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

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 MARCH 31, 2001

[ ] 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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

2655 SEELY AVENUE, BUILDING 5, SAN JOSE, 95134
CALIFORNIA
(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 [ ]

At May 5, 2001, there were 248,694,291 shares of the registrant's common
stock, $0.01 par value, outstanding.

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2

CADENCE DESIGN SYSTEMS, INC.

INDEX

PAGE
----

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets:
March 31, 2001 and December 30, 2000........................ 1
Condensed Consolidated Statements of Operations:
Three Months Ended March 31, 2001 and April 1, 2000......... 2
Condensed Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2001 and April 1, 2000......... 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 26

PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 30
Item 2. Changes in Securities and Use of Proceeds................... 33
Item 3. Defaults Upon Senior Securities............................. 33
Item 4. Submission of Matters to a Vote of Security Holders......... 33
Item 5. Other Information........................................... 33
Item 6. Exhibits and Reports on Form 8-K............................ 33
Signatures............................................................. 34

i
3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

MARCH 31, DECEMBER 30,
2001 2000
----------- ------------
(UNAUDITED)

Current Assets:
Cash and cash equivalents................................. $ 100,619 $ 85,220
Short-term investments.................................... 10,928 51,749
Receivables, net.......................................... 254,214 289,468
Inventories, net.......................................... 23,914 20,149
Prepaid expenses and other................................ 113,875 110,262
---------- ----------
Total current assets.............................. 503,550 556,848
Property, plant, and equipment, net......................... 371,348 368,879
Software development costs, net............................. 11,038 10,738
Acquired intangibles, net................................... 401,325 326,518
Installment contract receivables............................ 37,969 38,420
Other assets................................................ 169,497 175,918
---------- ----------
$1,494,727 $1,477,321
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of capital leases....... $ 1,914 $ 2,212
Accounts payable and accrued liabilities.................. 217,090 273,594
Income taxes payable...................................... 124 --
Deferred revenue.......................................... 221,352 215,768
---------- ----------
Total current liabilities......................... 440,480 491,574
---------- ----------
Long-term Liabilities:
Capital leases............................................ 2,793 3,298
Minority interest......................................... 10,757 11,612
Other long-term liabilities............................... 58,796 61,372
---------- ----------
Total long-term liabilities....................... 72,346 76,282
---------- ----------
Stockholders' Equity:
Common stock and capital in excess of par value........... 809,553 847,099
Treasury stock at cost.................................... (145,192) (256,260)
Deferred compensation..................................... (61,943) (60,978)
Retained earnings......................................... 398,046 394,224
Accumulated other comprehensive loss...................... (18,563) (14,620)
---------- ----------
Total stockholders' equity........................ 981,901 909,465
---------- ----------
$1,494,727 $1,477,321
========== ==========

The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
4

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

THREE MONTHS ENDED
---------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------

Revenue:
Product................................................... $181,257 $105,532
Services.................................................. 80,020 75,815
Maintenance............................................... 83,380 76,146
-------- --------
Total revenue..................................... 344,657 257,493
-------- --------
Costs and Expenses:
Cost of product........................................... 21,663 20,478
Cost of services.......................................... 53,716 49,001
Cost of maintenance....................................... 16,958 14,189
Amortization of acquired intangibles...................... 21,992 19,666
Marketing and sales....................................... 93,487 86,167
Research and development.................................. 70,980 62,573
General and administrative................................ 30,755 22,532
Amortization of deferred stock compensation(1)............ 5,940 --
Unusual items............................................. 17,084 --
-------- --------
Total costs and expenses............................... 332,575 274,606
-------- --------
Income (loss) from operations..................... 12,082 (17,113)
Other income (expense), net................................. (378) 1,046
-------- --------
Income (loss) before provision (benefit) for
income taxes.................................... 11,704 (16,067)
Provision (benefit) for income taxes........................ 7,882 (4,258)
-------- --------
Net income (loss)................................. $ 3,822 $(11,809)
======== ========
Basic net income (loss) per share........................... $ 0.02 $ (0.05)
======== ========
Diluted net income (loss) per share......................... $ 0.01 $ (0.05)
======== ========
Weighted average common shares outstanding.................. 245,994 244,629
======== ========
Weighted average common and potential common shares
outstanding-assuming dilution............................. 260,451 244,629
======== ========

- ---------------
(1) Amortization of deferred stock compensation would be classified as follows:

Cost of services............................................ $ 1,606 $ --
Marketing and sales......................................... 1,235 --
Research and development.................................... 420 --
General and administrative.................................. 2,679 --
-------- --------
$ 5,940 $ --
======== ========

The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
5

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

THREE MONTHS ENDED
---------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------

Cash and Cash Equivalents at Beginning of Period............ $ 85,220 $111,401
-------- --------
Cash Flows from Operating Activities:
Net income (loss)......................................... 3,822 (11,809)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 58,359 48,839
Net investment gain on sale, equity (gain) loss, and
write-downs............................................ 462 (413)
Write-off of acquired in-process technology............. 12,100 --
Minority interest income................................ (855) --
Provisions for losses on trade accounts receivable...... (1,453) (366)
Changes in current assets and liabilities, net of effect
of acquired and disposed businesses:
Receivables........................................... (4,017) (4,714)
Inventories........................................... (3,765) (1,160)
Prepaid expenses and other............................ (6,846) (2,847)
Deferred income taxes................................. 851 14
Installment contract receivables...................... 15,420 29,193
Accounts payable and accrued liabilities.............. (33,520) (25,963)
Tax benefit on stock option exercises................. 4,104 --
Deferred revenue...................................... 3,475 14,343
Other long-term liabilities........................... (2,477) 5,982
-------- --------
Net cash provided by operating activities.......... 45,660 51,099
-------- --------
Cash Flows from Investing Activities:
Maturities of short-term investments-held-to-maturity..... -- 999
Maturities of short-term investments-available-for-sale... 50,635 107
Purchases of short-term investments-available-for-sale.... (9,824) --
Purchases of property, plant, and equipment............... (33,127) (21,730)
Capitalization of software development costs.............. (7,619) (8,810)
Increase in acquired intangibles and other assets......... (9,227) (16,335)
Investment in venture capital partnership and equity
investments............................................. (8,528) (9,487)
Cash effect of business acquisitions...................... 2,162 (4,503)
Sale of put warrants...................................... 12,032 25,516
Purchase of call options.................................. (12,032) (25,516)
-------- --------
Net cash used for investing activities............. (15,528) (59,759)
-------- --------
Cash Flows from Financing Activities:
Proceeds from long-term payable........................... 85,549 --
Principal payments on long-term payable and capital
leases.................................................. (86,205) (20,693)
Proceeds from issuance of common stock.................... 23,961 21,041
Purchases of treasury stock............................... (61,887) (30,698)
Proceeds from transfer of financial assets in exchange for
cash.................................................... 26,354 38,799
-------- --------
Net cash provided by financing activities.......... (12,228) 8,449
-------- --------
Effect of Exchange Rate Changes on Cash..................... (2,505) (226)
-------- --------
Increase (Decrease) in Cash and Cash Equivalents............ 15,399 (437)
-------- --------
Cash and Cash Equivalents at End of Period.................. $100,619 $110,964
======== ========

The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
6

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

BASIS OF PRESENTATION

The condensed consolidated financial statements included herein have been
prepared by 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 are adequate to make the information presented not misleading. These
condensed consolidated financial statements 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 30,
2000.

The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) 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
revenue and expenses during the reporting period. Actual results could differ
from those estimates.

Certain amounts in the condensed consolidated financial statements as of
December 30, 2000 and for the three months ended April 1, 2000 have been
reclassified to conform with the March 31, 2001 presentation.

ACQUISITIONS

In February 2001, Cadence acquired CadMOS Design Technology, Inc., a
privately held design tools firm headquartered in San Jose. CadMOS provides
solutions to the noise problems experienced in ultra-deep submicron processes.
Its noise-analysis solutions are targeted at both digital and mixed signal
designers working on microprocessors, dynamic random access memory, mixed-signal
System-on-a-Chip, and application-specific integrated circuits. Cadence acquired
all of the outstanding stock of CadMOS and assumed all outstanding stock options
and warrants. The purchase price was $92.7 million and the acquisition was
accounted for as a purchase. The purchase price could increase up to an
additional $12.6 million, representing up to 488,970 shares, if certain
predetermined performance factors are achieved over the next three years. Of the
$12.6 million, $1.7 million is contingent on continued employment of certain
specified individuals. The $12.6 million is based on the share price of
Cadence's common stock at the time of the acquisition. In connection with the
acquisition, Cadence acquired goodwill of $58.3 million, which is being
amortized over 5 years, and technology and workforce intangibles of $12.9
million, which are being amortized over 3 to 5 years. The results of operations
of CadMOS and the estimated fair value of the assets acquired and liabilities
assumed are included in Cadence's consolidated financial statements from the
date of acquisition.

Upon consummation of the CadMOS acquisition, Cadence immediately charged to
expense $12.1 million representing acquired in-process technology that had not
yet reached technological feasibility and had no alternative future use. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Unusual Items." The value assigned to acquired in-process
technology was determined by identifying research projects in areas for which
technological feasibility has not been established. The value was determined by
estimating the costs to develop the acquired in-process technology into
commercially viable products, estimating the resulting net cash flows from such
projects, and discounting the net cash flows back to their present value. The
discount rate included a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The in-process technology is

4
7
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

expected to be commercially viable in 2002. Expenditures to complete the
in-process technology are expected to total approximately $1.8 million. These
estimates are subject to change, given the uncertainties of the development
process, and no assurance can be given that deviations from these estimates will
not occur. Additionally, these projects will require additional research and
development after they have reached a state of technological and commercial
feasibility.

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

INVENTORIES

Cadence's inventories include high technology parts and components for
complex computer systems that emulate the performance and operation of computer
chips and electronic systems.

A summary of inventories follows:

MARCH 31, DECEMBER 30,
2001 2000
--------- ------------
(IN THOUSANDS)

Raw materials........................................ $19,934 $17,897
Work in process...................................... 3,980 2,252
------- -------
Total inventories, net..................... $23,914 $20,149
======= =======

RESTRUCTURING

Liabilities for excess facilities and other restructuring charges are
included in accrued and other long-term liabilities, while severance and
benefits liabilities are included in payroll and payroll-related accruals. The
following table summarizes Cadence's restructuring activity during the first
quarter of 2001:

FOR THE THREE MONTHS ENDED MARCH 31, 2001
--------------------------------------------
SEVERANCE
AND EXCESS
BENEFITS FACILITIES ASSETS TOTAL
--------- ---------- ------ -------
(IN THOUSANDS)

Balance, December 30, 2000............................ $2,319 $ 4,938 $280 $ 7,537
Non-cash charges.................................... -- (2,462) (30) (2,492)
Cash charges........................................ (859) (630) -- (1,489)
------ ------- ---- -------
Balance, March 31, 2001............................... $1,460 $ 1,846 $250 $ 3,556
====== ======= ==== =======

CREDIT FACILITY

5
8
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

consenting bank holds. For both of the 2000 Facilities, Cadence has the option
to pay interest based on LIBOR plus a spread of between 1.25% and 1.50%, based
on a pricing grid tied to a financial covenant, or the higher of (i) the Federal
Funds Rate plus 0.50% or (ii) the prime rate. As a result, Cadence's interest
expense associated with this borrowing will vary with market rates. In addition,
commitment fees are payable on the unused portion of the Three-Year Facility at
rates between 0.25% and 0.34% based on a pricing grid tied to a financial
covenant and on the unused portion of the 364-Day Facility at a fixed rate of
0.20%. Cadence may not borrow under the 364-Day Facility at any time that any
portion of the Three-Year Facility remains unused. The 2000 Facilities contain
certain financial and other covenants. At March 31, 2001, there were no
borrowings outstanding under the 2000 Facilities.

COMPREHENSIVE LOSS

Comprehensive loss includes foreign currency translation gains and losses
and other unrealized gains and losses that have been previously excluded from
net income (loss) and reflected instead in stockholders' equity. A summary of
comprehensive loss follows:

THREE MONTHS ENDED
---------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
(IN THOUSANDS)

Net income (loss)...................................... $ 3,822 $(11,809)
Translation loss....................................... (2,253) (118)
Unrealized loss on investments......................... (1,690) (6,777)
------- --------
Comprehensive loss................................... $ (121) $(18,704)
======= ========

NET INCOME (LOSS) PER SHARE

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

THREE MONTHS ENDED
---------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
(IN THOUSANDS)

Weighted average common shares used to calculate basic
net income (loss) per share........................... 245,994 244,629
Options............................................... 13,917 --
Puts.................................................. 35 --
Warrants and other contingent common shares........... 505 --
------- -------
Weighted average common and potential common shares used
to calculate diluted net income (loss) per share...... 260,451 244,629
======= =======

Options to purchase 2,782,124 shares of common stock were outstanding at
March 31, 2001, but were not included in the computation of diluted net income
per share because their effect would be antidilutive. These options expire at
various dates through 2010. Put warrants to purchase 5,032,023 shares of common
stock were outstanding at March 31, 2001, but were not included in the
computation of diluted net income per share because their effect would be
antidilutive. The outstanding put warrants expire on various dates through
February 2002.

6
9
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

Options to purchase 52,173,200 shares of common stock were outstanding at
April 1, 2000, but were not included in the computation of diluted net loss per
share because their effect would be antidilutive. These options expire at
various dates through 2010. Warrants to purchase 140,000 shares of common stock
were outstanding at April 1, 2000, but were not included in the computation of
diluted net loss per share because their effect would be antidilutive. The
warrants outstanding expire in June 2003. Put warrants to purchase 9,127,015
shares of common stock were outstanding at April 1, 2000, but were not included
in the computation of diluted net loss per share because their effect would be
antidilutive. The put warrants outstanding during the first quarter of 2000
expired on various dates through February 2001.

CONTINGENCIES

Refer to Part II, Item 1 for a description of legal proceedings.

PUT WARRANTS AND CALL OPTIONS

Cadence has authorized three seasoned systematic stock repurchase programs
under which it repurchases Cadence common stock to satisfy estimated
requirements for shares to be issued under its Employee Stock Purchase Plan, or
ESPP, the 1997 Nonstatutory Stock Option Plan, referred to as the 1997 Plan, and
the 2000 Nonstatutory Stock Option Plan, referred to as the 2000 Plan. Such
repurchases are intended to cover Cadence's expected issuances under the ESPP
for the next 12 months and the 2000 Plan and 1997 Plan for the next 24 months.

As part of its authorized stock repurchase programs, Cadence has sold put
warrants through private placements. At March 31, 2001, there were 6.8 million
put warrants outstanding that entitle the holder to sell one share of common
stock to Cadence on a specified date and at a specified price ranging from
$21.95 to $26.90 per share. Additionally, during this same period, Cadence
purchased call options that entitle Cadence to buy one share of common stock at
a specified price to satisfy anticipated stock repurchase requirements under
Cadence's systematic stock repurchase programs. At March 31, 2001, Cadence had 5
million call options outstanding at prices ranging from $22.20 to $27.15 per
share. The put warrants and call options outstanding at March 31, 2001 expire on
various dates through February 2002 and Cadence has the contractual ability to
settle the options prior to their maturity. At March 31, 2001, the estimated
fair value of the call options was approximately $5.7 million and the fair value
of the put warrants was approximately $46.3 million.

If exercised, Cadence has the right to settle the put warrants with common
stock equal to the difference between the exercise price and the fair value of
the common stock at the date of exercise. Settlement of the put warrants with
common stock could cause Cadence to issue a substantial number of shares,
depending on the exercise price of the put warrants and the per share fair value
of Cadence's common stock at the time of exercise. In addition, settlement of
put warrants in common stock could lead to the disposition by put warrant
holders of shares of Cadence's common stock that such holders may have
accumulated in anticipation of the exercise of the put warrants or call options,
which may adversely affect the price of Cadence's common stock. At March 31,
2001, Cadence had the ability to settle these put warrants with common stock
and, therefore, no amount was classified out of stockholders' equity in the
condensed consolidated balance sheets.

TALITY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

deferred stock compensation resulting from Tality option grants and restricted
stock sales. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Unusual Items." On October 9, 2000, Cadence
announced the postponement of Tality's IPO due to unfavorable market conditions.
As a result of the postponement of the Tality IPO Cadence wrote off $2.8 million
of IPO fees in the first quarter of 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Unusual Items." On
April 17, 2001, Cadence announced the withdrawal of the Tality IPO registration
statement. The financial statements and financial information in this Quarterly
Report on Form 10-Q do not give effect to the IPO.

SEGMENT REPORTING

In 1998, Cadence adopted Statement of Financial Accounting Standards, or
SFAS, No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Under SFAS No. 131, operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker when deciding how to
allocate resources and when assessing performance. Cadence's chief operating
decision making group is the Executive Staff, which includes Cadence's President
and Chief Executive Officer and Cadence's other senior management. Cadence's
Executive Staff reviews the Cadence consolidated results within three segments:
Product, Services, and Maintenance, and also reviews Tality's results separately
as a stand-alone entity.

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

Segment income from operations is defined as gross margin under generally
accepted accounting principles and excludes amortization of acquired
intangibles, operating expenses (marketing and sales, research and development,
and general and administrative), unusual items, other income, net, and income
taxes. Profitability information about Cadence's segments is available only to
the extent of gross margin by segment, and operating expenses and other income
and expense items are managed on a functional basis. There are no differences
between the accounting policies used to measure profit and loss for segments and
those used on a consolidated basis. Revenue is defined as revenue from external
customers with no intersegment revenue.

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

8
11
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

The following tables present information about reported segments for the
three months ended March 31, 2001 and April 1, 2000:

FOR THE THREE MONTHS ENDED MARCH 31, 2001
--------------------------------------------------------------------
PRODUCT SERVICES MAINTENANCE OTHER TOTAL TALITY
-------- -------- ----------- --------- -------- --------
(IN THOUSANDS)

Revenue............................................. $181,257 $80,020 $83,380 $ -- $344,657 $ 44,180
Cost of revenue..................................... 21,663 53,716 16,958 -- 92,337 38,261
Amortization of acquired intangibles................ -- -- -- 21,992 21,992 --
-------- ------- ------- --------- -------- --------
Gross margin.................................... 159,594 26,304 66,422 (21,992) 230,328 5,919
Marketing and sales................................. -- -- -- (93,487) (93,487) (9,328)
Research and development............................ -- -- -- (70,980) (70,980) (6,599)
General and administrative.......................... -- -- -- (30,755) (30,755) (15,588)
Amortization of acquired intangibles................ -- -- -- -- -- (4,025)
Amortization of deferred stock compensation......... -- -- -- (5,940) (5,940) (3,538)
Unusual items....................................... -- -- -- (17,084) (17,084) (3,361)
Other expense, net.................................. -- -- -- (378) (378) (659)
-------- ------- ------- --------- -------- --------
Income (loss) before provision (benefit) for income
taxes............................................. $159,594 $26,304 $66,422 $(240,616) $ 11,704 $(37,179)
======== ======= ======= ========= ======== ========

FOR THE THREE MONTHS ENDED APRIL 1, 2000
--------------------------------------------------------------------
PRODUCT SERVICES MAINTENANCE OTHER TOTAL TALITY
-------- -------- ----------- --------- -------- --------
(IN THOUSANDS)

Revenue............................................. $105,532 $75,815 $76,146 $ -- $257,493 $ 43,027
Cost of revenue..................................... 20,478 49,001 14,189 -- 83,668 33,438
Amortization of acquired intangibles................ -- -- -- 19,666 19,666 --
-------- ------- ------- --------- -------- --------
Gross margin.................................... 85,054 26,814 61,957 (19,666) 154,159 9,589
Marketing and sales................................. -- -- -- (86,167) (86,167) (7,943)
Research and development............................ -- -- -- (62,573) (62,573) (2,772)
General and administrative.......................... -- -- -- (22,532) (22,532) (7,875)
Amortization of acquired intangibles................ -- -- -- -- -- (3,908)
Amortization of deferred stock compensation......... -- -- -- -- -- --
Unusual items....................................... -- -- -- -- -- --
Other income, net................................... -- -- -- 1,046 1,046 62
-------- ------- ------- --------- -------- --------
Income (loss) before provision (benefit) for income
taxes............................................. $ 85,054 $26,814 $61,957 $(189,892) $(16,067) $(12,847)
======== ======= ======= ========= ======== ========

9
12

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. Except for historical information, the following
discussion contains forward-looking statements based on current expectations
that involve certain risks and uncertainties. Cadence's actual results could
differ materially from those discussed in this Quarterly Report on Form 10-Q.
Factors that could cause actual results or performance to differ materially or
contribute to such differences include, but are not limited to, those discussed
below in "Results of Operations," "Liquidity and Capital Resources," "Factors
That May Affect Future Results," and "Disclosures about Market Risk."

OVERVIEW

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

The worldwide electronics industry has experienced expansion driven
primarily by the communications (networking and wireless) markets. However, the
electronics industry began to experience a slowdown in late 2000, and the
severity of which has increased in 2001. The electronics industry slowdown,
especially in the semiconductor industry, may reduce our revenue and harm our
results of operations.

In February 2001, Cadence acquired CadMOS Design Technology, Inc., a
privately held design tools firm headquartered in San Jose. CadMOS provides
solutions to the noise problems experienced in ultra-deep submicron processes.
Its noise-analysis solutions are targeted at both digital and mixed signal
designers working on microprocessors, dynamic random access memory, mixed-signal
System-on-a-Chip, and application-specific integrated circuits. Cadence acquired
all of the outstanding stock of CadMOS and assumed all outstanding stock options
and warrants. The purchase price was $92.7 million and the acquisition was
accounted for as a purchase. The purchase price could increase up to an
additional $12.6 million, representing up to 488,970 shares, if certain
predetermined performance factors are achieved over the next three years. Of the
$12.6 million, $1.7 million is contingent on continued employment. The $12.6
million is based on the share price of Cadence's common stock at the time of the
acquisition. In connection with the acquisition, Cadence acquired goodwill of
$58.3 million, which is being amortized over 5 years, and technology and
workforce intangibles of $12.9 million, which are being amortized over 3 to 5
years. The results of operations of CadMOS and the estimated fair value of the
assets acquired and liabilities assumed are included in Cadence's consolidated
financial statements from the date of acquisition.

On July 17, 2000, Cadence announced its plan to separate its electronics
design services group into a new company named Tality Corporation, or Tality.
Tality's separation from Cadence was substantially completed on October 4, 2000,
and the electronic design services business now operates as a majority-owned
subsidiary of Cadence. Tality filed a registration statement with the Securities
and Exchange Commission for Tality's initial public offering, or IPO. As a
result of the separation in the third quarter of 2000, Cadence has recorded
deferred stock compensation resulting from Tality option grants and restricted
stock sales. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Unusual Items." On October 9, 2000, Cadence
announced the postponement of Tality's IPO due to unfavorable market conditions.
As a result of the postponement of the Tality IPO Cadence wrote off $2.8 million
of IPO fees in the first quarter of 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Unusual Items." On
April 17, 2001, Cadence announced the withdrawal of the Tality IPO registration
statement. The financial statements and financial information in this Quarterly
Report on Form 10-Q do not give effect to the IPO.

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RESULTS OF OPERATIONS

REVENUE

THREE MONTHS ENDED
---------------------
MARCH 31, APRIL 1,
2001 2000 % CHANGE
--------- -------- --------
(IN MILLIONS)

Product....................................... $181.3 $105.5 72%
Services...................................... 80.0 75.8 6%
Maintenance................................... 83.4 76.2 10%
------ ------
Total revenue....................... $344.7 $257.5 34%
====== ======

SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE

Product....................................... 53% 41%
Services...................................... 23% 29%
Maintenance................................... 24% 30%

Product revenue increased $75.7 million in the first quarter of 2001,
compared to the first quarter of 2000, primarily due to an increase in license
renewals with major customers as well as an increase in new sales of Cadence's
software products. The increase in sales volume of products was primarily
attributable to higher sales of integrated circuit implementation products,
which include place and route, physical design, and physical verification
products, intellectual property creation products, which include mixed signal
and simulation products, and printed circuit board related products. Product
revenue associated with Cadence's ratable software license arrangements was
$58.4 million and $13.8 million in the first quarters of 2001 and 2000,
respectively. The growth in ratable revenue is primarily due to revenue
associated with software products sold under Cadence's subscription licensing
model. An increasing percentage of ratable software revenue can be expected as
Cadence continues to migrate customers to the subscription licensing model over
time.

Services revenue increased $4.2 million in the first quarter of 2001,
compared to the first quarter of 2000, primarily due to the continued deployment
of additional methodology services resources to support the product business.
Tality's revenue was roughly flat in the first quarter of 2001, compared to the
first quarter of 2000, reflecting weaker-than-expected business from both small,
venture-backed companies and some larger companies, particularly in the wireless
communications segment. Due to the current economic conditions Tality's revenues
are expected to grow modestly through the year, with 2001 revenues roughly flat
with 2000.

Maintenance revenue increased $7.2 million in the first quarter of 2001,
compared to the first quarter of 2000, primarily due to growth of the installed
customer base.

REVENUE BY GEOGRAPHY

THREE MONTHS ENDED
---------------------
MARCH 31, APRIL 1,
2001 2000 % CHANGE
--------- -------- --------
(IN MILLIONS)

Domestic...................................... $210.0 $152.4 38%
International................................. 134.7 105.1 28%
------ ------
Total revenue....................... $344.7 $257.5 34%
====== ======

REVENUE BY GEOGRAPHY AS A PERCENT OF TOTAL REVENUE

Domestic...................................... 61% 59%
International................................. 39% 41%

International revenue increased $29.6 million in the first quarter of 2001,
when compared to the first quarter of 2000, primarily due to increases in
product and maintenance revenue in all regions and an increase in services
revenue in Europe, partially offset by a decrease in services revenue in Japan,
Canada, and Asia.

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Other differences in the rate of revenue growth by geography over the years
presented are primarily due to fluctuations in sales volume of place and route,
physical design and verification products, and design and methodology services
offerings.

Foreign currency exchange rates negatively affected reported revenue by
$4.5 million during the first quarter of 2001, primarily due to the weakening of
the Japanese yen in relation to the U.S. dollar. Foreign currency exchange rates
positively affected reported revenue by $1.8 million during the first quarter of
2000, primarily due to the strengthening of the Japanese yen in relation to the
U.S. dollar, offset partially by the weakening of the French franc and German
mark.

COST OF REVENUE

THREE MONTHS ENDED
---------------------
MARCH 31, APRIL 1,
2001 2000 % CHANGE
--------- -------- --------
(IN MILLIONS)

Product....................................... $21.7 $20.5 6%
Services...................................... $53.7 $49.0 10%
Maintenance................................... $17.0 $14.2 20%

COST OF REVENUE AS A PERCENT OF RELATED REVENUE

Product....................................... 12% 19%
Services...................................... 67% 65%
Maintenance................................... 20% 19%

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

Cost of product revenue increased $1.2 million for the first quarter of
2001, when compared to the first quarter of 2000, primarily due to increases in
manufacturing expenses associated with emulation system products and purchased
software amortization, partially offset by a decrease in amortization of
software development costs.

Because the majority of Cadence's cost of software product revenue does not
vary significantly with changes in revenue, product gross margin increased in
the first quarter of 2001, when compared to the first quarter in 2000, primarily
due to an increase in price and volume of license renewals with major customers.

Cost of services revenue includes costs associated with providing services
to customers, primarily salaries and costs to recruit, develop, and retain
personnel, and costs to maintain the infrastructure necessary to manage a
services organization. Cost of services revenue increased $4.7 million in the
first quarter of 2001, when compared to the first quarter of 2000, primarily due
to Cadence's addition of services professionals and employee-related costs.

Services gross margin declined slightly for the first quarter of 2001, when
compared to the first quarter of 2000. This decrease was primarily due to
increased headcount in anticipation of increased demand which did not
materialize. Services gross margin has been, and may continue to be, reduced by
Cadence's inability to fully utilize its services resources. In addition,
services gross margin may continue to be reduced by Cadence's inability to
achieve operating efficiencies when implementing a growing number of services
offerings.

Cost of maintenance revenue includes the cost of customer services, such as
hot-line and on-site support, production personnel, packaging, and documentation
of maintenance updates. Cost of maintenance revenue increased $2.8 million in
the first quarter of 2001, when compared to the first quarter of 2000, primarily
due to employee-related costs.

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AMORTIZATION OF ACQUIRED INTANGIBLES

THREE MONTHS ENDED
---------------------
MARCH 31, APRIL 1,
2001 2000 % CHANGE
--------- -------- --------
(IN MILLIONS)

Amortization of acquired intangibles.................. $22.0 $19.7 12%

AMORTIZATION OF ACQUIRED INTANGIBLES AS A PERCENT OF TOTAL REVENUE

Amortization of acquired intangibles.................. 6% 8%

Amortization of acquired intangibles increased $2.3 million in the first
quarter of 2001, when compared with the first quarter of 2000, primarily due to
the 2001 acquisition of CadMOS.

OPERATING EXPENSES

THREE MONTHS ENDED
---------------------
MARCH 31, APRIL 1,
2001 2000 % CHANGE
--------- -------- --------
(IN MILLIONS)

Marketing and sales................................... $93.5 $86.2 8%
Research and development.............................. $71.0 $62.6 13%
General and administrative............................ $30.8 $22.5 36%

EXPENSES AS A PERCENT OF TOTAL REVENUE

Marketing and sales................................... 27% 33%
Research and development.............................. 21% 24%
General and administrative............................ 9% 9%

Marketing and sales expenses increased $7.3 million in the first quarter of
2001, when compared to the first quarter of 2000, primarily due to an increase
in employee-related costs and additional marketing programs.

Research and development expenses, prior to the reduction for
capitalization of software development costs, were $78.6 million in the first
quarter of 2001 and $71.4 million for the first quarter of 2000, representing
23% and 28% of total revenue, respectively. Cadence capitalized software
development costs of approximately $7.6 million in the first quarter of 2001 and
$8.8 million in the first quarter of 2000, which represented approximately 10%
and 12% of total research and development expenditures made in each of those
periods, respectively. The decrease in capitalized software development costs
for the first quarter of 2001 resulted primarily from an increase in new product
development in which costs are expensed until technological feasibility is
established. In any given period, the amount of capitalized software development
costs may vary depending on the exact nature of the development performed.

The increase in net research and development expenses of $8.4 million for
the first quarter of 2001, when compared to the first quarter of 2000, was
primarily attributable to employee-related costs and increased investment in
research and development projects.

General and administrative expenses increased $8.2 million in the first
quarter of 2001, when compared to the first quarter of 2000, due to increases in
bad debt expense, primarily in Tality, and consulting services.

Foreign currency exchange rates positively affected operating expenses by
$2.8 million during the first quarter of 2001, primarily due to the weakening of
the British pound and the Japanese yen in relation to the U.S. dollar. Foreign
currency exchange rates negatively affected operating expenses by $0.5 million
during the first quarter of 2000, primarily due to the strengthening of the
Japanese yen in relation to the U.S. dollar, offset partially by the weakening
of the French franc and German mark.

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AMORTIZATION OF DEFERRED STOCK COMPENSATION

THREE MONTHS ENDED
---------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
(IN MILLIONS)

Amortization of deferred stock compensation.............. $5.9 $ --

AMORTIZATION OF DEFERRED STOCK COMPENSATION AS A PERCENT OF TOTAL REVENUE

Amortization of deferred stock compensation.............. 2% 0%

In the third quarter of 2000, Cadence began recording deferred stock
compensation resulting from Tality option grants, Tality restricted stock sales,
and Cadence's acquisition of CadMOS. Deferred stock compensation from Tality
option grants and restricted stock sales represents the difference between the
exercise price of stock option grants to Tality employees and directors, and
restricted stock sales to certain Cadence executives and key employees, and the
deemed fair market value of Tality's common stock at the time of those grants
and sales. Deferred stock compensation from the CadMOS acquisition represents
the difference between the exercise price of stock option grants to CadMOS
employees and the fair market value of Cadence's common stock at the time of
acquisition. Cadence is amortizing the deferred stock compensation to expense
over the period during which the stock options and restricted stock vest. For
the first quarter of 2001, Cadence recorded $5.9 million of amortization of
deferred stock compensation for which there were no similar costs in the first
quarter of 2000.

UNUSUAL ITEMS

There were no unusual items in the first quarter of 2000. The following
table presents information regarding unusual items for the quarter ended March
31, 2001:

THREE MONTHS ENDED
MARCH 31, 2001
------------------
(IN MILLIONS)

Write-off of acquired in-process technology........ $12.1
Tality IPO fees and separation costs............... 3.5
Restructuring charges.............................. 1.5
-----
Total unusual items...................... $17.1
=====

Acquisitions and In-Process Technology

In February 2001, Cadence acquired CadMOS Design Technology, Inc., a
privately held design tools firm headquartered in San Jose. CadMOS provides
solutions to the noise problems experienced in ultra-deep submicron processes.
Its noise-analysis solutions are targeted at both digital and mixed signal
designers working on microprocessors, dynamic random access memory, mixed-signal
System-on-a-Chip, and application-specific integrated circuits. Cadence acquired
all of the outstanding stock of CadMOS and assumed all outstanding stock options
and warrants. The purchase price was $92.7 million and the acquisition was
accounted for as a purchase. The purchase price could increase up to an
additional $12.6 million, representing up to 488,970 shares, if certain
predetermined performance factors are achieved over the next three years. Of the
$12.6 million, $1.7 million is contingent on continued employment. The $12.6
million is based on the share price of Cadence's common stock at the time of the
acquisition. In connection with the acquisition, Cadence acquired goodwill of
$58.3 million, which is being amortized over 5 years, and technology and
workforce intangibles of $12.9 million, which are being amortized over 3 to 5
years. The results of operations of CadMOS and the estimated fair value of the
assets acquired and liabilities assumed are included in Cadence's consolidated
financial statements from the date of acquisition.

Upon consummation of the CadMOS acquisition, Cadence immediately charged to
expense $12.1 million representing acquired in-process technology that had not
yet reached technological feasibility and had no alternative future use. The
value assigned to acquired in-process technology was determined by identifying

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research projects in areas for which technological feasibility has not been
established. The value was determined by estimating the costs to develop the
acquired in-process technology into commercially viable products, estimating the
resulting net cash flows from such projects, and discounting the net cash flows
back to their present value. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the acquired
in-process technology. The in-process technology is expected to be commercially
viable in 2002. Expenditures to complete the in-process technology are expected
to total approximately $1.8 million. These estimates are subject to change,
given the uncertainties of the development process, and no assurance can be
given that deviations from these estimates will not occur. Additionally, these
projects will require additional research and development after they have
reached a state of technological and commercial feasibility.

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

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

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

The discount of the net cash flows to their present value was based on the
weighted average cost of capital, or WACC. The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on the required rates of return from investments in various areas of the
enterprise. The rate used to discount the net cash flows from purchased
in-process technology was 28%. The discount rate is sometimes higher than the
WACC due to the inherent uncertainties in the estimates, including the
uncertainty surrounding the successful development of the acquired in-process
technology, the useful life of such technology, the profitability levels of such
technology, if any, and the uncertainty of technological advances, all of which
were unknown at that time.

Tality IPO Fees and Separation Costs

In the first quarter of 2001, Cadence wrote off $2.8 million of Tality IPO
fees as a result of the postponement of the Tality IPO on October 9, 2001. These
fees consisted of legal and accounting services and registration statement
printing and filing fees and were incurred primarily during 2000. In addition,
Cadence recorded $0.7 million of Tality separation costs in the first quarter of
2001, related primarily to information systems separation.

Restructuring

In the first quarter of 2001, Cadence recorded $1.5 million of
restructuring expenses incurred in connection with its research and development
process. Cadence expects to record restructuring charges in the second quarter
of 2001, estimated between $30 million and $40 million. These restructuring
efforts are
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targeted at work force and infrastructure reductions within Tality and
facilities and asset consolidations within Cadence.

OTHER INCOME AND INCOME TAXES

Other income decreased $1.4 million in the first quarter of 2001, when
compared to the first quarter of 2000, primarily due to a $1.4 million
investment loss, an increase in foreign exchange losses of $0.9 million, offset
by an increase in minority interest income of $0.9 million. The investment loss
was due to an accounting adjustment by an equity investment, Integrated
Measurement Systems, Inc., related to Staff Accounting Bulletin, No. 101,
"Revenue Recognition in Financial Statements", which became effective in
December 1999.

Cadence's estimated effective tax rate in the first quarter of 2001 was
26.5%, excluding the effect of the write-off of acquired in-process technology
of $12.1 million and amortization of deferred stock compensation of $5.9
million. The effective tax rate for the first quarter of 2000 was 26.5%.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2001, Cadence's principal sources of liquidity consisted of
$111.5 million of cash and cash equivalents and short-term investments, compared
to $137 million at December 30, 2000, and two syndicated senior unsecured credit
facilities totaling $350 million. As of March 31, 2001, Cadence had no
outstanding borrowings under these credit facilities.

Cash provided by operating activities decreased $5.4 million to $45.7
million for the first quarter of 2001 when compared to the first quarter of
2000. The decrease was primarily due to the payment of accounts payable and
accrued liabilities.

At March 31, 2001, Cadence had net working capital of $63.1 million
compared with $65.3 million at December 30, 2000. The working capital decrease
was driven primarily by a decrease in receivables of $35.3 million and a
decrease in cash and cash equivalents and short-term investments of $25.4
million, partially offset by a decrease in accounts payable and accrued
liabilities of $56.5.

In addition to its short-term investments, Cadence's primary investing
activities consisted of an acquisition, purchases of property, plant, and
equipment, capitalization of software development costs, and venture capital
partnership investments, which combined represented $56.3 million and $60.9
million of cash used for investing activities in the first quarters of 2001 and
2000, respectively.

Cadence sells put warrants and purchases call options through private
placements. See "Notes to Consolidated Financial Statements -- Put Warrants and
Call Options." At March 31, 2001, Cadence had a maximum potential obligation
related to put warrants to buy back 6.8 million shares of its common stock at an
aggregate price of approximately $168.3 million. The put warrants will expire on
various dates through February 2002, and Cadence has the contractual ability to
settle the put warrants and call options prior to their maturity. Cadence has
the ability to settle these put warrants with stock and, therefore, no amount
was classified out of stockholders' equity in the condensed consolidated balance
sheets.

As part of its overall investment strategy, Cadence is a limited partner in
a venture capital fund and is committed to invest up to $100 million. As of
March 31, 2001, Cadence had contributed approximately $58.9 million to this
partnership, which is reflected in other assets in the accompanying condensed
consolidated balance sheets, net of operating expenses.

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364-Day Facility. The Three-Year Facility terminates on September 29, 2003. The
364-Day Facility will terminate on September 28, 2001, at which time the 364-Day
Facility may be converted to a two-year term loan with a maturity date of
September 29, 2003, or, at the request of Cadence and with the consent of
members of the bank group that wish to do so, the termination date of the
364-Day Facility may be extended for one additional 364-day period with respect
to the portion of the 364-Day Facility that a consenting bank holds. For both of
the 2000 Facilities, Cadence has the option to pay interest based on LIBOR plus
a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial
covenant, or the higher of (i) the Federal Funds Rate plus 0.50% or (ii) the
prime rate. As a result, Cadence's interest expenses associated with this
borrowing will vary with market rates. In addition, commitment fees are payable
on the unused portion of the Three-Year Facility at rates between 0.25% and
0.34% based on a pricing grid tied to a financial covenant and on the unused
portion of the 364-Day Facility at a fixed rate of 0.20%. Cadence may not borrow
under the 364-Day Facility at any time that any portion of the Three-Year
Facility remains unused. The 2000 Facilities contain certain financial and other
covenants. At March 31, 2001, there were no borrowings outstanding under the
2000 Facilities.

Cadence anticipates that current cash and short-term investment balances,
cash flows from operations, and its $350 million revolving credit facilities
will be sufficient to meet its working capital and capital requirements on a
short-and long-term basis.

NEW ACCOUNTING STANDARDS

In September 2000, the Emerging Issues Task Force, or EITF, published their
consensus on EITF Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,"
which was taken up to address implementation of the EITF's March 2000 final
consensus of EITF Issue No. 00-7, "Application of EITF Issue No. 96-13 to Equity
Derivative Instruments That Contain Certain Provisions That Require Net Cash
Settlement If Certain Events Outside the Control of the Issuer Occur." The final
consensus in Issue No. 00-7 generally stated that equity derivative contracts
that contain provisions that implicitly or explicitly require net cash
settlement outside of the control of the company must be treated as assets and
liabilities and carried at fair value with changes in fair value recognized in
earnings rather than equity instruments carried at original cost and reported as
part of permanent equity. This interpretation becomes effective June 30, 2001
and is not expected to have a material effect on Cadence's consolidated
financial position, results of operations, or cash flows.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value. It
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met and that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. In June 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133," was issued. The adoption of this statement did not
have a material effect on Cadence's 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. The risks and uncertainties
described below are not the only ones Cadence faces. Additional risks and
uncertainties not currently known to Cadence or that Cadence currently deem
immaterial also may impair Cadence's business operations. If any of the
following risks actually occur, Cadence's business, operating results, and
financial condition could be materially harmed. Unless specifically noted,
references to Cadence in the discussion below are references to Cadence and its
subsidiaries, including Tality Corporation and its subsidiaries.

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CADENCE IS SUBJECT TO THE CYCLICAL NATURE OF THE INTEGRATED CIRCUIT INDUSTRY AND
THE ELECTRONICS SYSTEMS INDUSTRY, AND THE CURRENT DOWNTURN OR ANY FUTURE
DOWNTURNS MAY REDUCE OUR REVENUE

Purchases of our products and services are highly dependent upon the
commencement of new design projects by integrated circuit manufacturers and
electronics systems companies. The integrated circuit industry is highly
cyclical and is characterized by constant and rapid technological change, rapid
product obsolescence and price erosion, evolving standards, short product life
cycles, and wide fluctuations in product supply and demand. The integrated
circuit and electronics systems industries have experienced significant
downturns, often connected with, or in anticipation of, maturing product cycles
of both these companies' and their customers' products and a decline in general
economic conditions. These downturns have been characterized by diminished
product demand, production over capacity, high inventory levels and accelerated
erosion of average selling prices. During these downturns, the number of new
design projects may decrease. A number of integrated circuit manufacturers and
electronics systems companies have announced slowdowns of demand and production.
The current slowdown and any future downturns may reduce our revenue and harm
our results of operations.

CADENCE HAS REORGANIZED ITS DESIGN SERVICES GROUP AS A SEPARATE COMPANY, WHICH
MAY IMPACT ITS FINANCIAL RESULTS

Since 1995, Cadence has operated an electronics design services group. On
July 17, 2000, Cadence announced its plan to separate its design services group
into a separate company named Tality Corporation focused on providing design
solutions and proprietary technology to electronics product companies and
integrated circuit manufacturers, and announced the planned initial public
offering of the separate company. The separation was substantially completed on
October 4, 2000. On October 9, 2000, Cadence announced that it had postponed
Tality's initial public offering due to unfavorable market conditions. On April
17, 2001, Tality withdrew the registration statement for its initial public
offering. Cadence currently intends to consider undertaking an initial public
offering for Tality when market conditions become favorable. Tality operates as
a majority-owned subsidiary of Cadence. Cadence's expenses in the design
services business increased substantially in connection with Tality's separation
from Cadence and its expenses may continue to increase as it seeks to expand its
business. The rate of growth of Tality's revenue over prior periods may not
continue or increase at all, and its separation and expansion may prove more
expensive than Cadence anticipates. If Tality fails to increase its revenue to
offset its expenses, Tality will continue to experience losses.

CADENCE HAS AGREED TO GRANT CERTAIN RIGHTS AND PROVIDE CERTAIN SERVICES TO
TALITY ON TERMS THAT ARE MORE FAVORABLE TO TALITY THAN TERMS THAT WOULD BE
OFFERED TO AN UNRELATED PARTY

In connection with the separation of Tality, Cadence entered into a number
of agreements governing its business relationships with Tality and Cadence's
provision of certain services to Tality, including provision of certain
facilities, and accounting, finance, legal, human resources, and other
administrative services, on terms that are more favorable to Tality than terms
that would be offered to an unrelated entity. As a result, Cadence is obligated
to provide certain services to Tality for the periods defined in the various
agreements, some of which have long or unspecified terms, which may impact our
financial results.

CADENCE HAS HISTORICALLY SUFFERED LOSSES IN ITS ELECTRONICS DESIGN AND
METHODOLOGY SERVICES BUSINESS AND MAY CONTINUE TO DO SO IN THE FUTURE

The market for electronics design and methodology services is relatively
new and rapidly evolving. Cadence's or Tality's failure to succeed in these
services businesses may seriously harm Cadence's business, operating results,
and financial condition.

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

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

- Cadence's cost of services personnel is high and reduces gross
margin. Gross margin represents the difference between the amount of
revenue from the sale of services and Cadence's cost of providing those
services. Cadence must pay high salaries to attract and retain
professional services personnel. This results in a lower gross margin
than the gross margin in Cadence's software business. In addition, the
high cost of training new services personnel or not fully utilizing these
personnel can significantly lower gross margin.

- A substantial portion of these services contracts are fixed-price
contracts. This means that the customer pays a fixed price that is agreed
upon at the time of contract execution, regardless of how much time or
how many resources Cadence must actually devote to successfully complete
the contract. Although Cadence is moving towards more time based
contracts, there can be no guarantee that this shift will occur. If
Cadence's cost in performing the services consistently and significantly
exceeds the amount the customer has agreed to pay, it could seriously
harm Cadence's business, operating results, and financial condition.

CADENCE'S FAILURE TO RESPOND QUICKLY TO TECHNOLOGICAL DEVELOPMENTS COULD MAKE
ITS PRODUCTS UNCOMPETITIVE AND OBSOLETE

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

- The size of features such as wires, transistors, and contacts on chips is
shrinking due to advances in semiconductor manufacturing processes.
Process feature sizes refer to the width of the transistors and the width
and spacing of the interconnect on the chip. Feature size is normally
identified by the headline transistor length, which is shrinking from
0.35 microns to 0.18 microns and smaller. This is commonly referred to in
the semiconductor industry as the migration to deep submicron and it
represents a major challenge for all levels of the semiconductor industry
from chip design and design automation to design of manufacturing
equipment and the manufacturing process itself. Shrinkage of transistor
length to such infinitesimal proportions (for reference, the diameter of
the period at the end of this sentence is approximately 400 microns) is
challenging fundamental laws of physics and chemistry.

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

If Cadence is unable to respond quickly and successfully to these
developments and changes, Cadence may lose its competitive position and its
products or technologies may become uncompetitive or obsolete. In order to
compete successfully, Cadence must develop or acquire new products and improve
its existing products and processes on a schedule that keeps pace with
technological developments in its industries. Cadence must also be able to
support a range of changing computer software, hardware platforms and customer
preferences. There is no guarantee that Cadence will be successful in this
regard.

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CADENCE'S FAILURE TO OBTAIN SOFTWARE OR OTHER INTELLECTUAL PROPERTY LICENSES OR
ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS COULD SERIOUSLY HARM ITS BUSINESS

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

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

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

INTELLECTUAL PROPERTY INFRINGEMENT BY OR AGAINST CADENCE COULD SERIOUSLY HARM
ITS BUSINESS

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

- Pay damages to the party claiming infringement;

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

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

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

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

CADENCE OBTAINS KEY COMPONENTS FOR ITS HARDWARE PRODUCTS FROM A LIMITED NUMBER
OF SUPPLIERS

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

FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS COULD HURT CADENCE'S BUSINESS
AND THE MARKET PRICE OF ITS STOCK

Cadence has experienced, and may continue to experience, varied quarterly
operating results. Various factors affect Cadence's quarterly operating results
and some of them are not within Cadence's control, including the mix of products
and services sold, the mix of licenses used to sell products and the timing of
significant orders for its software products and services by customers.
Quarterly operating results are affected by the mix of products and services
sold because there are significant differences in margins from the sale of
hardware and software products and services. For example, based on a three-year
average through 2000, Cadence had realized gross margins on software product
sales of approximately 90% but realized gross margins of approximately 67% on
hardware product sales and approximately 33% on its performance of services. In
the first quarter of 2001, realized gross margins increased to approximately 92%
for software products, decreased to approximately 52% for hardware products, and
remained approximately 33% for services. In addition, Cadence's quarterly
operating results are affected by the mix of licenses entered into in connection
with the sale of software products. Cadence has three basic licensing models:
perpetual, fixed-term, and subscription. Perpetual and fixed-term licenses
recognize a larger portion of the revenue at the beginning of the license period
and subscription licenses recognize revenue ratably over each quarter of the
term of the license. As Cadence customers purchase more software products
pursuant to subscription agreements, future operating results may be lower than
that of comparable quarters in which perpetual and fixed-term licenses were in
greater use for software product transactions. Finally, Cadence's quarterly
operating results are affected by the timing of significant orders for its
software products because a significant number of contracts for software
products are in excess of $5 million. The failure to close a contract for the
sale of one or more orders of Cadence's software products could seriously harm
its quarterly operating results.

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

In addition, Cadence bases its expense budgets partially on its
expectations of future revenue. However, it is difficult to predict revenue
levels or growth. Revenue levels that are below Cadence's expectations could
seriously hurt Cadence's business, operating results, and financial condition.
If revenue or operating results fall short of the levels expected by public
market analysts and investors, the trading price of Cadence common stock could
decline dramatically. Also, because of the timing of large orders and its
customers' buying patterns, Cadence may not learn of revenue shortfalls,
earnings shortfalls or other failures to meet market expectations until late in
a fiscal quarter, which could cause even more immediate and serious harm to the
trading price of Cadence common stock.

Cadence believes that quarter-to-quarter comparisons of the results of
operations of its services business segments may not be meaningful. Therefore,
stockholders should not view Cadence's historical results of operations as
reliable indicators of its future performance. In addition, many of our services
engagements are terminable with little or no advance notice and without penalty.
Since a significant portion of our costs is fixed, we may not be able to reduce
our costs in a timely manner in connection with the unanticipated revenue loss
when one or more projects is terminated.

THE LENGTHY SALES CYCLE OF CADENCE'S PRODUCTS AND SERVICES MAKES THE TIMING OF
ITS REVENUE DIFFICULT TO PREDICT AND MAY CAUSE ITS OPERATING RESULTS TO
FLUCTUATE UNEXPECTEDLY

Cadence has a lengthy sales cycle that generally extends at least three to
six months. The length of our 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 and

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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:

- Customers' budgetary constraints and internal acceptance review
procedures;

- The timing of customers' budget cycles; and

- The timing of customers' competitive evaluation processes.

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

CADENCE HAS RECENTLY COMPLETED AN ACQUISITION, EXPECTS TO ACQUIRE OTHER
COMPANIES, AND MAY NOT SUCCESSFULLY INTEGRATE THEM

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

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

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

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

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

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

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

- Unanticipated costs;

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

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

CADENCE'S INTERNATIONAL OPERATIONS MAY SERIOUSLY HARM ITS FINANCIAL CONDITION
BECAUSE OF SEVERAL WEAK FOREIGN ECONOMIES AND THE EFFECT OF FOREIGN
EXCHANGE RATE FLUCTUATIONS

Cadence has significant operations outside the United States. Cadence's
revenue from international operations as a percentage of total revenue was
approximately 39% for the first quarter of 2001 and 41% for the first quarter of
2000. Cadence also transacts business in various foreign currencies.
Fluctuations in the rate of exchange between the U.S. dollar and the currencies
of countries other than the United States in which Cadence conducts business
could seriously harm its business, operating results, and financial condition.
For example, if there is an increase in the rate at which a foreign currency
exchanges into U.S. dollars, it will take more of the foreign currency to equal
a specified amount of U.S. dollars than before the rate increase. If Cadence
prices its products and services in the foreign currency, it will receive less
in U.S. dollars than it did before the rate increase went into effect. If
Cadence prices its products and services in U.S. dollars, an increase in the
exchange rate will result in an increase in the price for Cadence's products and
services compared to those products of its competitors that are priced in local
currency. This could result in Cadence's
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prices being uncompetitive in markets where business is transacted in the
local currency. Cadence's international operations may also be subject to other
risks, including:

- The adoption and expansion of government trade restrictions;

- Volatile foreign exchange rates and currency conversion risks;

- Limitations on repatriation of earnings;

- Reduced protection of intellectual property rights in some countries;

- Recessions in foreign economies;

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

- Difficulties in managing foreign operations;

- Political and economic instability;

- Unexpected changes in regulatory requirements;

- Tariffs and other trade barriers; and

- U.S. government licensing requirements for export which make licenses
difficult to obtain.

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

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

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

FAILURE TO OBTAIN EXPORT LICENSES COULD HARM CADENCE'S BUSINESS

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

CADENCE'S INABILITY TO COMPETE IN ITS INDUSTRIES COULD SERIOUSLY HARM ITS
BUSINESS

The EDA market and the commercial electronics design and methodology
services industries are highly competitive. If Cadence is unable to compete
successfully in these industries, it could seriously harm Cadence's business,
operating results, and financial condition. To compete in these industries,
Cadence must identify and develop innovative and cost competitive electronic
design automation software products and market them in a timely manner. It must
also gain industry acceptance for its design and methodology services and offer
better strategic concepts, technical solutions, prices and response time, or a
combination of these factors, than those of other design companies and the
internal design departments of electronics manu-

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facturers. Cadence cannot assure you that it will be able to compete
successfully in these industries. Factors that could affect Cadence's ability to
succeed include:

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

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

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

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

In the EDA products industry, Cadence currently competes with three large
companies, Avant! Corporation, Mentor Graphics Corporation, and Synopsys, Inc.,
and numerous smaller companies. Cadence also competes with manufacturers of
electronic devices that have developed or have the capability to develop their
own EDA products. Many manufacturers of electronic devices may be reluctant to
purchase services from independent vendors such as Cadence because they wish to
promote their own internal design departments. In the electronics design and
methodology services industries, Cadence competes with numerous electronic
design and consulting companies as well as with the internal design capabilities
of electronics manufacturers. Other electronics companies and management
consulting firms continue to enter the electronic design and methodology
services industries.

CADENCE'S FAILURE TO ATTRACT, TRAIN, MOTIVATE, AND RETAIN KEY EMPLOYEES MAY HARM
ITS BUSINESS

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

IF CADENCE BECOMES SUBJECT TO UNFAIR HIRING CLAIMS, CADENCE COULD BE PREVENTED
FROM HIRING NEEDED PERSONNEL, INCUR LIABILITY FOR DAMAGES AND INCUR
SUBSTANTIAL COSTS IN DEFENDING ITSELF

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

ERRORS OR DEFECTS IN CADENCE DESIGNS COULD EXPOSE IT TO LIABILITY AND HARM OUR
REPUTATION

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

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

- Failure to attract new customers or achieve market acceptance;

- Diversion of development resources to resolving the problem;

- Increased service costs; and

- Liability for damages.

WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR
EXPENSES

California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. We currently have backup
generators or alternate sources of power for critical operations in the event of
a blackout. If, however, blackouts interrupt our power supply, or the power
supply of our service providers, we may be temporarily unable to continue
operations at our facilities. Any such interruption in our ability to continue
operations at our facilities could damage our reputation, harm our ability to
retain existing customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business and results of
operations. Our current insurance does not provide coverage for any damages we
or our customers may suffer as a result of any interruption in our power supply.

ANTI-TAKEOVER DEFENSES IN CADENCE'S CHARTER, BY-LAWS, AND UNDER DELAWARE LAW
COULD PREVENT AN ACQUISITION OF CADENCE OR LIMIT THE PRICE THAT INVESTORS
MIGHT BE WILLING TO PAY FOR CADENCE COMMON STOCK

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

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

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

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

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

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CADENCE'S INABILITY TO DEAL EFFECTIVELY WITH THE CONVERSION TO THE EURO MAY
NEGATIVELY IMPACT ITS MARKETING AND PRICING STRATEGIES

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

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

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

On September 29, 2000, Cadence entered into two syndicated senior unsecured
credit facilities that allow Cadence to borrow up to $350 million, referred to
as the 2000 Facilities. The 2000 Facilities replace a prior $355 million
revolving credit facility consisting of a $177.5 million two-year revolving
credit facility, which was terminated on September 27, 2000, and a $177.5
million 364-day revolving credit facility, which was terminated immediately
prior to consummation of the 2000 Facilities. One of the new 2000 Facilities is
a $100 million three-year revolving credit facility, referred to as the
Three-Year Facility. The other new facility is a $250 million 364-day revolving
credit facility convertible into a two-year term loan, referred to as the
364-Day Facility. The Three-Year Facility terminates on September 29, 2003. The
364-Day Facility will terminate on September 28, 2001, at which time the 364-Day
Facility may be converted to a two-year term loan with a maturity date of
September 29, 2003, or, at the request of Cadence and with the consent of
members of the bank group that wish to do so, the termination date of the
364-Day Facility may be extended for one additional 364-day period with respect
to the portion of the 364-Day Facility that a consenting bank holds. For both of
the 2000 Facilities, Cadence has the option to pay interest based on LIBOR plus
a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial
covenant, or the higher of (i) the Federal Funds Rate plus 0.50% or (ii) the
prime rate. As a result, Cadence's interest expenses associated with this
borrowing will vary with market rates. In addition, commitment fees are payable
on the unused portion of the Three-Year Facility at rates between 0.25% and
0.34% based on a pricing grid tied to a financial covenant and

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on the unused portion of the 364-Day Facility at a fixed rate of 0.20%. Cadence
may not borrow under the 364-Day Facility at any time that any portion of the
Three-Year Facility remains unused. The 2000 Facilities contain certain
financial and other covenants. At March 31, 2001, there were no borrowings
outstanding under the 2000 Facilities.

The table below presents the carrying value and related weighted average
interest rates for Cadence's interest bearing instruments. All highly liquid
investments with an original maturity of three months or less at the date of
purchase are considered to be cash equivalents; investments with original
maturities between three and 12 months are considered to be short-term
investments. Investments with original maturities greater than 12 months are
considered long-term investments. As of March 31, 2001, all of Cadence's
investments have maturities of less than 12 months. The carrying value
approximated fair value at March 31, 2001.

CARRYING AVERAGE
VALUE INTEREST RATE
------------- -------------
(IN MILLIONS)

Interest Bearing Instruments:
Cash -- fixed rate................................ $54.7 1.33%
Cash -- variable rate............................. 20.4 4.10%
Short-term investments -- fixed rate.............. 10.9 3.94%
Cash equivalents -- variable rate................. 5.9 4.69%
-----
Total interest bearing instruments........ $91.9 2.47%
=====

INTEREST RATE SWAP RISK

Cadence entered into a 4.8% fixed interest rate-swap in connection with its
accounts receivable financing program to modify the interest rate
characteristics of the receivables sold to a financing institution on a non-
recourse basis. As of March 31, 2001, the notional amount payable was $6.5
million that will be amortized in quarterly installments of approximately $2.2
million through October 2001. The estimated fair value at March 31, 2001 was
negligible.

FOREIGN CURRENCY RISK

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

Cadence enters into foreign currency forward exchange contracts and
purchases foreign currency put options with financial institutions primarily to
protect against currency exchange risks associated with existing assets and
liabilities and probable but not firmly committed transactions, respectively.
Forward contracts are not accounted for as hedges and, therefore, the unrealized
gains and losses are recognized in other income, net in advance of the actual
foreign currency cash flows with the fair value of these forward contracts being
recorded as accrued liabilities.

Cadence purchases put options to hedge the currency exchange risks
associated with probable but not firmly committed transactions. Probable but not
firmly committed transactions consist of revenue from Cadence's products and
maintenance contracts in a currency other than the functional currency. These
transactions are made through Cadence's subsidiaries in Ireland and Japan. The
premium costs of the put options are recorded in other current assets while the
gains and losses are deferred and recognized in income in the same period as the
hedged transaction. Gains and losses on accounting hedges realized before the
settlement date of the related hedged transaction are also generally deferred
and recognized in income in the same period as the hedged transaction. Cadence
does not use forward contracts and put options for trading purposes. Cadence's
ultimate realized gain or loss with respect to currency fluctuations will depend
on the currency exchange rates and other factors in effect as the forward
contracts and put options mature.

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The table below provides information as of March 31, 2001 about Cadence's
forward contracts. As of March 31, 2001, there were no put options outstanding.
The information is provided in U.S. dollar equivalent amounts. The table
presents the notional amounts, at contract exchange rates, and the weighted
average contractual foreign currency exchange rates. These forward contracts
mature prior to May 17, 2001.

WEIGHTED
AVERAGE
NOTIONAL CONTRACT
AMOUNT RATE
------------- --------
(IN MILLIONS)

Forward Contracts:
Euro................................................ $45.3 0.92
Swedish krona....................................... 13.1 9.92
Japanese yen........................................ 12.9 109.14
British pound sterling.............................. 4.6 1.45
Canadian dollars.................................... 3.3 1.55
Singapore dollars................................... 1.2 1.76
Hong Kong dollars................................... 0.5 7.80
-----
$80.9
=====
Estimated fair value................................ $(1.3)
=====

While Cadence actively manages its foreign currency risks on an ongoing
basis, there can be no assurance that Cadence's foreign currency hedging
activities will substantially offset the impact of fluctuations in currency
exchange rates on its results of operations, cash flows, and financial position.
On a net basis, foreign currency fluctuations did not have a material impact on
Cadence's consolidated results of operations and financial position during the
quarter ended March 31, 2001. The realized gain (loss) on the forward contracts
as they matured was not material to the consolidated operations of Cadence.

EQUITY PRICE RISK

Cadence repurchases shares of its common stock under stock repurchase
programs for issuance under its Employee Stock Purchase Plan, or ESPP, its 1997
Stock Option Plan, referred to as the 1997 Plan, and its 2000 Stock Option Plan,
referred to as the 2000 Plan, adopted in January 2000. As part of these
repurchase programs, Cadence has purchased and will purchase call options or has
sold and will sell put warrants. The put warrants, if exercised and settled by
physical delivery of shares, would entitle the holder to sell shares of Cadence
common stock to Cadence at a specified price. Similarly, the call options
entitle Cadence to buy shares of Cadence common stock at a specified price.
Cadence has the option to elect "net share settlement", rather than physical
settlement, of put warrants that are exercised; that is, Cadence has the right
to settle the exercised put warrants with shares of Cadence common stock valued
at the difference between the exercise price and the fair value of the stock at
the date of exercise. These transactions may result in sales of a large number
of shares and consequent decline in the market price of Cadence common stock.
Cadence's stock repurchase program includes the following characteristics:

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

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

- Depending on the exercise price of the put warrants and the market price
of Cadence common stock at the time of exercise, "net share settlement"
of the put warrants with Cadence common stock could

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cause Cadence to issue a substantial number of shares to the holder of
the put warrant. The holder may sell these shares in the open market,
which could cause the price of Cadence common stock to fall.

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

The table below provides information as of March 31, 2001 about Cadence's
outstanding put warrants and call options. The table presents the contract
amounts and the weighted average strike prices. The put warrants and call
options expire on various dates through February 2002 and Cadence has the
contractual ability to settle the options prior to their maturity.

2001 2002 ESTIMATED
MATURITY MATURITY FAIR VALUE
--------- --------- -----------
(SHARES AND CONTRACT AMOUNTS IN MILLIONS)

Put Warrants:
Shares.................................. 5.1 1.7
Weighted average strike price........... $ 24.54 $25.13
Contract amount......................... $ 125.9 $ 42.4 $46.3
Call Options:
Shares.................................. 3.8 1.2
Weighted average strike price........... $ 24.80 $25.38
Contract amount......................... $ 93.0 $ 31.7 $ 5.7

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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.

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

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

In an order issued on December 19, 1997, as modified on January 26, 1998,
the District Court entered a preliminary injunction barring Avant! from any
further infringement of Cadence's copyrights in DESIGN FRAMEWORK II(R) software,
or selling, licensing or copying such product derived from DESIGN FRAMEWORK II,
including, but not limited to, Avant!'s ArcCell products. On December 7, 1998,
the District Court issued a further preliminary injunction, which enjoined
Avant! from selling its Aquarius product line. Cadence posted a $10 million bond
in connection with the issuance of the preliminary injunction. On July 30, 1999,
the U.S. Court of Appeals for the Ninth Circuit affirmed the preliminary
injunction.

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

On September 7, 1999, the District Court ruled on the parties' Motions for
Summary Adjudication, and granted in part, and denied in part, each party's
motion regarding the scope of a June 6, 1994 Release Agreement between the
parties. The court held that Cadence's copyright infringement claim against
Avant! is not barred by the release and that Cadence may proceed on that claim.
The court also held that Cadence's trade secret claim based on Avant!'s use of
Cadence's DESIGN FRAMEWORK II source code is barred by the release. On May 15,
2001, the Ninth Circuit will hear oral arguments by both parties on their
appeals from the District Court's order. The trial date has been vacated pending
a decision on the appeal and the outcome of the criminal case, for which the
trial is scheduled to begin in May 2001.

In February 1998, Aptix Corporation and Meta Systems, Inc. filed a lawsuit
against Quickturn Design Systems, Inc. in the U.S. District Court for the
Northern District of California. In this lawsuit, entitled Aptix Corporation and
Meta Systems, Inc. v. Quickturn Design Systems, Civil Action No. C 98-00762 WHA,
Aptix and Meta Systems alleged that Quickturn infringed a U.S. patent owned by
Aptix and licensed to Meta. Quickturn filed a counterclaim requesting the
District Court to declare the Aptix patent invalid in view of the prior art and
unenforceable based on inequitable conduct during the prosecution of the patent.
In June 2000 the District Court entered judgment in favor of Quickturn,
dismissing the complaint and declaring the patent unenforceable. The Court also
granted summary judgment to Aptix denying Quickturn's abuse of process
counterclaim, and Quickturn filed an appeal brief on June 30, 2000. On September
8, 2000 the Court ordered Aptix to pay $4.2 million to Quickturn as
reimbursement to Quickturn of the attorneys' fees and costs it incurred in the
litigation. Aptix has appealed the District's Court's judgment and, in the
meantime, has agreed

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to post a $2 million bond to secure the judgment. The U.S. Court of Appeals for
the Federal Circuit will hear oral arguments on June 7, 2001 on Aptix and Meta's
appeal of the sanctions and claim construction and on Quickturn's appeal of the
denial of its abuse of process counterclaim.

On January 7, 1999, in the suit captioned Mentor Graphics Corporation, et.
al. v. Lobo, et. al., Delaware Chancery Court, New Castle County, Civ. Action
No. 16843-NC ("Mentor v. Lobo"), an amended complaint was filed and served by
Mentor asserting claims against Cadence, Quickturn Design Systems, Inc. and its
Board of Directors for declaratory and injunctive relief for various alleged
breaches of fiduciary duty purportedly owned by Quickturn and its Board of
Directors to Quickturn's shareholders in connection with the merger between
Quickturn and Cadence. Mentor alleged that Cadence aided and abetted Quickturn
and its Board of Directors in those purported breaches. Mentor has not
prosecuted the matter since January 1999. In May 2000, Mentor advised the
Delaware Chancery Court of its objection to the settlement of a companion action
brought on behalf of certain Quickturn shareholders. Mentor further advised the
court that it would seek an award of attorneys' fees related to its prosecution
of the Mentor v. Lobo action. At the request of the court, on July 28, 2000,
Mentor filed its brief in support of its standing to seek such an award.
Cadence, Quickturn and the individual defendants have opposed Mentor's request.
A hearing on the matter was held on February 1, 2001. The court has taken the
matter under submission.

On April 30, 1999, Cadence and several of its officers and directors were
named as defendants in a lawsuit filed in the U.S. District Court for the
Northern District of California, entitled Spett v. Cadence Design Systems, et
al., civil action no. C 99-2082. The action was brought on behalf of a class of
stockholders who purchased Cadence common stock between November 4, 1998 and
April 20, 1999, and alleges violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The lawsuit arises out of Cadence's
announcement of its first quarter 1999 financial results. On September 18, 2000
the District Court granted Cadence's Motion to Dismiss Plaintiffs' Claims with
leave to amend. To date, no amended complaint has been filed. Should an amended
complaint be filed, Cadence and the individual defendants intend to continue
their vigorous defense of the allegations.

In early 1999, Cadence entered into negotiations with Intelect
Communications, Inc., and Intelect's wholly-owned subsidiary, DNA Enterprises,
Inc., with respect to a potential purchase of substantially all the assets of
DNA. The transaction was not consummated and, in July 1999, Intelect and DNA
filed suit against Cadence in a Texas state court alleging breach of contract,
fraud, negligent misrepresentation and breach of fiduciary duty, seeking
unspecified compensatory and punitive damages. Cadence has answered, denying
liability, and discovery has concluded. In February 2001, Cadence filed a motion
for partial summary judgment, which the Court has taken under submission. A
trial date has been schedule for October 2001. Cadence believes that it has
defenses to and disputes the allegations made by Intelect and DNA, including the
allegation that a purchase contract was entered into, and intends to defend the
action vigorously.

On July 21, 1999, Mentor filed suit against Quickturn in the U.S. District
Court for the District of Delaware, alleging that Quickturn's MERCURY(TM)
hardware emulation systems infringe U.S. Patent Nos. 5,777,489 and 5,790,832
allegedly assigned to Mentor. At Quickturn's request, Cadence was added as a
party defendant. Mentor has since asserted that Quickturn's MERCURYPLUS(TM)
emulation systems also infringe U.S. Patent Nos. 5,777,489 and 5,790,832. The
complaint seeks a permanent injunction and unspecified damages. Cadence intends
to vigorously defend itself against these claims. On December 14, 1999, this
action was transferred to the U.S. District Court for the Northern District of
California, and renumbered Civil Action No. C 99-5464 SI.

On February 25, 2000, Cadence and several of its officers were named as
defendants in a lawsuit filed in the U.S. District Court for the Northern
District of California, entitled Maxick v. Cadence Design Systems, Inc., File
No. C 00 0658PJH. The action was brought on behalf of a class of shareholders of
OrCAD, Inc., and alleges violations of Section 14(d)(7) of the Securities
Exchange Act of 1934, as amended, and Rule 14d-10 thereunder. The lawsuit arises
out of Cadence's acquisition of OrCAD, which was completed in August 1999.
Cadence's Motion to Dismiss plaintiffs' claims was denied. Discovery is
continuing. The defendants believe the complaint is without merit and intend to
continue their vigorous defense of the allegations.

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34

On March 24, 2000, Mentor and Meta and several founders of Meta filed suit
against Quickturn and Cadence and a former Quickturn employee in the U.S.
District Court for the Northern District of California, Civil Action No. C
00-01030 WHA. The suit alleges patent infringement of a U.S. Patent allegedly
assigned to Mentor, misappropriation of trade secrets and breach of confidence,
and seeks unspecified damages, injunctive relief and the assignment to Mentor of
a patent previously issued to Quickturn. Cadence intends to vigorously defend
itself against these claims, and has filed a counterclaim for declaratory
judgment of invalidity of several patents allegedly assigned to Mentor.
Following a motion by Cadence, the former Quickturn employee was dismissed as a
party to the action. Discovery in the action has subsequently been consolidated
with discovery in Civil Action No. C 99-5464, the Mentor v. Quickturn suit
transferred from Delaware.

In April 2000, Cadence filed suit against a former design services
customer, IMI Telecommunications, Inc., for breach of contract relating to IMI
Telecommunications' failure to make payments due and fulfill its obligations
under a services agreement. Damages claimed by Cadence were approximately $1
million. The defendant countersued, alleging breach of oral contract,
rescission, negligent misrepresentation and fraud by Cadence and claiming
damages exceeding $100 million and seeking punitive damages exceeding $500
million. Cadence filed a motion to dismiss IMI's counterclaims, and the motion
to dismiss was granted on October 5, 2000. IMI then filed an amended
counterclaim on October 25, 2000, for negligent misrepresentation, seeking
monetary damages in excess of $100 million. On March 19, 2001, the suit was
settled for an undisclosed amount in a confidential 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 (Case
No. C-00-03291) accusing Quickturn and Cadence of infringing U.S. Patent No.
5,574,388, purportedly owned by Mentor and seeking unspecified damages and
injunctive relief. Quickturn and Cadence believe the complaint filed by Mentor
is without substance and that the patent that is the subject of this suit in
invalid and not infringed. Cadence and Quickturn are vigorously defending the
claim. On November 3, 2000, Mentor filed a motion for preliminary injunction,
asking the Court to prohibit the sale of Quickturn's MERCURYPLUS emulation
systems prior to trial of this action. The hearing on that motion was held on
April 17, 2001. The Court took the matter under submission. The parties have
agreed to consolidate this action with Civil Action Nos. C99-5464 and C 00-01030
WHA, described above, for purposes of discovery and pre-trial motions. A trial
date of October 7, 2002 has been set for all three actions.

On November 2, 2000, Mentor and Meta filed a complaint for declaratory
judgment against Quickturn and Cadence in the U.S. District Court for the
District of Oregon (Case No. C-00-1489) seeking a ruling that Mentor's proposed
design verification approach (in which chip designers would use U.S.-based
computer terminals to operate SimExpress emulation systems located overseas)
will not infringe Quickturn's patents and will not violate the permanent
injunction entered by the Oregon District Court on July 7, 1999 in Civil Action
No. C-96-00342. On January 5, 2001, Quickturn and Cadence answered the
complaint. In their answer, Quickturn and Cadence denied Mentor and Meta's
contention, and asserted that Mentor and Meta's complaint lacks subject matter
jurisdiction and is barred by res judicata and collateral estoppel. In January
2001, Quickturn and Cadence filed a Motion to Dismiss the action, based on lack
of subject matter jurisdiction. On May 1, 2001, the Court provisionally granted
Quickturn's motion to dismiss.

On November 22, 2000, a former design services customer, Uniden
Corporation, filed an action for fraud, negligent misrepresentation and breach
of contract in the State Court of Texas against Cadence, and alleged those
causes of action as well as others against Intel Corporation and entities
related to Intel. Uniden seeks compensatory and punitive damages in an
unspecified amount. The suit was filed after Cadence demanded payment of
approximately $1 million for design services rendered to Uniden. Cadence since
has filed a counterclaim to recover the approximate $1 million owed for services
rendered. Intel has filed a motion for forum non conviens requesting that the
action to be moved to California. Cadence has joined in that motion. Cadence
intends to vigorously defend the action brought by Uniden.

On December 28, 2000, a former design services customer, Scanz
Communications, filed an action for fraud, breach of contract, negligence,
intentional interference with prospective advantage, negligent interfer-

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ence with prospective advantage, negligent misrepresentation and unfair business
practices in the Los Angeles Superior Court of California against Cadence and
Tality. Scanz seeks compensatory and punitive damages in an unspecified amount.
The suit was filed after Cadence demanded payment of $4,657,556.17 for design
services rendered to Scanz. Cadence demurred to Scanz' complaint. Cadence's
demurrer was sustained on all causes of actions. Accordingly, Scanz's complaint
was dismissed on March 13, 2001, with leave to amend. Cadence and Tality filed a
Complaint against Scanz in April 2001 for recovery of the $4,657,556.17 owed.
Scanz filed its First Amended Complaint on April 2, 2001, to which Cadence
demurred on May 7, 2001. The hearing on Cadence's demurrer to Scanz's First
Amended Complaint is set for June 25, 2001. Cadence filed a cross-complaint
against Scanz on May 8, 2001.

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In connection with Cadence's acquisition of CadMOS Design Technology, Inc.
completed in February 2001, Cadence has or will issue up to an aggregate of
4,085,094 shares of its common stock as consideration for all of the outstanding
shares of capital stock, and assumption of options and warrants of CadMOS. Such
shares are being issued pursuant to an exemption from registration under Section
3(a)(10) of the Securities Act of 1933, as amended. For further discussion, see
"Acquisitions" in the notes to condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q.

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:

None.

(b) Reports on Form 8-K:

On January 8, 2001, the Registrant filed a Current Report on Form 8-K
reporting Cadence's definitive agreement to acquire CadMOS Design Technology,
Inc., a Delaware corporation.

On March 5, 2001, the Registrant filed a Current Report on Form 8-K
reporting the completion of Cadence's acquisition of CadMOS Design Technology,
Inc.

On April 18, 2001, the Registrant filed a Current Report on Form 8-K
reporting the withdrawal by Tality Corporation of its Registration Statement on
Form S-1 under the Securities Act of 1933, as amended.

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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: May 14, 2001 By: /s/ H. RAYMOND BINGHAM
------------------------------------
H. Raymond Bingham
President, Chief Executive Officer,
and Director

DATE: May 14, 2001 By: /s/ WILLIAM PORTER
------------------------------------
William Porter
Senior Vice President
and Chief Financial Officer