan Securities Inc. and SG Cowen
Securities Corporation and the other initial purchasers named in and a party to
the Purchase Agreement.

         "LIQUIDATED DAMAGES" has the meaning set forth in Section 2(e) hereof.

         "LIQUIDATED DAMAGES PAYMENT DATE" means each February 15 and August 15.

         "LOSSES" has the meaning set forth in Section 5(d) hereof.

         "MAJORITY HOLDERS" means the Holders of a majority of the then
outstanding aggregate principal amount of Securities being registered under a
Shelf Registration Statement; provided that Holders of the shares of Common
Stock issued upon conversion of Securities shall be deemed to be Holders of the
aggregate principal amount of Securities from which such Common Stock was
converted; and provided further, that Securities or shares of Common

                                       2


Stock which have been sold or otherwise transferred pursuant to the Shelf
Registration Statement shall not be included in the calculation of Majority
Holders.

         "NASD" has the meaning set forth in Section 3(i) hereof.

         "NASD RULES" means the rules and regulation promulgated by the NASD.

         "NOTICE AND QUESTIONNAIRE" means a Selling Securityholder Notice and
Questionnaire substantially in the form of Annex A to the Offering Memorandum.

         "NOTICE HOLDER" shall mean, on any date, any Holder of Transfer
Restricted Securities that has delivered a completed and signed Notice and
Questionnaire to the Company on or prior to such date.

         "OFFERING MEMORANDUM" means the Final Memorandum as defined in the
Purchase Agreement.

         "OPTION" has the meaning set forth in the preamble hereto.

         "PERSON" has the meaning set forth in the Indenture.

         "PROSPECTUS" means the prospectus included in any Shelf Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Securities or shares of Common Stock issuable
upon conversion thereof covered by such Shelf Registration Statement, and all
amendments and supplements to such prospectus, including all documents
incorporated or deemed to be incorporated by reference in such prospectus.

         "PURCHASE AGREEMENT" has the meaning set forth in the preamble hereto.

         "RECORD HOLDER" means each person who is registered on the books of the
registrar as the holder of Securities at the close of business on February 1 and
August 1 immediately preceding such Liquidated Damages Payment Date.

         "REGISTRATION DEFAULT" has the meaning set forth in Section 2(e)
hereof.

         "REPRESENTATIVE" means J.P. Morgan Securities Inc., as representative
of the Initial Purchasers.

         "RULE 144" means Rule 144 under the Securities Act (or any similar
provision then in force).

         "RULE 144A" means Rule 144A under the Securities Act (or any successor
provision promulgated by the SEC).

                                       3


         "RULE 144(k)" means Rule 144(k) under the Securities Act (or any
successor provision promulgated by the SEC).

         "RULE 415" means Rule 415 under the Securities Act (or any successor
provision promulgated by the SEC).

         "SEC" means the Securities and Exchange Commission.

         "SECURITIES" has the meaning set forth in the preamble hereto.

         "SHELF REGISTRATION" means a registration effected pursuant to Section
2 hereof.

         "SHELF REGISTRATION PERIOD" has the meaning set forth in Section 2(c)
hereof.

         "SHELF REGISTRATION STATEMENT" means any "shelf" registration statement
of the Company filed pursuant to the provisions of Section 2 hereof which covers
the Transfer Restricted Securities on Form S-3 or on another appropriate form
(as determined by the Company) for an offering to be made on a delayed or
continuous basis pursuant to Rule 415 and all amendments and supplements to such
registration statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
documents incorporated or deemed to be incorporated by reference therein.

         "SUSPENSION PERIOD" has the meaning set forth in Section 2(d) hereof.

         "TRANSFER RESTRICTED SECURITIES" means each Security and each share of
Common Stock issuable upon conversion thereof (and any security issued with
respect thereto upon any stock dividend, split or similar event) until the
earliest of the date on which such Security or share of Common Stock, or any
security issued with respect thereto upon any stock dividend, split or similar
event, as the case may be, (i) has been transferred pursuant to a Shelf
Registration Statement or another registration statement covering such Security
or share of Common Stock which has been filed with the SEC pursuant to the Act,
in either case after such registration statement has become effective and while
such registration statement is effective under the Act, (ii) has been
transferred pursuant to Rule 144 (or any similar provision then in force), (iii)
may be sold or transferred pursuant to Rule 144(k) (or any successor provision
promulgated by the SEC) or (iv) the date on which such Security or Common Stock
ceases to be outstanding.

         "TRUSTEE" means the trustee with respect to the Securities under the
Indenture.

         All references in this Agreement to financial statements and schedules
and other information which is "contained," "included," or "stated" in the Shelf
Registration Statement, any preliminary Prospectus or Prospectus (and all other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information incorporated or deemed
to be incorporated by reference in such Shelf Registration Statement,
preliminary Prospectus or Prospectus, as the case may be; and all references in
this Agreement to amendments or supplements to the Shelf Registration Statement,
any preliminary Prospectus or Prospectus shall be deemed to mean and include any
document filed with the SEC under the Exchange Act, after the date of such Shelf
Registration Statement, preliminary Prospectus or

                                       4


Prospectus, as the case may be, which is incorporated or deemed to be
incorporated by reference therein.

                  2.       Shelf Registration Statement.

                  (a)      The Company shall, at its expense, prepare and file
with the SEC within 90 days following the Closing Date a Shelf Registration
Statement with respect to resales of the Transfer Restricted Securities by the
Holders from time to time on a delayed or continuous basis pursuant to Rule 415
and in accordance with the methods of distribution elected by such Holders and
set forth in such Shelf Registration Statement and thereafter shall use its
reasonable best efforts to cause such Shelf Registration Statement to be
declared effective under the Securities Act within 180 days after the Closing
Date; provided that if any Securities are issued upon exercise of the Option
granted to the Initial Purchasers in the Purchase Agreement and the date on
which such Securities are issued occurs after the Closing Date, the Company will
take such steps, prior to the effective date of the Shelf Registration
Statement, to ensure that such Securities issued upon an exercise of the Option
and the shares of Common Stock issuable upon conversion thereof are included in
the Shelf Registration Statement on the same terms as the Securities issued on
the Closing Date. The Company shall supplement or amend the Shelf Registration
Statement if required by the rules, regulations or instructions applicable to
the registration form used by the Company for the Shelf Registration Statement,
or by the Act, the Exchange Act or the SEC.

                  (b) (1)  The Company shall take action to name each Holder
that is a Notice Holder as of the date that is 5 Business Days prior to the
effectiveness of the Shelf Registration Statement so that such Holder is named
as a selling securityholder in the Shelf Registration Statement at the time of
its effectiveness and is permitted to deliver the Prospectus forming a part
thereof as of such time to purchasers of such Holder's Transfer Restricted
Securities in accordance with applicable law. The Company shall be under no
obligation to name any Holder that is not a Notice Holder as a selling security
holder in the Shelf Registration Statement.

                  (2)      After the Shelf Registration Statement has become
effective, the Company shall, upon the request of any Holder of Transfer
Restricted Securities, promptly send a Notice and Questionnaire to such Holder
and the Company shall (i) as promptly as is practicable after the date a
completed and signed Notice and Questionnaire is delivered to the Company, and
in any event within 10 Business Days after such date, prepare and file with the
SEC (x) a supplement to the Prospectus or, if required by applicable law, a
post-effective amendment to the Shelf Registration Statement and (y) any other
document required by applicable law, so that the Holder delivering such Notice
and Questionnaire is named as a selling securityholder in the Shelf Registration
Statement and is permitted to deliver the Prospectus to purchasers of such
Holder's Transfer Restricted Securities in accordance with applicable law. If
the Company files a post-effective amendment to the Shelf Registration
Statement, it shall use its reasonable best efforts to cause such post-effective
amendment to become effective under the Securities Act as promptly as is
practicable; provided, however, that if a Notice and Questionnaire is delivered
to the Company during a Suspension Period, the Company shall not be obligated to
take the actions set forth above until the termination of such Suspension
Period.

                                       5


                  (c)      The Company shall use its reasonable best efforts to
keep the Shelf Registration Statement continuously effective, supplemented and
amended under the Securities Act in order to permit the Prospectus forming a
part thereof to be usable, subject to Section 2(d), by all Notice Holders until
the earliest to occur of (i) the last date on which the holding period
applicable to sales of all Transfer Restricted Securities under Rule 144(k) has
expired, (ii) the date as of which all Transfer Restricted Securities have been
transferred under Rule 144 under the Act, and (iii) such date as of which all
Transfer Restricted Securities have been sold pursuant to the Shelf Registration
Statement (in any such case, such period being called the "SHELF REGISTRATION
PERIOD"). The Company will, (x) subject to Section 2(d), prepare and file with
the SEC such amendments and post-effective amendments to the Shelf Registration
Statement as may be necessary to keep the Shelf Registration Statement
continuously effective for the Shelf Registration Period, (y) subject to Section
2(d), cause the related Prospectus to be supplemented by any required
supplement, and as so supplemented to be filed pursuant to Rule 424 (or any
similar provisions then in force) under the Securities Act and (z) comply in all
material respects with the provisions of the Securities Act with respect to the
disposition of all Transfer Restricted Securities covered by the Shelf
Registration Statement during the Shelf Registration Period in accordance with
the intended methods of disposition by the Holders thereof set forth in such
Shelf Registration Statement and the related Prospectus, as amended and
supplemented.

                  (d)      The Company may suspend the availability of any Shelf
Registration Statement and the use of any Prospectus (the period during which
the availability of any Shelf Registration Statement and any Prospectus may be
suspended herein referred to as the "SUSPENSION PERIOD"), without incurring any
obligation to pay Liquidated Damages pursuant to Section 2(e), for a period not
to exceed either 45 days in the aggregate in any three-month period or 120 days
in the aggregate during any 12-month period for valid business reasons, to be
determined by the Company in its sole judgment (which shall not include the
avoidance of the Company's obligations hereunder), including, without
limitation, the acquisition or divestiture of assets, pending corporate
developments, public filings with the SEC and similar events; provided that the
Company promptly thereafter complies with the requirements of Section 3(j)
hereof, if applicable.

                  (e)      The Company and the Initial Purchasers agree that the
Holders of Transferred Restricted Securities will suffer damages, and it would
not be feasible to ascertain the extent of such damages with precision, if the
Company fails to fulfill its obligations under Section 2 hereof. Accordingly, if
(i) the Shelf Registration Statement is not filed with the SEC on or within 90
days after the Closing Date, (ii) the Shelf Registration Statement has not been
declared effective by the SEC within 180 days after the Closing Date, or (iii)
the Shelf Registration Statement is filed and declared effective but shall
thereafter cease to be effective (without being succeeded immediately by a
replacement Shelf Registration Statement filed and declared effective) or usable
(including as a result of a Suspension Period) for the offer and sale of
Transfer Restricted Securities for a period of time (including any Suspension
Period) which exceeds either 45 days in the aggregate in any three-month period
or 120 days in the aggregate in any 12-month period (each such event referred to
in clauses (i) through (iii), a "REGISTRATION DEFAULT"), the Company shall pay
to each Notice Holder (who is also a Record Holder) during any period in which a
Registration Default has occurred or is continuing in an the amount (the
"LIQUIDATED DAMAGES") equal to (i) one-quarter of one percent (25 basis points)
per annum per $1,000 principal amount of Securities constituting Transfer
Restricted Securities for the period

                                       6


up to and including the 90th day during which such Registration Default has
occurred and is continuing and (ii) one-half of one percent (50 basis points)
per annum per $1,000 principal amount of Securities constituting Transfer
Restricted Securities for the period including and subsequent to the 91st day
during which such Registration Default has occurred and is continuing, it being
understood that all calculations pursuant to this and the preceding sentence
shall be carried out to five decimal places. Following the cure of all
Registration Defaults, Liquidated Damages will cease to accrue with respect to
such Registration Defaults. All accrued Liquidated Damages shall be paid by the
Company on each Liquidated Damages Payment Date in cash to the date of such cure
and Liquidated Damages will be calculated on the basis of a 360-day year
consisting of twelve 30-day months. The parties hereto agree that the Liquidated
Damages provided for in this Section 2(e) constitute a reasonable estimate of
the damages that may be incurred by Holders by reason of a Registration Default
and that such Liquidated Damages are the only monetary damages available to
Holders in the event of a Registration Default.

                  (f)      All of the Company's obligations (including, without
limitation, the obligation to pay Liquidated Damages) set forth in the preceding
paragraph which are outstanding or exist with respect to any Transfer Restricted
Security at the time such security ceases to be a Transfer Restricted Security
shall survive until such time as all such obligations with respect to such
security shall have been satisfied in full. Notwithstanding the foregoing, no
Liquidated Damages shall accrue as to any Transfer Restricted Security from and
after the earlier of (x) the date such security is no longer a Transfer
Restricted Security and (y) the expiration of the Shelf Registration Period.

                  (g)      Immediately upon the occurrence or the termination of
a Registration Default, the Company shall give (i) the Trustee, so long as the
Securities remain outstanding, and (ii) the transfer agent for the Common Stock,
in the case of notice with respect to the shares of Common Stock issuable upon
conversion of Securities, notice of such commencement or termination of the
obligation to pay Liquidated Damages with regard to the Securities or the Common
Stock, as the case may be, and the amount thereof and of the nature of the
default giving rise to such commencement or the event giving rise to such
termination, as the case may be (such notice to be contained in an Officer's
Certificate (as such term is defined in the Indenture)), and prior to receipt of
such Officer's Certificate the Trustee and the transfer and paying agent shall
be entitled to assume that no such commencement or termination has occurred, as
the case may be.

                  3.       Registration Procedures. In connection with any Shelf
Registration Statement, the following provisions shall apply:

                  (a)      The Company shall (i) furnish to the Initial
Purchasers, within a reasonable period of time, but in any event within three
Business Days, prior to the filing thereof with the SEC to afford the Initial
Purchasers and their counsel a reasonable opportunity for review, a copy of each
Shelf Registration Statement, and each amendment thereof, and a copy of each
Prospectus, and each amendment or supplement thereto (excluding amendments
caused by the filing of a report under the Exchange Act), and shall reflect in
each such document, when so filed with the SEC, such comments as the Initial
Purchasers may reasonably propose, except to the extent the Company reasonably
determines it to be inadvisable or inappropriate to reflect

                                       7


such comments therein, and (ii) include information regarding the Notice Holders
and the methods of distribution they have elected for their Transfer Restricted
Securities provided to the Company in Notice and Questionnaires as necessary to
permit such distribution by the methods specified therein.

                  (b)      Subject to Section 2(d), the Company shall ensure
that (i) any Shelf Registration Statement and any amendment thereto and any
Prospectus forming a part thereof and any amendment or supplement thereto comply
in all material respects with the Securities Act and the rules and regulations
thereunder, (ii) any Shelf Registration Statement and any amendment thereto does
not, when it becomes effective, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading and (iii) any Prospectus forming a
part of any Shelf Registration Statement, and any amendment or supplement to
such Prospectus, does not include an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided
that the Company makes no representation with respect to any Holder Information.

                  (c)      The Company, as promptly as reasonably practicable
(but in any event within two Business Days), shall notify the Initial Purchasers
and each Notice Holder and, if requested by you or any such Holder, confirm such
notice in writing:

                  (i)      when a Shelf Registration Statement or any amendment
         thereto or any Prospectus or any amendment or supplement thereto has
         been filed with the SEC and when the Shelf Registration Statement or
         any post-effective amendment thereto has become effective;

                  (ii)     of any request, following effectiveness of the Shelf
         Registration Statement under the Act, by the SEC or any other federal
         or state governmental authority for amendments or supplements to the
         Shelf Registration Statement or the Prospectus or for additional
         information (other than any such request relating to a review of the
         Company's Exchange Act filings);

                  (iii)    of the issuance by the SEC or any other federal or
         state governmental authority of any stop order suspending the
         effectiveness of the Shelf Registration Statement or of any order
         preventing or suspending the use of any Prospectus or the initiation or
         threat of any proceedings for that purpose;

                  (iv)     of the receipt by the Company of any notification
         with respect to the suspension of the qualification or exemption from
         qualification of the Transfer Restricted Securities included in any
         Shelf Registration Statement for sale in any jurisdiction or the
         initiation or threat of any proceeding for that purpose;

                  (v)      of the occurrence of any event or the existence of
         any condition or any information becoming known that requires the
         making of any changes in the Shelf Registration Statement or the
         Prospectus or any document incorporated by reference therein so that,
         as of such date, the statements therein are not misleading and the
         Shelf

                                       8


         Registration Statement or the Prospectus or any document incorporated
         by reference therein, as the case may be, does not include an untrue
         statement of a material fact or omit to state a material fact required
         to be stated therein or necessary to make the statements therein (in
         the case of the Prospectus, in light of the circumstances under which
         they were made) not misleading;

                  (vi)     of the Company's determination that a post-effective
         amendment to the Shelf Registration Statement is necessary; and

                  (vii)    of the commencement (including as a result of any of
         the events or circumstances described in paragraphs (ii) through (vi)
         above) and termination of any Suspension Period.

                  (d)      The Company shall use its reasonable best efforts to
obtain (i) the withdrawal of any order suspending the effectiveness of any Shelf
Registration Statement and the use of any related Prospectus and (ii) the
lifting of any suspension of the qualification (or exemption from qualification)
of any of the Transfer Restricted Securities for offer or sale in any
jurisdiction in which they have been qualified for sale, in each case at the
earliest possible time, and shall provide notice to each Notice Holder and the
Initial Purchasers of the withdrawal of any such orders or suspensions.

                  (e)      The Company shall promptly furnish to each Notice
Holder and the Initial Purchasers, without charge, at least one copy of any
Shelf Registration Statement and any post-effective amendment thereto, excluding
all documents incorporated or deemed to be incorporated therein by reference and
all exhibits thereto (unless requested to the Company by such Notice Holder).

                  (f)      The Company shall, during the Shelf Registration
Period, promptly deliver to the Initial Purchasers, each Notice Holder and any
sales or placement agent or underwriters acting on their behalf, without charge,
as many copies of the Prospectus (including each preliminary Prospectus)
included in any Shelf Registration Statement, and any amendment or supplement
thereto, as such person may reasonably request and except as provided in
Sections 2(d) and 3(s) hereof; and the Company hereby consents to the use of the
Prospectus and any amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Transfer Restricted
Securities covered by the Prospectus or any amendment or supplement thereto.

                  (g)      Prior to any offering of Transfer Restricted
Securities pursuant to any Shelf Registration Statement, the Company shall
register or qualify or cooperate with the Notice Holders and their respective
counsel in connection with the registration or qualification (or exemption from
such registration or qualification) of such Transfer Restricted Securities for
offer and sale, under the securities or blue sky laws of such jurisdictions
within the United States as any such Notice Holders reasonably request and shall
maintain such qualification in effect so long as required and do any and all
other acts or things necessary or advisable to enable the offer and sale in such
jurisdictions of the Transfer Restricted Securities covered by such Shelf
Registration Statement; provided, however, that the Company will not be required
to (A) qualify generally to do business as a foreign corporation or as a dealer
in securities in any jurisdiction

                                       9


where it is not then so qualified or to (B) take any action which would subject
it to service of process or taxation in excess of a nominal dollar amount in any
such jurisdiction where it is not then so subject.

                  (h)      The Company shall cooperate with the Holders to
facilitate the timely preparation and delivery of certificates representing
Transfer Restricted Securities sold pursuant to any Shelf Registration Statement
free of any restrictive legends and, with respect of any Securities, in such
denominations permitted by the Indenture and registered in such names as Holders
may request at least two Business Days prior to settlement of sales of Transfer
Restricted Securities pursuant to such Shelf Registration Statement.

                  (i)      Subject to the exceptions contained in (A) and (B) of
Section 3(g) above, the Company shall use its reasonable best efforts to cause
the Transfer Restricted Securities covered by the applicable Shelf Registration
Statement to be registered with or approved by such other federal, state and
local governmental agencies or authorities, and self-regulatory organizations in
the United States as may be necessary to enable the Holders to consummate the
disposition of such Transfer Restricted Securities as contemplated by the Shelf
Registration Statement; without limitation to the foregoing, the Company shall
provide all such information as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the offering under the
Shelf Registration Statement of the Transfer Restricted Securities (including,
without limitation, such as may be required by NASD Rule 2710 or 2720), and
shall cooperate with each Holder in connection with any filings required to be
made with the NASD by such Holder in that regard.

                  (j)      Upon the occurrence of any event described in Section
3(c)(v) or 3(c)(vi) hereof, the Company shall promptly prepare and file with the
SEC a post-effective amendment to any Shelf Registration Statement, or an
amendment or supplement to the related Prospectus, or any document incorporated
therein by reference, or file a document which is incorporated or deemed to be
incorporated by reference in such Shelf Registration Statement or Prospectus, as
the case may be, so that, as thereafter delivered to purchasers of the Transfer
Restricted Securities included therein, the Shelf Registration Statement and the
Prospectus, in each case as then amended or supplemented, will not include an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein (in
the case of the Prospectus, in light of the circumstances under which they were
made) not misleading and, in the case of a post-effective amendment, use its
reasonable best efforts to cause it to become effective as promptly as
practicable; provided that the Company's obligations under this paragraph (j)
shall be suspended if the Company has suspended the use of the Prospectus in
accordance with Section 2(d) hereof and given notice of such suspension to
Notice Holders, it being understood that the Company's obligations under this
Section 3(j) shall be automatically reinstated at the end of such Suspension
Period.

                  (k)      The Company shall provide, prior to the effective
date of any Shelf Registration Statement hereunder (i) a CUSIP number for the
Transfer Restricted Securities registered under such Shelf Registration
Statement and (ii) global certificates for such Transfer Restricted Securities
to the Trustee, in a form eligible for deposit with DTC.

                                       10


                  (l)      The Company shall use its reasonable best efforts to
comply with all applicable rules and regulations of the SEC and shall make
generally available to its security holders an earnings statement satisfying the
provisions of Section 11(a) of the Securities Act and Rule 158 promulgated by
the SEC thereunder (or any similar rule promulgated under the Act) for a
12-month period commencing on the first day of the first fiscal quarter of the
Company commencing after the effective date of any Shelf Registration Statement
or each post-effective amendment to any Shelf Registration Statement, which such
statements shall be made available no later than 45 days after the end of the
12-month period or 90 days after the end of the 12-month period, if the 12-month
period coincides with the fiscal year of the Company.

                  (m)      The Company shall use its reasonable best efforts to
cause the Indenture to be qualified under the TIA (as defined in the Indenture)
not later than the effective date of the first Shelf Registration Statement.

                  (n)      The Company shall cause all shares of Common Stock
issuable upon conversion of the Securities to be reserved for listing on each
securities exchange or quotation system on which the Common Stock is then listed
no later than the date the applicable Shelf Registration Statement is declared
effective and, shall cause all Common Stock to be so listed when issued, and, in
connection therewith, to make such filings as may be required under the Exchange
Act and to have such filings declared effective as and when required thereunder.

                  (o)      The Company may require each Holder of Transfer
Restricted Securities to be sold pursuant to any Shelf Registration Statement to
furnish to the Company such information regarding the Holder and the
distribution of such Transfer Restricted Securities sought by the Notice and
Questionnaire and such additional information as may, from time to time, be
required by the Securities Act and/or the SEC or any other federal or state
governmental authority, and the obligations of the Company to any Holder
hereunder shall be expressly conditioned on the compliance of such Holder with
such request.

                  (p)      The Company shall, if reasonably requested, promptly
incorporate in a Prospectus supplement or post-effective amendment to a Shelf
Registration Statement (i) such information as the Majority Holders provide and
(ii) such information as a Holder may provide from time to time to the Company
in writing for inclusion in a Prospectus or any Shelf Registration Statement
concerning such Holder and the distribution of such Holder's Transfer Restricted
Securities and, in either case, shall make all required filings of such
Prospectus supplement or post-effective amendment promptly after being notified
in writing of the matters to be incorporated in such Prospectus supplement or
post-effective amendment; provided that the Company shall not be required to
take any action under this Section 3(p) that is not, in the reasonable opinion
of counsel for the Company, in compliance with applicable law.

                  (q)      In the case of an underwritten offering, take all
actions necessary, or reasonably requested by the holders of a majority of the
Transfer Restricted Securities being sold, in order to expedite or facilitate
disposition of such Transfer Restricted Securities; provided that the Company
shall not be required to take any action in connection with an underwritten
offering without its consent;

                                       11


                  (r)      If reasonably requested in writing in connection with
any disposition of Transfer Restricted Securities pursuant to a Shelf
Registration Statement, make reasonably available for inspection during normal
business hours by a representative for the Notice Holders of such Transfer
Restricted Securities and any broker-dealers, attorneys and accountants retained
by such Notice Holders, all relevant financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries, and
cause the appropriate executive officers, directors and designated employees of
the Company and its subsidiaries to make reasonably available for inspection
during normal business hours all relevant information reasonably requested by
such representative for the Notice Holders or any such broker-dealers, attorneys
or accountants in connection with such disposition, in each case as is customary
for similar "due diligence" examinations; provided, however, that any
information that is designated by the Company, in good faith, as confidential at
the time of delivery of such information shall be kept confidential by such
persons, unless disclosure thereof is made in connection with a court,
administrative or regulatory proceeding or required by law, or such information
has become available to the public generally through the Company or through a
third party without an accompanying obligation of confidentiality.

                  (s)      Each Notice Holder agrees that, upon receipt of
notice of the happening of an event described in Sections 3(c)(ii) through and
including 3(c)(vii), each Holder shall forthwith discontinue (and shall cause
its agents and representatives to discontinue) disposition of Transfer
Restricted Securities and will not resume disposition of Transfer Restricted
Securities until such Holder has received copies of an amended or supplemented
Prospectus contemplated by Section 3(j) hereof, or until such Holder is advised
in writing by the Company that the use of the Prospectus may be resumed or that
the relevant Suspension Period has been terminated, as the case may be, provided
that the foregoing shall not prevent the sale, transfer or other disposition of
Transfer Restricted Securities by a Notice Holder in a transaction which is
exempt from, or not subject to, the registration requirements of the Act, so
long as such Notice Holder does not and is not required to deliver the
applicable Prospectus or Shelf Registration Statement in connection with such
sale, transfer or other disposition, as the case may be; and provided, further,
that the provisions of this Section 3(s) shall not prevent the occurrence of a
Registration Default or otherwise limit the obligation of the Company to pay
Liquidated Damages.

                  (t)      In the event that any broker-dealer shall underwrite
any Transfer Restricted Securities or participate as a member of an underwriting
syndicate or selling group or "assist in the public distribution" (within the
meaning of the NASD Rules) thereof, whether as a Holder of such Transfer
Restricted Securities or as an underwriter, a placement or sales agent or a
broker or dealer in respect thereof, or otherwise, the Company shall assist such
broker-dealer in complying with the NASD Rules, including, without limitation,
by:

                  (i)      if the NASD Rules shall so require, engaging a
         "qualified independent underwriter" (as defined in the NASD Rules) to
         participate in the preparation of the Shelf Registration Statement, to
         exercise usual standards of due diligence with respect thereto and, if
         any portion of the offering contemplated by the Shelf Registration
         Statement is an underwritten offering or is made through a placement or
         sales agent, to recommend the price of such Transfer Restricted
         Securities;

                                       12


                  (ii)     indemnifying any such qualified independent
         underwriter to the extent of the indemnification of Holders provided in
         Section 5 hereof; and

                  (iii)    providing such information to such broker-dealer as
         may be required in order for such broker-dealer to comply with the
         requirements of the NASD Rules.

                  4.       Registration Expenses. The Company shall bear all
fees and expenses incurred in connection with the performance of its obligations
under Sections 2 and 3 hereof and shall reimburse the Holders for the reasonable
fees and disbursements of one firm or counsel designated by the Company (and
reasonably acceptable to the Representative on behalf of the Holders) to act as
counsel for the Holders in connection therewith. Such fees and expenses shall
include, without limitation: (i) all registration and filing fees and expenses
(including filings made with the NASD); (ii) all fees and expenses of compliance
with federal securities and state Blue Sky or securities laws; (iii) all
expenses of printing (including printing of Prospectuses and certificates for
the Common Stock to be issued upon conversion of the Securities) and the
Company's expenses for messenger and delivery services and telephone; (iv) all
fees and disbursements of counsel to the Company; (v) all application and filing
fees in connection with listing (or authorizing for quotation) the Common Stock
on a national securities exchange or automated quotation system pursuant to the
requirements hereof; and (vi) all fees and disbursements of independent
certified public accountants of the Company. The Company shall bear its internal
expenses (including, without limitation, all salaries and expenses of their
officers and employees performing legal, accounting or other duties), the
expenses of any annual audit and the fees and expenses of any Person, including
special experts, retained by the Company. Notwithstanding the provisions of this
Section 4, each Holder shall bear the expense of any broker's commission, agency
fee and underwriter's discount or commission (including, without limitation, the
expenses related to the engagement of a "qualified independent underwriter"), if
any, relating to the sale or disposition of such Holder's Transfer Restricted
Securities pursuant to a Shelf Registration Statement.

                  5.       Indemnification and Contribution.

                  (a)      The Company agrees to indemnify and hold harmless
each Holder of Transfer Restricted Securities covered by any Shelf Registration
Statement (including, without limitation, each Initial Purchaser), its
directors, officers, and employees and each person, if any, who controls any
such Holder within the meaning of either the Securities Act or the Exchange Act
(collectively referred to for purposes of this Section 5 as a "HOLDER") against
any losses, claims, damages or liabilities, joint or several, or actions in
respect thereof, to which any of them may become subject, under the Securities
Act or otherwise, insofar as such losses, claims, damages, liabilities or
actions arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the Shelf Registration Statement, or
in any Prospectus, or any amendment thereof or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and will reimburse
each such party for any legal or other expenses reasonably incurred by such
party in connection with investigating or defending any such action or claim as
such expenses are incurred; provided, however, that (i) the Company shall not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon Holder

                                       13


Information and (ii) with respect to any untrue statement or omission of
material fact made in any Shelf Registration Statement, or in any Prospectus,
the indemnity agreement contained in this Section 5(a) shall not inure to the
benefit of the Holder or any person who controls the Holder within the meaning
of either the Securities Act or the Exchange Act from whom the person asserting
any such loss, claim, damage or liability purchased the securities concerned, to
the extent that any such loss, claim, damage or liability of the Holders occurs
under the circumstance where it shall have been established that (w) the Company
had previously furnished copies of the Prospectus, and any amendments and
supplements thereto, to the Holder, (x) delivery of the Prospectus, and any
amendment or supplements thereto, was required by the Securities Act to be made
to such person, (y) the untrue statement or omission of a material fact
contained in the Prospectus was corrected in amendments or supplements thereto,
and (z) there was not sent or given to such person, at or prior to the written
confirmation of the sale of such securities to such person, a copy of such
amendments or supplements to the Prospectus. This indemnity agreement will be in
addition to any liability that the Company may otherwise have.

                  (b)      Each Holder, severally and not jointly, agrees to
indemnify and hold harmless the Company, each of its directors and officers and
each person, if any, who controls the Company within the meaning of either the
Securities Act or the Exchange Act, to the same extent as the foregoing
indemnity from the Company to the Holders and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any loss, claim,
damage, liability or action, but only with reference to Holder Information
supplied by such Holder. In no event shall any Holder, its directors, officers
or any person, if any, who controls such Holder be liable or responsible for any
amount in excess of the amount by which the total amount received by such Holder
with respect to its sale of Transfer Restricted Securities pursuant to a Shelf
Registration Statement exceeds (i) the amount paid by such Holder for such
Transfer Restricted Securities plus (ii) the amount of any damages that such
Holder, its directors, officers or any person who controls such Holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. This indemnity agreement will be in
addition to any liability that such Holder may otherwise have.

                  (c)      Promptly after receipt by an indemnified party under
this Section 5 of notice of any claim or the commencement of any action or
proceeding (including any governmental investigation), such indemnified party
will, if a claim for indemnification in respect thereof is to be made against
the indemnifying party under Section 5(a) or 5(b) hereof, notify the
indemnifying party in writing of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party to the extent it is not materially prejudiced
as a result thereof and in any event shall not relieve it from any liability
which it may have otherwise than on account of this indemnity agreement. In case
any such action or proceeding is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein (jointly with any other
indemnifying party similarly notified), and to the extent that it may elect, by
written notice, delivered to such indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; provided,
however, that if the defendants (including any impleaded parties) in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have

                                       14


reasonably concluded that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have
the right to select separate counsel to defend such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying party
to such indemnified party of its election so to appoint counsel to defend such
action and approval by the indemnified party of such counsel, the indemnifying
party will not be liable to such indemnified party under this Section 5 for any
legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party shall have
employed separate counsel in accordance with the proviso to the preceding
sentence (it being understood, however, that the indemnifying party shall not be
liable for the expense of more than one separate counsel (in addition to any
local counsel), approved by the Holders in the case of paragraph (a) of this
Section 5, representing the indemnified parties under such paragraph (a) who are
parties to such action), (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice or commencement of the
action, (iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party, or (iv) the
use of counsel chosen by the indemnifying party to represent the indemnified
party would present such counsel with a conflict of interest. An indemnifying
party will not, without the prior written consent of the indemnified parties,
settle or compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding. If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by this Section 5(c), the indemnifying party agrees that
it shall be liable for any settlement of any proceeding effected by the
indemnified party without its consent if (i) such settlement is entered into
more than 30 days after receipt by such indemnifying party of such request for
reimbursement and (ii) such indemnifying party shall not have reimbursed the
indemnified person in accordance with such request prior to the date of any
settlement.

                  (d)      In the event that the indemnity provided in paragraph
(a) or (b) of this Section 5 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, each indemnifying party agrees to
contribute to the aggregate losses, claims, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating or
defending same) (collectively, "LOSSES") to which the indemnified party may be
subject in such proportion as is appropriate to reflect the relative benefits
received by the Company from the Initial Placement, on the one hand, and a
Holder with respect to the sale by such Holder of Securities or Common Stock, on
the other hand; provided, however, that in no case shall an indemnifying party
that is a Holder be responsible for any amount in excess of the total price at
which the Transfer Restricted Securities are sold by such Holder to a purchaser.
If the allocation provided by the immediately preceding sentence is unavailable
for any reason, the Company and such Holder shall contribute in such proportion
as is appropriate to reflect not only such relative benefits but also the
relative fault of the Company on the one hand and of such Holder on the other in
connection with the statements or omissions which resulted in such Losses, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on

                                       15


the one hand and such Holder on the other shall be deemed to be in the same
respective proportions as the total net proceeds from the Initial Placement
(before deducting expenses) received by or on behalf of the Company as set forth
in the Offering Memorandum, on the one hand, and the total proceeds received by
such Holder with respect to its sale of Transferred Restricted Securities under
the Shelf Registration Statement, on the other hand, bear to the total gross
proceeds from the Initial Placement. Relative fault shall be determined by
reference to, among other things, whether any untrue or any alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information provided by the Company on the one hand or
relates to Holder Information supplied by such Holder, on the other, the intent
of the parties and their relative knowledge, information and opportunity to
correct or prevent such untrue statement or omission. The parties agree that it
would not be just and equitable if contribution pursuant to this paragraph (d)
were determined by pro rata allocation or any other method of allocation that
does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph (d), no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 5(d), each person who
controls such Holder within the meaning of either the Securities Act or the
Exchange Act shall have the same rights to contribution as such Holder, and each
person who controls the Company within the meaning of either the Securities Act
or the Exchange Act and each officer and director of the Company shall have the
same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (d).

                  (e)      The provisions of this Section 5 will remain in full
force and effect, regardless of any investigation made by or on behalf of any
Holder, any underwriter or the Company or any of the officers, directors or
controlling persons referred to in Section 5 hereof, and will survive the sale
by a Holder of Transfer Restricted Securities covered by a Shelf Registration
Statement.

                  6.       Rules 144 and 144A. The Company covenants that it
shall use its reasonable best efforts to file the reports required to be filed
by it under the Securities Act and the Exchange Act in a timely manner so long
as the Transfer Restricted Securities remain outstanding. If at any time the
Company is not required to file such reports, it will, upon request of any
Holder or beneficial owner of Transfer Restricted Securities, make available
such information necessary to permit sales pursuant to Rule 144A. The Company
further covenants that, for as long as any Transfer Restricted Securities remain
outstanding, it will take such further action as any Holder of Transfer
Restricted Securities may reasonably request, all to the extent required from
time to time to enable such Holder to sell Transfer Restricted Securities
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144 and Rule 144A. Upon the written request of any
Holder of Transfer Restricted Securities, the Company shall deliver to such
Holder a written statement as to whether it has complied with such requirements.

                  7.       Underwritten Offerings.

                  (a)      If any of the Transfer Restricted Securities covered
by any Shelf Registration Statement are to be sold in an underwritten offering,
the investment banker or

                                       16


investment bankers and manager or managers that will administer the underwritten
offering will be selected by the Majority Holders of such Transfer Restricted
Securities included in such underwritten offering, subject to the consent of the
Company (which shall not be unreasonably withheld or delayed), and such Holders
shall be responsible for all underwriting commissions and discounts in
connection therewith; provided, however, that notwithstanding anything contained
in this Agreement to the contrary, no underwritten offering shall be effected
pursuant to this Agreement without the prior consent of the Company.

                  (b)      No Holder may participate in any underwritten
offering hereunder unless such person (i) agrees to sell such Holder's Transfer
Restricted Securities on the basis reasonably provided in any underwriting
arrangements approved by the Holders entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.

                  8.       Miscellaneous.

                  (a)      No Inconsistent Agreements. The Company has not, as
of the date hereof, entered into nor shall it, on or after the date hereof,
enter into, any agreement with respect to its securities that is inconsistent
with the rights granted to the Holders herein or otherwise conflicts with the
provisions hereof. In addition, the Company shall not grant to any of its
securityholders (other than the Holders of Transfer Restricted Securities in
such capacity) the right to include any of its securities in the Shelf
Registration Statement provided for in this Agreement other than the Transfer
Restricted Securities.

                  (b)      Amendments and Waivers. The provisions of this
Agreement, including the provisions of this sentence, may not be amended,
qualified, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, unless the Company has obtained the
written consent of at least the majority of the Holders of the then outstanding
Transfer Restricted Securities; provided that with respect to any matter that
directly or indirectly affects the rights of the Initial Purchasers hereunder,
the Company shall obtain the written consent of the Initial Purchasers against
which such amendment, qualification, supplement, waiver or consent is to be
effective. Notwithstanding the foregoing (except the foregoing proviso), a
waiver or consent to departure from the provisions hereof with respect to a
matter that relates exclusively to the rights of Holders whose Transfer
Restricted Securities are being sold pursuant to a Shelf Registration Statement
and that does not directly or indirectly affect the rights of other Holders may
be given by the Majority Holders.

                  (c)      Notices. All notices and other communications
provided for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail, telecopier, or air courier guaranteeing overnight delivery:

                  (i)      if to the Initial Purchasers, initially at their
         address set forth in the Purchase Agreement;

                  (ii)     if to any other Holder, at the most current address
         of such Holder maintained by the Registrar under the Indenture or the
         registrar of the Common Stock

                                       17


         (provided that while the Securities or the Common Stock are in
         book-entry form, notice to the Trustee shall serve as notice to the
         Holders), or, in the case of the Notice Holder, the address set forth
         in its Notice and Questionnaire; and

                  (iii)    if to the Company, to:

                           Cadence Design Systems, Inc.
                           2655 Seely Avenue, Building 5
                           San Jose, CA  95134
                           Facsimile: (408) 943-0513
                           Attn: General Counsel

                           With a copy to:

                           Gibson, Dunn & Crutcher LLP
                           One Montgomery Street, 31st Floor
                           San Francisco, CA  94104
                           Facsimile: (415) 986-5309
                           Attn: Gregory J. Conklin, Esq.

         All such notices and communications shall be deemed to have been duly
given when received, if delivered by hand or air courier, and when sent, if sent
by first-class mail or telecopier.

         The Initial Purchasers or the Company by notice to the other may
designate additional or different addresses for subsequent notices or
communications.

                  (d)      Successors and Assigns. This Agreement shall inure to
the benefit of and be binding upon the successors and assigns of each of the
parties, including, without the need for an express assignment or any consent by
the Company thereto, subsequent Holders. The Company hereby agrees to extend the
benefits of this Agreement to any Holder and underwriter and any such Holder and
underwriter may specifically enforce the provisions of this Agreement as if an
original party hereto. In the event that any other person shall succeed to the
Company under the Indenture, then such successor shall enter into an agreement,
in form and substance reasonably satisfactory to the Initial Purchasers, whereby
such successor shall assume all of the Company's obligations under this
Agreement.

                  (e)      Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.

                  (f)      Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

                  (g)      GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW

                                       18


YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.

                  (h)      Severability. In the event that any one of more of
the provisions contained herein, or the application thereof in any
circumstances, is held invalid, illegal or unenforceable in any respect for any
reason, the validity, legality and enforceability of any such provision in every
other respect and of the remaining provisions hereof shall not be in any way
impaired or affected thereby, it being intended that all of the rights and
privileges of the parties shall be enforceable to the fullest extent permitted
by law.

                  (i)      Securities Held by the Company, etc. Whenever the
consent or approval of Holders of a specified percentage of principal amount of
Securities or the shares of Common Stock issuable upon conversion thereof is
required hereunder, Securities or the shares of Common Stock issued upon
conversion thereof held by the Company or its Affiliates (other than subsequent
Holders of Securities or the Common Stock issued upon conversion thereof if such
subsequent Holders are deemed to be Affiliates solely by reason of their
holdings of such Securities) shall not be counted in determining whether such
consent or approval was given by the Holders of such required percentage.

                  (j)      Termination. This Agreement and the obligations of
the parties hereunder shall terminate upon the end of the Shelf Registration
Period, except for any liabilities or obligations under Section 2(e), 4 or 5 to
the extent arising prior to the end of the Shelf Registration Period.

                                       19


         Please confirm that the foregoing correctly sets forth the agreement
between the Company and you.

                                     Very truly yours,

                                     CADENCE DESIGN SYSTEMS, INC.

                                     By: /s/ William Porter
                                         --------------------------------
                                         Name:  William Porter
                                         Title: Senior Vice President and Chief
                                                Financial Officer

The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.

J.P. MORGAN SECURITIES INC.
SG COWEN SECURITIES CORPORATION

Acting on behalf of itself and as Representative
of the Initial Purchasers

By: J.P. MORGAN SECURITIES INC.,


By:      /s/ Gerald S. Walters
         ---------------------
         Name: Gerald S. Walters
         Title: Vice President

EX-31.1

                                                                    EXHIBIT 31.1

                                 CERTIFICATIONS

I, H. Raymond Bingham, certify that:

    1.   I have reviewed this Form 10-Q of Cadence Design Systems, Inc.;

    2.   Based on my knowledge, this report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this report;

    3.   Based on my knowledge, the financial statements, and other financial
         information included in this report, fairly present in all material
         respects the financial condition, results of operations and cash flows
         of the registrant as of, and for, the periods presented in this report;

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

                  (a) Designed such disclosure controls and procedures, or
                  caused such disclosure controls and procedures to be designed
                  under our supervision, to ensure that material information
                  relating to the registrant, including its consolidated
                  subsidiaries, is made known to us by others within those
                  entities, particularly during the period in which this report
                  is being prepared;

                  (b) Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

                  (c) Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter (the registrant's
                  fourth fiscal quarter in the case of an annual report) that
                  has materially affected, or is reasonably likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

    5.   The registrant's other certifying officer(s) and I have disclosed,
         based on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of the
         registrant's board of directors (or persons performing the equivalent
         functions):

                  (a) All significant deficiencies and material weaknesses in
                  the design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

                  (b) Any fraud, whether or not material, that involves
                  management or other employees who have a significant role in
                  the registrant's internal control over financial reporting.

Date: November 6, 2003                /s/ H. Raymond Bingham
                                      ------------------------------
                                      H. Raymond Bingham
                                      President, Chief Executive Officer, and
                                      Director

                                      Cadence Design Systems, Inc.

EX-31.2

                                                                    EXHIBIT 31.2

                                 CERTIFICATIONS

I, William Porter, certify that:

    1.   I have reviewed this Form 10-Q of Cadence Design Systems, Inc.;

    2.   Based on my knowledge, this report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this report;

    3.   Based on my knowledge, the financial statements, and other financial
         information included in this report, fairly present in all material
         respects the financial condition, results of operations and cash flows
         of the registrant as of, and for, the periods presented in this report;

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

                  (a) Designed such disclosure controls and procedures, or
                  caused such disclosure controls and procedures to be designed
                  under our supervision, to ensure that material information
                  relating to the registrant, including its consolidated
                  subsidiaries, is made known to us by others within those
                  entities, particularly during the period in which this report
                  is being prepared;

                  (b) Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

                  (c) Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter (the registrant's
                  fourth fiscal quarter in the case of an annual report) that
                  has materially affected, or is reasonably likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

    5.   The registrant's other certifying officer(s) and I have disclosed,
         based on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of the
         registrant's board of directors (or persons performing the equivalent
         functions):

                  (a) All significant deficiencies and material weaknesses in
                  the design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

                  (b) Any fraud, whether or not material, that involves
                  management or other employees who have a significant role in
                  the registrant's internal control over financial reporting.

Date: November 6, 2003                     /s/ William Porter
                                           ------------------------------
                                           William Porter
                                           Senior Vice President and
                                           Chief Financial Officer
                                           Cadence Design Systems, Inc.

EX-32.1

                                                                    EXHIBIT 32.1

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
                       PURSUANT TO 18 U.S.C. SECTION 1350,
                       AS ADOPTED PURSUANT TO SECTION 906
                        OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report on Form 10-Q for the fiscal
quarter ended September 27, 2003 of Cadence Design Systems, Inc. (the "Company")
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, H. Raymond Bingham, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:

                  1.  The Report fully complies with the requirements of Section
                      13(a) or 15(d) of the Securities Exchange Act of 1934; and

                  2.  The information contained in the Report fairly presents,
                      in all material respects, the financial condition and
                      results of operations of the Company.

                                         /s/ H. Raymond Bingham
                                         _______________________________________
                                         H. Raymond Bingham
                                         President and Chief Executive Officer
                                         Date: November 6, 2003

  A signed original of this written statement required by Section 906 has been
  provided to Cadence Design Systems, Inc. and will be retained by Cadence and
 furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

                                                                    EXHIBIT 32.2

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
                       PURSUANT TO 18 U.S.C. SECTION 1350,
                       AS ADOPTED PURSUANT TO SECTION 906
                        OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report on Form 10-Q for the fiscal
quarter ended September 27, 2003 of Cadence Design Systems, Inc. (the "Company")
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, William Porter, Senior Vice President and Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:

                  1.  The Report fully complies with the requirements of Section
                      13(a) or 15(d) of the Securities Exchange Act of 1934; and

                  2.  The information contained in the Report fairly presents,
                      in all material respects, the financial condition and
                      results of operations of the Company.

                             /s/ William Porter
                             ___________________________________________________
                             William Porter
                             Senior Vice President and Chief Financial Officer
                             Date:  November 6, 2003

   A signed original of this written statement required by Section 906 has been
  provided to Cadence Design Systems, Inc. and will be retained by Cadence and
 furnished to the Securities and Exchange Commission or its staff upon request.