TALITY CORP, S-1/A, 2000-09-28

TALITY CORP
S-1/A, 2000-09-28
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 2000.

REGISTRATION NO. 333-41552
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--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
------------------------

AMENDMENT NO. 4

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

TALITY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE NO. 7373 77-0548279
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>

555 RIVER OAKS PARKWAY, BUILDING 3
SAN JOSE, CALIFORNIA 95134
(408) 943-1234
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

ROBERT P. WIEDERHOLD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TALITY CORPORATION
555 RIVER OAKS PARKWAY, BUILDING 3
SAN JOSE, CALIFORNIA 95134
(408) 943-1234
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

COPIES TO:

<TABLE>
<S> <C> <C>
GREGORY J. CONKLIN, ESQ. R. L. SMITH MCKEITHEN, ESQ. JOHN L. SAVVA, ESQ.
LISA A. FONTENOT, ESQ. CADENCE DESIGN SYSTEMS, INC. KRISTEN SMITH DAYLEY, ESQ.
GIBSON, DUNN & CRUTCHER LLP 2655 SEELY AVENUE, BUILDING 5 SULLIVAN & CROMWELL
ONE MONTGOMERY STREET SAN JOSE, CALIFORNIA 95134 1870 EMBARCADERO ROAD,
TELESIS TOWER PALO ALTO, CALIFORNIA 94303
SAN FRANCISCO, CALIFORNIA 94104
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE(1)
------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock, par
value $.001 per share....... 14,662,500 $12.00 $175,950,000 $46,451
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended. Previously
paid.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2

THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.

Subject to Completion. Dated September 28, 2000.

12,750,000 Shares

[Tality Logo]
Class A Common Stock
------------------------
This is an initial public offering of shares of Class A common stock of
Tality Corporation. All of the 12,750,000 shares of Class A common stock are
being sold by Tality Corporation.

Immediately following the offering, Tality Corporation will be a holding
company whose principal assets will be its 1% general partnership interest and
approximately 16.7% limited partnership interest in Tality, LP. At that time,
Cadence Design Systems, Inc. will own an approximately 82.3% limited partnership
interest in Tality, LP and our only outstanding share of Class B common stock.
Through its ownership of our Class B common stock, Cadence will have
approximately 82.3% of the voting power of all outstanding shares of our voting
stock and will be able to control all matters requiring stockholder approval.

Prior to this offering, there has been no public market for the Class A
common stock. Tality estimates that the initial public offering price per share
will be between $10.00 and $12.00. Application has been made for quotation of
the Class A common stock on the Nasdaq National Market under the symbol "TLTY".

See "Risk Factors" beginning on page 9 to read about factors you should
consider before buying shares of Class A common stock.
------------------------

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY
OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------

<TABLE>
<CAPTION>
Per
Share Total
------ ------------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Tality........................ $ $
</TABLE>

To the extent that the underwriters sell more than 12,750,000 shares of
Class A common stock, the underwriters have the option to purchase up to an
additional 1,912,500 shares from Tality Corporation at the initial public
offering price less the underwriting discount.
------------------------
The underwriters expect to deliver the shares of Class A common stock in
New York, New York, on , 2000.

GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
UBS WARBURG LLC
SG COWEN
------------------------
Prospectus dated , 2000.
<PAGE> 3

Inside cover graphics to depict the stages of the electronics design process
generally, and identify the participation by Tality in the steps of the design
process. The steps of the design process represented will include:

ELECTRONIC PRODUCT REALIZATION:

Tality Corporation provides innovative engineering services that extend
from product concept through manufacturing to help communications companies
realize their product visions.

- concept

We assist clients in refining a product concept and mapping
technology options.

- specification

We map our clients' product concept into technology, partition it
into software and hardware, and define how each component will
operate.

- implementation

We physically implement specifications into advanced integrated
circuits, complex printed circuit boards and complete systems.

- prototype

We work with third-party manufacturers to develop and deliver
product prototypes for testing to identify and resolve remaining
design issues.

- manufacturing support

We assist clients through the process of moving to volume
manufacturing.
<PAGE> 4

PROSPECTUS SUMMARY

This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read this entire prospectus carefully,
including the section entitled "Risk Factors" and the financial statements and
notes to those statements, before you decide to buy our Class A common stock.

TALITY

We are a leading global provider of innovative engineering services for the
design of complex electronic systems and integrated circuits, or chips. We focus
our offerings primarily on the growing communications market. Our targeted
segments of this market include wireline and wireless communications
infrastructure, high-speed data access equipment and consumer communication
products. Our engineering expertise encompasses all aspects of product design,
including complete system, sub-system and advanced integrated circuit design.
The breadth of this expertise extends from product conceptualization through
implementation for production manufacturing.

We are the world's largest independent electronics design services
provider, with over 1,000 engineers located at 14 design sites in the United
States, Canada, the United Kingdom and India. Since the beginning of 1998, we
have completed over 500 design projects. Our clients include both leading and
emerging electronic systems companies and integrated circuit manufacturers. Our
top three clients by revenue for 1999 were Texas Instruments, Unisys and Philips
Business Communications.

In recent years, proliferation of the Internet and the increasing need for
connectivity have driven growth in the worldwide demand for communications
products. This demand has increased technological and business complexity,
competition, resource constraints and the need to introduce products to market
quickly. To address these issues, electronic products manufacturers and chip
companies increasingly rely on outsourcing to provide expertise in areas that
fall outside of their core competencies and areas of competitive
differentiation. Examples of this trend include the expanded role of electronics
contract manufacturers, integrated circuit foundries and, more recently,
electronics design services and intellectual property companies.

Our design solutions enable clients to address the pressures of increasing
business and technological complexity, growing competition, resource constraints
and the need to decrease time-to-market. Our engineering team has extensive
expertise in our targeted segments of the communications market. We also have
significant experience in systems design, embedded software and firmware design,
printed circuit board and chip-level design and full systems integration. In
addition, through our internal research and development efforts and our design
projects, we have accumulated a growing portfolio of intellectual property that
we may offer clients as part of our electronics design services. To every design
engagement, we bring an established design infrastructure, comprised of the
design automation tools, computing infrastructure and laboratory environments
necessary for the development of clients' products. We also assist clients by
providing project management services to address the growing complexities of the
design phase of product development and offer assistance in the management of
clients' supply chains through the application of our in-depth knowledge of and
experience in technical and business management processes.

Our goal is to be the preferred global design partner and intellectual
property provider for electronic products companies and integrated circuit
manufacturers in communications-related markets. To achieve this objective, we
intend to:

- target segments of the electronics market that we believe offer
opportunities for rapid and sustainable growth;

- grow our base of intellectual property to generate complementary and
recurring revenue streams and to enhance operating efficiencies;

1
<PAGE> 5

- strengthen our relationships with select clients to develop and maintain
a continuous, strategic role in their product development activities and
participate in their commercial success on an incentive basis;

- develop an extensive supply chain network to enhance our ability to
assist clients in the management of their supply chains;

- grow through acquisitions of complementary businesses and technologies;
and

- expand our sales and marketing activities.

OUR RELATIONSHIP WITH CADENCE

Tality Corporation is a holding company whose principal assets immediately
after completion of this offering will be a 1% general partnership interest and
an approximately 16.7% limited partnership interest in Tality, LP. At that time,
Tality, LP's partners will consist of Tality Corporation and a wholly-owned
subsidiary of Cadence.

Immediately after completion of this offering, Cadence will own the only
outstanding share of Class B common stock of Tality Corporation and an
approximately 82.3% limited partnership interest in Tality, LP. Through its
ownership of Class B common stock, Cadence will have voting rights equal to its
percentage ownership in Tality, LP. As a result, its voting power in Tality
Corporation associated with its ownership of Class B common stock will be
approximately 82.3%. With the 510,000 shares of Class A common stock held by
Cadence Design Systems, Inc. and the share of Class B common stock held by
Cadence Holdings, Inc., Cadence will have total voting power in Tality
Corporation of approximately 82.9% immediately after completion of this
offering. The special voting rights associated with Cadence's share of Class B
common stock are not transferable by Cadence except to its subsidiaries. Except
for its special voting rights, and the right to convert into Class C common
stock as described below, the Class B common stock has the same rights as our
Class A common stock.

The following chart describes the relationships of Cadence and Tality
immediately after completion of the offering:

LOGO

2
<PAGE> 6

Cadence will have the right at any time to exchange each of its limited
partnership units in Tality, LP for, and convert its share of Class B common
stock into, one share of Class A common stock. Partnership units held by Tality
Corporation or any of its subsidiaries are not exchangeable into shares of Class
A common stock. While Cadence currently has no plans to distribute its equity
interests in Tality Corporation and Tality, LP to Cadence stockholders, the
amended and restated certificate of incorporation of Tality Corporation and the
limited partnership agreement of Tality, LP contain provisions intended to
preserve flexibility for such a transaction in the future. If Cadence decides in
the future to effect a tax-free distribution of its equity interests in Tality
Corporation and Tality, LP to Cadence stockholders, Cadence will have the right
to convert its share of Class B common stock into, and exchange all of its
partnership units in Tality, LP for, an equal number of shares of our Class C
common stock. The Class C common stock may only be issued in connection with a
tax-free distribution. In general, the Class C common stock will have voting
rights intended to provide Cadence, and its stockholders who receive shares of
Class C common stock in the tax-free distribution, with 80% of the fully-diluted
voting power of Tality Corporation. In all other respects, the Class C common
stock will have the same rights as our Class A common stock.

Cadence has agreed with the underwriters not to transfer its Class B common
stock and limited partnership units in Tality, LP, or any Class A common stock
or Class C common stock acquired by it, through the date that is 180 days after
the date of this prospectus, except with the prior written consent of Goldman,
Sachs & Co. After the expiration of this 180-day period, Cadence will no longer
be restricted from transferring any of its common stock of Tality Corporation or
limited partnership units in Tality, LP to the public or to its stockholders.

We expect that the separation of our business from Cadence will be
substantially completed prior to the completion of this offering. In connection
with the separation, prior to completion of this offering, we will enter into
agreements with Cadence providing for, among other things:

- the transfer by Cadence to us of assets and liabilities relating to our
business;

- the allocation of intellectual property between us and Cadence; and

- various ongoing relationships between us and Cadence.

The agreements regarding the separation of our business operations from
those of Cadence are described more fully in the section of this prospectus
entitled "Arrangements Between Tality and Cadence". The terms of these
agreements, which are being negotiated in the context of a parent-subsidiary
relationship, may be more or less favorable to us than if they had been
negotiated with unaffiliated third parties. The assets and liabilities to be
transferred to us by Cadence are described more fully in our consolidated
financial statements and notes to those statements that are also included
elsewhere in this prospectus.

OUR CORPORATE INFORMATION

Tality Corporation was incorporated on July 13, 2000 in the State of
Delaware.

Our principal executive offices are located at 555 River Oaks Parkway,
Building 3, San Jose, California 95134, and our telephone number at that address
is (408) 943-1234.

TRADEMARKS

We have applied for trademark registrations in the United States and
several other countries for the name Tality. This prospectus contains other
product names, trade names and trademarks that belong to us or to other
organizations.
------------------------

Unless specified otherwise or the context otherwise requires, "Tality",
"we", "us" and "our" refer to Tality Corporation and its subsidiaries, including
Tality, LP. When this prospectus discusses the historical business of Tality,
references to Tality include all predecessor companies that operated
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<PAGE> 7

the business currently conducted by the Cadence design services group and
Tality, LP immediately following its separation from Cadence.

Unless specified otherwise or the context otherwise requires, "Cadence"
refers to Cadence Design Systems, Inc., a Delaware corporation, and its
subsidiaries other than Tality Corporation and its subsidiaries, including
Tality, LP.

Unless specified otherwise, this prospectus:

- gives effect to the filing of Tality Corporation's amended and restated
certificate of incorporation;

- gives effect to our separation from Cadence; and

- assumes that the underwriters have not exercised their option to purchase
additional shares of our Class A common stock in the offering.

4
<PAGE> 8

THE OFFERING

CLASS A COMMON STOCK
OFFERED.................. 12,750,000 shares

COMMON STOCK TO BE
OUTSTANDING AFTER THIS
OFFERING:

CLASS A COMMON STOCK..... 15,120,000 shares

CLASS B COMMON STOCK..... 1 share

CONTROL BY CADENCE......... Cadence will own the only share of Class B common
stock outstanding immediately following this
offering. By virtue of Cadence's ownership of our
Class B common stock, Cadence will be able to
control our corporate actions, such as electing our
board of directors, amending our certificate of
incorporation and controlling all fundamental
corporate decisions.

LIMITED PARTNERSHIP UNITS
TO BE OUTSTANDING AFTER
THIS OFFERING............ 84,367,801 units

Each limited partnership unit not owned by Tality
Corporation or any of its subsidiaries is
exchangeable for one share of Class A common stock.
Each share of Class B common stock is convertible
into one share of Class A common stock. Limited
partnership units owned by Tality Corporation or
any of its subsidiaries are not exchangeable for
shares of Class A common stock.

If Cadence Holdings, Inc. were to convert its share
of Class B common stock into, and exchange all of
its limited partnership units for, Class A common
stock, it would own 70,100,001 shares of Class A
common stock, or approximately 82.3% of our
outstanding Class A common stock, or 80.5% if the
underwriters' option to purchase additional shares
of our Class A common stock is exercised in full.
Together with the 510,000 shares of Class A common
stock held by Cadence Design Systems, Inc., upon
such conversion and exchange Cadence would own
approximately 82.9% of our outstanding Class A
common stock, or 81.0% if the underwriters' option
to purchase additional shares of our Class A common
stock is exercised in full.

If all limited partnership units, other than those
owned by Tality Corporation or any of its
subsidiaries, were exchanged for, and the share of
Class B common stock was converted into, Class A
common stock, there would be 85,220,001 shares of
Class A common stock outstanding immediately after
this offering.

5
<PAGE> 9

USE OF PROCEEDS:
BY TALITY CORPORATION.... To purchase additional partnership interests in
Tality, LP, resulting in a 1% general partnership
interest and an approximately 16.7% limited
partnership interest.

BY TALITY, LP............ For general partnership purposes, including working
capital, capital expenditures, sales and marketing
activities and potential acquisitions and
investments.

PROPOSED NASDAQ NATIONAL
MARKET SYMBOL............ TLTY

VOTING RIGHTS.............. Each holder of Class A common stock is entitled to
one vote per share.

A holder of Class B common stock is entitled to a
number of votes equal to the total number of shares
of Class B common stock plus the total number of
limited partnership units of Tality, LP owned by
such holder.

Holders of our Class A and Class B common stock
generally will vote together as a single class on
all matters.

The information set forth above:

- includes approximately 1,640,000 shares of Class A common stock owned by
certain Cadence employees and 220,000 shares of Class A common stock
owned by Tality directors as of September 28, 2000;

- includes 510,000 shares of Class A common stock owned by Cadence; and

- excludes 13,124,840 shares of Class A common stock issuable upon the
exercise of outstanding stock options with a weighted average exercise
price of $6.25 per share and 4,830,160 shares of Class A common stock
currently available for future issuance under our 2000 Equity Incentive
Plan, our 2000 Broad Based Equity Incentive Plan and our Directors Stock
Option Plan.

6
<PAGE> 10

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The summary financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto
appearing elsewhere in this prospectus. The following table sets forth the
historical summary data for Tality, LP for the years ended December 30, 1995,
December 28, 1996, January 3, 1998, January 2, 1999 and January 1, 2000 and the
six months ended July 3, 1999 and July 1, 2000. Also set forth below are the pro
forma statements of operations data for Tality Corporation and Tality, LP on a
consolidated basis for the year ended January 1, 2000 and the six months ended
July 1, 2000.

The historical financial information included in this prospectus may not be
indicative of our future performance and does not necessarily reflect what our
financial position and results of operations would have been had we operated as
a separate, stand-alone entity during the periods presented.

The pro forma statements of operations data set forth the consolidated
results of Tality Corporation and Tality, LP on a pro forma basis and reflect
the following:

- the structure of Tality Corporation and Tality, LP upon completion of
this offering, the receipt by Tality Corporation of net proceeds of
approximately $126.8 million from this offering and the purchase by
Tality Corporation of additional partnership interests of Tality, LP,
resulting in a 1% general partnership interest and an approximately 16.7%
limited partnership interest;

- the allocation of approximately 82.3% of the net losses of Tality, LP to
Cadence; and

- the net losses attributable to Tality Corporation.

<TABLE>
<CAPTION>
TALITY, LP TALITY CORPORATION
--------------------------------------------------------------------------- -------------------------------
YEAR ENDED SIX MONTHS ENDED SIX MONTHS
----------------------------------------------------- ------------------- YEAR ENDED ENDED
DEC. 30, DEC. 28, JAN. 3, JAN. 2, JAN. 1, JULY 3, JULY 1, JANUARY 1, 2000 JULY 1, 2000
1995 1996 1998 1999 2000 1999 2000 PRO FORMA PRO FORMA
-------- -------- -------- --------- -------- -------- -------- --------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Revenue.............. $ 47,249 $ 88,400 $ 90,690 $ 105,262 $128,873 $ 57,520 $ 90,284 $128,873 $ 90,284
Costs and expenses... 66,507 119,480 151,367 255,097 189,190 92,384 115,371 189,190 115,371
Loss from
operations......... (19,258) (31,080) (60,677) (149,835) (60,317) (34,864) (25,087) (60,317) (25,087)
Loss before minority
interest........... (19,457) (31,609) (61,234) (151,260) (62,253) (35,741) (25,022) (62,253) (25,022)
Minority interest.... -- -- -- -- -- -- -- 51,234 20,593
Net loss............. $(19,457) $(31,609) $(61,234) $(151,260) $(62,253) $(35,741) $(25,022) $(11,019) $ (4,429)
Pro forma basic and
diluted net loss
per share.......... $ (0.73) $ (0.29)
Weighted average
shares used in
computing pro forma
basic and diluted
net loss per
share.............. 15,120 15,120
</TABLE>

7
<PAGE> 11

The pro forma balance sheet data for the financial position of Tality, LP
below gives effect to the retention by Cadence of all of Tality, LP's working
capital except the current portion of capital lease obligations and deferred
revenue, as provided in the amended and restated master separation agreement.

The pro forma as adjusted balance sheet data reflect, for the consolidated
financial position of Tality Corporation and Tality, LP:

- the reclassification of the equity interest of Cadence to minority
interest; and

- the receipt of the estimated net proceeds of this offering based on an
assumed initial public offering price of $11 per share and after
deducting an assumed underwriting discount and estimated offering
expenses payable by us.

- the receipt of proceeds of $1,375,000 from the purchase by three
directors of 220,000 restricted shares of Class A common stock for $6.25
per share under the 2000 Equity Incentive Plan.

<TABLE>
<CAPTION>
AT JULY 1, 2000
-------------------------------------------------------
TALITY
TALITY TALITY, LP CORPORATION
CORPORATION TALITY, LP PRO PRO FORMA
ACTUAL ACTUAL FORMA AS ADJUSTED
----------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $ -- $ -- $ -- $128,183
Working capital.......................... -- 40,744 (6,521) 121,662
Total assets............................. -- 156,478 80,105 208,288
Long-term liabilities.................... -- 3,242 3,242 3,242
Minority interest........................ -- -- -- 163,386
Cadence's net investment................. -- 117,607 70,342 --
Total stockholders' equity............... -- -- -- 35,139
</TABLE>

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

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<PAGE> 12

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or results of operations could be harmed. If that
happens, the trading price of our Class A common stock could decline, and you
may lose all or part of your investment. Many of the risk factors below relate
to the business of Tality, LP. These risks also affect Tality Corporation
because Tality Corporation's sole assets immediately after the offering will be
its partnership interests in Tality, LP.

RISKS RELATED TO OUR BUSINESS

OUR ELECTRONICS DESIGN SERVICES BUSINESS HAS A LIMITED OPERATING HISTORY, HAS
HISTORICALLY SUFFERED LOSSES AND MAY NEVER ACHIEVE PROFITABILITY.

We began operating in 1995 as the electronics design services group within
Cadence and will continue to operate our business within Cadence until
completion of the separation, which we expect to be substantially complete upon
the completion of this offering. We have no long-term experience in offering
electronics design services and licensing our intellectual property. We have
historically incurred losses and we may not succeed in generating sufficient
revenue to achieve profitability. We incurred net losses of $61.2 million in
1997, $151.3 million in 1998 and $62.3 million in 1999. We expect our expenses
to increase substantially in connection with our separation from Cadence and as
we continue to expand our operations. In particular, we will be required to
incur new fixed costs to build a business and administration infrastructure
separate from Cadence and additional expenses associated with hiring engineering
professionals, research and development and sales and marketing activities. The
rate of growth of our revenue over prior periods may not continue or increase,
and our separation and expansion may prove more expensive than we anticipate. If
we fail to increase our revenue to offset our expenses, we will continue to
experience losses.

IF OUR ELECTRONICS DESIGN SERVICES DO NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE,
WE MAY BE UNABLE TO INCREASE OUR REVENUE.

To increase our revenue, we will need to successfully market our
electronics design services, including our proprietary technologies, to existing
and potential clients, particularly communications-related products companies
and integrated circuit manufacturers that could choose to develop and maintain
product design capabilities internally. If we do not develop technologies that
meet the needs of clients and successfully promote the use of external design
services, we may be unable to increase our revenue. The market for independent
electronics design services is new, making it difficult to determine the size
and growth of the market and to predict how this market will develop. We face
numerous obstacles in marketing our services to prospective clients, including:

- the time and expense entailed in building relationships with these
companies;

- intense competition with the internal design teams of potential clients
and factors that may make it more cost-effective for them to use their
internal resources;

- difficulties in establishing technical and business credibility to
convince companies to rely on us for critical design expertise and
technology;

- difficulties in persuading companies to bear the development costs
associated with our services and technologies;

- the desire of many prospective clients to retain sole management of their
supply chain for product development;

- the desire of clients to retain rights to all intellectual property
developed in the design process; and

- rapid changes in technology and industry standards with which we must be
technically competent.

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<PAGE> 13

COMPETITION FOR QUALIFIED PERSONNEL IN OUR INDUSTRY IS INTENSE, AND OUR BUSINESS
COULD SUFFER IF WE ARE NOT ABLE TO SUCCESSFULLY ATTRACT AND RETAIN KEY EMPLOYEES
AND QUALIFIED PROFESSIONALS.

If we are unable to retain the services of our key personnel and hire and
retain additional qualified personnel, we may be unable to manage our business
effectively and our operating results would suffer. We depend substantially on
the continued services of Robert P. Wiederhold, our president and chief
executive officer, other members of senior management, design services engineers
and sales personnel. Mr. Wiederhold is our only employee with whom we have an
employment agreement. As our success depends on our ability to develop and
introduce new technology and respond to changing design environments and
standards, retaining qualified engineers with the requisite education and
experience will be fundamental to our growth. 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.

In addition, our success will depend on our ability to hire additional
experienced engineers, senior management and sales and marketing personnel. The
robust economy and opportunities available in other high technology companies
has made, and could continue to make, recruiting and retaining employees,
especially design engineers, more difficult for us. 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 design sites. 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.

WE HAVE EXPERIENCED SIGNIFICANT VARIATIONS IN OUR PAST QUARTERLY OPERATING
RESULTS. VARIATIONS IN OUR FUTURE QUARTERLY OPERATING RESULTS COULD CAUSE THE
MARKET PRICE OF OUR CLASS A COMMON STOCK TO DECLINE.

We have experienced, and may continue to experience, significant variations
in our quarterly operating results. For example, since the beginning of 1998,
our quarterly gross margins have fluctuated between (29)% of revenue and 22% of
revenue. If our revenue or operating results fall short of the levels expected
by public market analysts and investors, the trading price of our Class A common
stock could decline dramatically. As we expand our operations, we expect that
operating expenses, particularly the cost of hiring engineering professionals,
research and development costs and sales and marketing costs, will continue to
increase. In addition, we base our expense budgets partially on our expectations
of future revenue, which is difficult to predict. A significant portion of our
expenses is fixed, at least in the short-term. If our revenue falls below the
levels we expect or decreases and we are unable to reduce our costs rapidly, our
operating results would suffer. For example, during 1997, we rapidly expanded
our engineering resources by hiring additional design engineers and establishing
new design sites in anticipation of a significantly increased number of new
design services engagements. However, in 1998, new design services engagements
fell short of levels that we had anticipated, which harmed our operating results
in 1998 and 1999.

In addition, many of our client 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors Affecting Operating Results" for a discussion
of factors that may cause our quarterly operating results to fluctuate.

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THE LENGTHY SALES CYCLE OF OUR SERVICES AND TECHNOLOGIES MAKES THE TIMING OF OUR
REVENUE DIFFICULT TO PREDICT AND MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE
UNEXPECTEDLY.

We have a lengthy sales cycle that generally extends approximately three to
five 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 client education and
approval process. Consequently, we may incur substantial expenses and devote
significant management effort and expense to develop potential relationships
that do not result in agreements or revenue and may prevent us from pursuing
other opportunities.

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

- clients' budgetary constraints and internal acceptance review procedures;

- the timing of clients' budget cycles; and

- the timing of clients' competitive evaluation processes.

If clients 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.

WE RELY ON FIXED PRICE ARRANGEMENTS FOR A SIGNIFICANT PORTION OF OUR
ENGAGEMENTS, WHICH ARRANGEMENTS MAY NOT BE PROFITABLE IN THE LONG TERM.

We derive a significant portion of our revenue from arrangements under
which a fixed fee is agreed upon in advance of performing our services. If we
are unable to accurately price our design services delivered under fixed price
arrangements, our business may not become profitable and the market price of our
Class A common stock could decrease. Under these arrangements, we must make
assumptions and estimates regarding the time and resources that we will need to
devote to a project. If we underestimate the resources necessary to complete a
fixed price project, we may be required to complete the project at a loss or at
a significantly lower profit margin. In addition, if we underestimate the time
necessary to complete a project, we may be required to recognize revenue at a
later date than we anticipated, which could have a negative impact on our
quarterly results of operations.

IF WE ARE UNABLE TO DERIVE SIGNIFICANT REVENUE FROM OUR INTELLECTUAL PROPERTY,
WE MAY NOT BE ABLE TO OFFSET OUR RESEARCH AND DEVELOPMENT COSTS IN ACCORDANCE
WITH OUR EXPECTATIONS.

As part of our strategy, we will be developing proprietary technology for
license in conjunction with our design services and will increasingly focus on
generating revenue through royalty arrangements under which fees will be paid
for the use of our intellectual property. We have recently begun to derive
revenue from licensing our technology, including technology developed at our own
direction and expense and technology developed in the course of performing
services for clients. We expect research and development expenses to increase as
licensable technologies and license fees become a source of revenue. Despite our
increased spending on research and development activities, we cannot be certain
that our licenses or royalty arrangements will generate significant revenue over
the long term.

BECAUSE THE COMMUNICATIONS AND INTEGRATED CIRCUIT MARKETS IN WHICH WE COMPETE
EXPERIENCE RAPID TECHNOLOGICAL CHANGE, OUR BUSINESS WILL SUFFER IF WE ARE UNABLE
TO ADAPT OUR SERVICE OFFERINGS TO THESE TECHNOLOGICAL CHANGES QUICKLY AND IN A
COST-EFFECTIVE MANNER.

The communications and integrated circuit markets are characterized by
rapid technological change, the adoption of new standards, frequent new product
introductions and changes in client and end user requirements. We may be unable
to respond quickly or effectively to these developments.

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<PAGE> 15

The need to continuously adapt our service offerings and invest in our
intellectual property to respond to these changes may require us to incur
significant expenses and may disrupt our ability to deliver our services in a
timely manner as we transition to new technologies and standards. The
introduction of new services by competitors, market acceptance of products based
on new or alternative technologies or the emergence of new industry standards
could render our existing or future service offerings uncompetitive, which would
harm our operating results.

WE FACE INTENSE COMPETITION AND EXPECT NEW ENTRANTS TO OUR INDUSTRY, AND OUR
FAILURE TO COMPETE SUCCESSFULLY COULD PREVENT US FROM INCREASING REVENUE AND
BECOMING PROFITABLE.

The electronics design services industry is highly competitive, and the
market it serves is experiencing rapid technological developments, changes in
industry standards, varying client requirements and frequent new product
introductions and improvements. If we are unable to compete effectively, our
ability to increase our revenue and market share will be harmed and our
operating results will suffer.

The electronics design services industry is relatively new, and electronic
products companies and integrated circuit manufacturers are only beginning to
purchase these services from outside vendors. In order to compete successfully,
we must gain industry acceptance for our design services and proprietary
technology and deliver design capabilities superior to those delivered by the
internal design departments of potential clients and those of other design
companies. We may not be successful in competing against existing or new
competitors.

We face competition from:

- numerous existing small- and medium-size engineering services companies;

- design services organizations of electronic products company suppliers,
integrated circuit foundries, electronics manufacturing service
providers, intellectual property companies, application specific
integrated circuit vendors and real-time operating systems companies, any
of which may decide to increase their design services offerings to
complement their existing design products and services; and

- professional engineering services firms that may enter the market.

In addition, as we increase our focus on licensing our intellectual property, we
expect competition with intellectual property companies to increase.

IF OUR TARGETED SEGMENTS OF THE COMMUNICATIONS MARKET DEVELOP MORE SLOWLY THAN
WE EXPECT, OUR REVENUE WILL NOT GROW AS FAST AS ANTICIPATED, IF AT ALL.

Many of our targeted segments of the communications market are either
emerging or rapidly changing, and the potential size of these market segments
and the timing of their development are difficult to predict. If these targeted
segments develop more slowly than we expect, our ability to increase revenue may
be limited. We depend, in part, upon the broad acceptance by businesses and
consumers of a wide variety of consumer electronics. Our ability to achieve this
broad acceptance will depend on many factors, including:

- the development of content and applications for consumer appliances and
devices;

- the willingness of large numbers of businesses and consumers to use these
devices to perform functions currently carried out manually or by
traditional personal computers; and

- the evolution of industry standards facilitating use of the Internet in
consumer electronics devices through wired and wireless
telecommunications systems, satellite or cable.

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<PAGE> 16

A SIGNIFICANT PORTION OF OUR HISTORICAL GROWTH HAS RESULTED FROM ACQUISITIONS,
AND IF WE ARE UNABLE TO IDENTIFY AND MAKE FUTURE ACQUISITIONS, OUR ABILITY TO
EXPAND OPERATIONS AND INCREASE REVENUE MAY SUFFER.

In the past, a significant portion of our growth has been attributable to
the acquisition of other businesses and technologies. Although we currently have
no specific understandings, commitments or agreements with respect to any
acquisition, we expect that acquisitions of complementary businesses and
technologies will continue to play a key role in our ability to expand our
operations, hire additional personnel and increase our revenue. If we are unable
to identify suitable targets for acquisition or complete acquisitions on
acceptable terms, we may fail to expand our services offerings and our revenue
may increase more slowly than we expect. Even if we are able to identify and
complete acquisitions, we may be unable to realize the benefits anticipated as a
result of these acquisitions.

ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND ADVERSELY AFFECT OUR
FINANCIAL CONDITION OR OUR OPERATIONS.

Although we currently have no specific understandings, commitments or
agreements for any acquisition, we have acquired other businesses before and
expect to make investments in or acquisitions of complementary businesses and
technologies in the future. We cannot be certain that we would successfully
integrate any businesses, technologies or personnel that we might acquire, and
any acquisitions might divert management's attention away from our core
business. Growth through acquisition involves a number of risks, including:

- difficulties in combining the acquired operations or technology with our
company;

- the assumption of unanticipated liabilities;

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

- potential loss of key personnel of an acquired business;

- unanticipated costs;

- adverse effects on existing relationships with suppliers and clients; and

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

We are also likely to issue additional equity in connection with future
acquisitions, which could result in dilution of our stockholders' equity
interests. Fluctuations in our stock price may make acquisitions more expensive
or prevent us from being able to complete them on acceptable terms.

OUR RECENT GROWTH HAS PLACED A STRAIN ON OUR MANAGEMENT AND OPERATIONAL
RESOURCES, AND, IF WE DO NOT EFFECTIVELY MANAGE OUR GROWTH AND INTEGRATE
NEWLY-HIRED KEY PERSONNEL, WE MAY BE UNABLE TO PROVIDE ADEQUATE SERVICES AND
SUPPORT TO CLIENTS AND EXECUTE OUR BUSINESS STRATEGY.

Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, technical, operational and financial
resources. If we do not effectively manage our growth, we may be unable to
deliver services in a timely fashion, fulfill existing client commitments or
attract and retain clients. We have grown from approximately 850 employees at
June 30, 1999 to over 1,200 employees as of September 28, 2000. We have recently
hired and continue to hire new members of our management team, including our
chief financial officer, who joined us in July 2000. We have also recently hired
several other individuals who serve important operational, marketing and sales
functions. These individuals have only worked together a short time and have
limited experience with us and our operations. Our success will depend to a
significant extent on the ability of new key employees to integrate themselves
into our daily operations and to work effectively as a team. After this
offering, we expect to significantly increase our hiring of personnel in all
areas and continue our expansion. To manage our growth, we must train and
integrate employees quickly, implement

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<PAGE> 17

additional information systems and further develop our operational,
administrative and financial systems. We will also need to manage an increasing
number of complex relationships with clients, marketing partners and other third
parties. Our business would suffer if our systems, procedures or controls are
inadequate to support our current or future operations or we are unable to
effectively manage our expansion.

ERRORS OR DEFECTS IN OUR DESIGNS COULD EXPOSE US TO LIABILITY AND HARM OUR
REPUTATION.

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

- loss of current clients and loss of market share;

- failure to attract new clients or achieve market acceptance;

- loss of or delay in revenue;

- diversion of development resources to resolving the problem;

- increased service costs; and

- liability for damages.

IF NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY ARE TERMINATED OR BECOME
UNAVAILABLE OR TOO EXPENSIVE, OUR COMPETITIVE POSITION AND SERVICES WOULD
SUFFER.

Many of our services require software applications and other intellectual
property that is licensed from third parties. In addition, we may be required to
license technology from other third-party suppliers to enable us to offer new
services and intellectual property or enhance our current offerings. Our
inability to renew or obtain on favorable terms any third-party license required
to provide services to clients could require us to obtain substitute technology
of lower quality or performance standards or at greater cost. Even if we are
able to obtain adequate substitute technology, our operations could be disrupted
and our ability to deliver services could be impaired as we transition to the
new technology. Either of these outcomes could seriously impair our ability to
sell existing or new design services and develop our intellectual property and
could harm our operating results.

WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS TO BE COMPETITIVE, AND IF WE ARE
UNABLE TO PROTECT THESE RIGHTS, OUR ABILITY TO COMPETE EFFECTIVELY MAY BE
LIMITED.

We rely on a combination of patent, copyright, trademark and trade secret
laws to establish and protect our intellectual property rights. We enter into
confidentiality, invention assignment and license agreements with our employees,
consultants and third parties with whom we have strategic relationships, and we
control access to, and distribution of, our software, documentation and other
proprietary information. Despite precautions we may take to protect our
intellectual property, we cannot be certain that the steps we take will prevent
the disclosure of our trade secrets or unauthorized use of our technology. In
addition, the rights granted under our patents may not provide us with any
competitive advantages and any future patents may not be sufficiently broad to
protect our technology. The laws of foreign countries may not protect our
proprietary rights in those countries to the same extent that U.S. law protects
these rights in the United States. If we are unable to protect our intellectual
property rights, our ability to compete could suffer, and our ability to
generate revenue and become profitable could be harmed.

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<PAGE> 18

DISPUTES RELATED TO INTELLECTUAL PROPERTY INFRINGEMENT COULD SUBJECT US TO
LIABILITY, PREVENT US FROM PROVIDING OUR SERVICES AND DIVERT MANAGEMENT
ATTENTION.

There are numerous patents in the electronic products and integrated
circuits design industry and new patents are being issued at a rapid rate. As a
result, from time to time, we may be a party to litigation to protect our
intellectual property or as a result of alleged infringements by us of others'
intellectual property. In addition, we could become involved in intellectual
property claims asserted by third parties against our clients because our client
agreements generally require us to defend our clients' ability to use our
intellectual property. These claims, regardless of merit, could consume valuable
management time or result in costly litigation. 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 are forced to take any of these actions, our business and results of
operations may be harmed.

IF WE BECOME SUBJECT TO UNFAIR HIRING CLAIMS, WE COULD BE PREVENTED FROM HIRING
NEEDED PERSONNEL, INCUR LIABILITY FOR DAMAGES AND INCUR SUBSTANTIAL COSTS IN
DEFENDING OURSELVES.

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

OUR INTERNATIONAL OPERATIONS, WHICH ACCOUNT FOR A SIGNIFICANT PORTION OF OUR
REVENUE, MAY SUBJECT US TO DIVERGENT REGULATORY REQUIREMENTS AND OTHER RISKS
THAT MAY HARM OUR OPERATING RESULTS.

Our revenue from international operations as a percentage of total revenue
was approximately 54% in 1999 and 43% for the first six months of 2000. We
expect that our international operations will continue to account for a
significant portion of our total revenue and plan to expand these operations.
Maintaining operations in different countries requires us to expend significant
resources to keep our operations coordinated and subjects us to differing laws
and regulatory regimes that may affect our services offerings and ability to
generate revenue. The success of these operations may be affected by:

- limitations on repatriation of earnings;

- reduced protection of intellectual property rights in some countries;

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

- political and economic instability;

- the adoption by certain members of the European Union of the euro, making
our pricing and marketing strategies uncompetitive;

- unexpected changes in regulatory requirements and tax laws; and

- tariffs and other trade barriers.

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OUR INTERNATIONAL OPERATIONS EXPOSE US TO EXCHANGE RATE FLUCTUATIONS THAT COULD
HARM OUR REVENUE AND FINANCIAL CONDITION.

We have significant operations outside the United States, including design
sites and sales offices in Canada, the United Kingdom, Europe, India and other
parts of Asia, and we transact business in various foreign currencies.
Fluctuations in the exchange rate between the U.S. dollar and the currencies of
other countries where we conduct business could harm our business and results of
operations. 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 we
price our services in the foreign currency, we will receive less in U.S. dollars
than before the rate increase went into effect. If we price our services in U.S.
dollars, an increase in the exchange rate will result in an increase in the
price for our services compared to those of our competitors that are priced in
the other currency. This could result in our prices being uncompetitive in one
or more foreign markets.

In addition, we have exposure to foreign currency translation risk when a
subsidiary conducts transactions in a currency different from the currency in
which it primarily conducts its operations. We currently have operating
subsidiaries in Canada and the United Kingdom that conduct transactions in the
currency of those countries. Significant exchange rate movements may hurt our
results of operations.

WE ARE SUBJECT TO THE CYCLICAL NATURE OF THE INTEGRATED CIRCUIT INDUSTRY. ANY
FUTURE DOWNTURNS WILL LIKELY REDUCE OUR REVENUE.

Purchases of our services are highly dependent upon the commencement of new
design projects by integrated circuit manufacturers. 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 industry has experienced significant downturns, often connected
with, or in anticipation of, maturing product cycles of both integrated circuit
companies' and their clients' products and a decline in general economic
conditions. These downturns have been characterized by diminished product
demand, production overcapacity, high inventory levels and accelerated erosion
of average selling prices. During these downturns, the number of new integrated
circuit design projects often decreases. Any future downturns will likely reduce
our revenue and harm our results of operations.

RISKS RELATED TO OUR CORPORATE STRUCTURE AND RELATIONSHIP WITH CADENCE

CADENCE WILL CONTINUE TO HAVE CONTROL OVER US AFTER THIS OFFERING, AND MAY HAVE
INTERESTS THAT CONFLICT WITH OUR INTERESTS AS A SEPARATE COMPANY AND THE
INTERESTS OF OUR OTHER STOCKHOLDERS.

Immediately following this offering, Cadence Holdings, Inc. will own our
only outstanding share of Class B common stock, which will represent
approximately 82.3% of the combined voting power of our outstanding common
stock, or 80.5% if the underwriters' option to purchase additional shares of
Class A common stock is exercised in full. With the 510,000 shares of Class A
common stock held by Cadence Design Systems, Inc., Cadence will have total
combined voting power equal to approximately 82.9% of the combined voting power
of our outstanding common stock, or 81.0% if the underwriters' option to
purchase additional shares of Class A common stock is exercised in full. As a
result of its ownership of our Class B common stock and the fact that two
officers of Cadence will be members of our board of directors, Cadence will be
in a position to effect corporate actions that could conflict with your
interests and ours. Cadence will have the ability to control all matters
submitted to our stockholders for approval, including the election of directors
and any significant corporate transactions. This ownership concentration may
delay or prevent a third party from acquiring or merging with us even if our
other stockholders wanted it to occur. Additionally, Cadence is not prohibited
from selling its controlling interest in us to a third party.

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As a result of its controlling ownership position, Cadence will have the
ability to determine:

- the allocation of business opportunities that may be suitable for either
us or Cadence;

- the amount, manner and terms of our financing;

- changes to the agreements providing for our separation from and ongoing
business arrangements with Cadence;

- our fundamental accounting policies;

- the payment of dividends on our common stock; and

- our tax matters.

Cadence's control could limit the price that certain investors would be willing
to pay for shares of our Class A common stock.

CADENCE COULD DISTRIBUTE TO ITS STOCKHOLDERS SHARES OF TALITY CLASS C COMMON
STOCK HAVING HIGHER VOTING RIGHTS THAN OUR CLASS A COMMON STOCK, AND THIS COULD
ADVERSELY AFFECT THE TRADING PRICE OF OUR CLASS A COMMON STOCK.

Although Cadence currently has no plan to do so, if Cadence effects a
tax-free distribution of its equity interests in Tality Corporation and Tality,
LP to Cadence stockholders, Cadence will have the right to convert its Class B
common stock into, and exchange all of its limited partnership units in Tality,
LP for, an equal number of shares of Class C common stock shortly before the
distribution. The Class C common stock will have voting rights that are intended
to provide Cadence, and its stockholders who receive shares of Class C common
stock in the tax-free distribution, with an aggregate of 80% of the
fully-diluted voting power of all then outstanding Tality Corporation common
stock. Cadence will have this right to obtain and distribute Class C common
stock so long as its owns 30% or more of Tality, LP's limited partnership units.
The higher voting rights associated with the Class C common stock could make the
Class C common stock more attractive to investors than the Class A common stock.
As a result, the issuance and distribution of Class C common stock and the
existence of a trading market for the Class C common stock could cause the
trading price of the Class A common stock to decline.

OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.

Our consolidated financial statements have been extracted from the
consolidated financial statements of Cadence using the historical results of
operations and historical bases of the assets and liabilities of the Cadence
design services business that have been and will be transferred to us.
Accordingly, the historical financial information we have included in this
prospectus does not necessarily reflect what our financial position, results of
operations and cash flows would have been had we been a separate, stand-alone
entity during the periods presented. As a result, this historical financial
information is not necessarily indicative of our future financial results and,
therefore, we may have difficulty in projecting our revenue or expenses.
Similarly, investors may have difficulty in evaluating our prospects.

Cadence did not account for us, and we were not operated, as a separate,
stand-alone entity for the periods presented in this prospectus. Our costs and
expenses include allocations of infrastructure costs associated with our
utilization of or benefit from a variety of centralized corporate services.

In addition, our historical financial information does not reflect the
significant changes that will occur in our cost structure, funding and
operations as a result of our separation from Cadence, including:

- increased costs associated with reduced economies of scale;

- increased costs required to build a business and administrative
infrastructure separate from Cadence;

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- increased marketing expenses related to building a company brand identity
separate from Cadence; and

- increased costs associated with being a publicly traded, stand-alone
company.

WE CURRENTLY USE CADENCE'S OPERATIONAL AND ADMINISTRATIVE INFRASTRUCTURE, AND
OUR ABILITY TO OPERATE OUR BUSINESS WILL SUFFER IF THESE SERVICES DECLINE OR ARE
TERMINATED OR IF WE ARE UNABLE TO REPLACE THESE SERVICES WHEN OUR SERVICE
AGREEMENTS WITH CADENCE TERMINATE.

Cadence has agreed to provide certain corporate services to us, including
services related to:

- information technology systems;

- human resources administration;

- sales and marketing;

- buildings and facilities;

- treasury; and

- legal, finance and accounting.

Although Cadence has agreed to provide us with these services for specified
periods or until termination by either party, generally upon six months' notice,
these services may not be provided at the same level as when we were wholly
owned by Cadence, and may not produce the same benefits. If the services
provided to us by Cadence are not sufficient to meet our needs, or if we are not
able to replace these services after our agreements with Cadence expire or are
terminated, we will be unable to manage critical operational functions of our
business. Many of the systems we utilize are proprietary to Cadence and are very
complex. Some of these systems have been modified, and are in the process of
being further modified, to enable us to separately track items related to our
business. These modifications, however, may result in unexpected system failures
or the loss or corruption of data. Any failure or significant downtime in
Cadence's or our own information systems could prevent us from performing our
services or billing clients in a timely manner. In addition, Cadence's and our
information systems require the services of employees with extensive knowledge
of these information systems and the business environment in which we operate.
Also, we currently have leased office space in certain of Cadence's locations.
We will lease facilities from Cadence at its San Jose, California campus, which
lease will be terminable by either party with six months' notice and will expire
in 2005. We will also lease part of Cadence's Livingston, United Kingdom
facility. This non-terminable lease will expire in 2015.

THE TERMS OF OUR CORPORATE SERVICES AND OTHER AGREEMENTS WITH CADENCE MAY NOT BE
REPRESENTATIVE OF THOSE TERMS WE WOULD BE ABLE TO NEGOTIATE WITH UNRELATED THIRD
PARTIES, WHICH COULD IMPAIR OUR ABILITY TO COMPETE EFFECTIVELY.

The terms of the corporate services and other agreements were negotiated
with Cadence in the context of a parent-subsidiary relationship and were
negotiated in the overall context of our separation from Cadence. These
agreements will also govern our purchase and license of Cadence products and
intellectual property and Cadence's rights to use certain of our intellectual
property. They may have terms and conditions, including pricing terms, that
could be perceived to be more or less beneficial to us than agreements that we
might have negotiated with unaffiliated third parties. If these terms differ
materially from those we could have negotiated in the market, our ability to
price our services and compete effectively could suffer. So long as we are
controlled by Cadence, Cadence may be able to require us to amend these
agreements in ways that may be less favorable to us than their current terms. In
addition, in some instances, our ability to terminate these agreements will be
limited, which may prevent us from negotiating more favorable terms with Cadence
after the offering or from entering into similar agreements with third parties.
Further, in connection with our separation from Cadence, under the terms of our
indemnification and insurance matters agreement with Cadence, we
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will indemnify and hold Cadence harmless for any damages or losses that may
arise out of the conduct of our design services business prior to our
separation, including Cadence's current litigation regarding termination of
acquisition discussions with DNA Enterprises, Inc. and litigation brought by a
former Cadence employee. See "Business -- Litigation" for a discussion of these
matters.

WE WILL NOT BE ABLE TO RELY ON CADENCE TO FUND OUR FUTURE CAPITAL REQUIREMENTS
AND, IF WE ARE UNABLE TO OBTAIN ADDITIONAL CAPITAL WHEN NEEDED, WE MAY BE UNABLE
TO EXPAND OUR OPERATIONS.

In the past, our capital needs have been satisfied by Cadence. However,
following the completion of this offering, Cadence will no longer be obligated
to provide funds to finance our working capital or other cash requirements. If
we need to raise additional funds, it is unlikely that we will be able to obtain
financing with terms as favorable as those that Cadence could obtain. Future
equity financings would be dilutive to the existing holders of our common stock.
Future debt financings could involve restrictive covenants and increase our
financial risk.

If we are unable to obtain additional financing or meet unexpected cash
requirements on acceptable terms, or at all, we may be unable to develop or
enhance our services offerings, expand our operations, make investments or
acquisitions or respond to competitive pressures or unexpected requirements. We
believe that the proceeds from this offering, together with future cash flow
from our operations, will be sufficient to satisfy our capital requirements for
at least the next 12 months. Our capital requirements will depend upon, among
other things, our future operating results, capital expenditures, working
capital, management, research and development activities and acquisitions or
other investments.

WE MAY HAVE POTENTIAL CONFLICTS OF INTEREST WITH CADENCE WITH RESPECT TO OUR
PAST AND ONGOING RELATIONSHIPS AND, BECAUSE OF CADENCE'S CONTROLLING OWNERSHIP,
ANY CONFLICTS OF INTEREST MAY NOT BE RESOLVED ON TERMS MOST FAVORABLE TO OUR
BUSINESS.

Conflicts of interest may arise between Cadence and us in a number of areas
relating to our past and ongoing relationships. We may not be able to resolve
potential conflicts and, even if we do, the resolution may be less favorable
than if we were dealing with an unrelated party. Areas of potential conflict
include:

- the nature, quality and pricing of corporate services Cadence has agreed
to provide us;

- intellectual property rights;

- labor, tax, employee benefit, indemnification and other matters arising
from our separation from Cadence;

- business opportunities that may be attractive to both Cadence and us;

- sales or distributions by Cadence of all or any portion of its ownership
interest in us;

- employee retention and recruiting; and

- environmental matters.

In addition, Cadence will not be restricted from engaging or investing in
the same business as we do, conducting business with our clients, or taking
advantage of business or investment opportunities brought to individuals who may
be directors, officers and employees of both entities. As a result, Cadence may
actively compete with us for business opportunities and personnel, which may
harm our ability to compete and our operating results.

OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE INTERESTS THAT CONFLICT WITH THOSE
OF OUR STOCKHOLDERS.

A number of our directors and executive officers own a substantial amount
of Cadence common stock and options to purchase Cadence common stock. In
addition, H. Raymond Bingham, one of our
19
<PAGE> 23

directors, is currently the president and chief executive officer of Cadence,
and Ronald R. Barris, another one of our directors, is an executive officer of
Cadence. Ownership of Cadence common stock by our directors and officers and
Messrs. Bingham's and Barris' employment by Cadence could create, or appear to
create, conflicts of interest following our separation when directors and
officers are faced with decisions that could have different implications for
Cadence than they do for us. These conflicts or potential conflicts could result
in decisions that are not in the best interest of our stockholders.

AS A HOLDING COMPANY, TALITY CORPORATION DEPENDS ON TALITY, LP TO PROVIDE IT
WITH SUFFICIENT FUNDS TO MEET ITS OPERATING NEEDS. ANY FAILURE BY TALITY, LP TO
PROVIDE TALITY CORPORATION WITH NECESSARY FUNDING WOULD HARM ITS LIQUIDITY.

Tality Corporation is a holding company and, immediately following the
completion of this offering, its only material assets will consist of
partnership interests in Tality, LP. Tality Corporation has no independent means
of generating revenue. As a partner of Tality, LP, Tality Corporation will incur
income taxes on its share of any net taxable income of Tality, LP. Tality
Corporation intends to cause Tality, LP to distribute cash to its partners in
amounts sufficient to cover their tax liabilities arising from any taxable
income of Tality, LP. Tality, LP is also required to reimburse Tality
Corporation for expenses it incurs relating to the ownership of partnership
interests in and operation of Tality, LP. To the extent Tality Corporation needs
funds to pay taxes or for any other purpose and Tality, LP is unable to provide
Tality Corporation with sufficient funds, Tality Corporation's liquidity may
suffer and it may be unable to meet its obligations.

RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR CLASS A COMMON
STOCK

WE DO NOT EXPECT TO PAY DIVIDENDS.

Tality Corporation has never declared or paid any dividends on its common
stock and Tality, LP has never made any distributions to its partners. Neither
Tality Corporation nor Tality, LP currently anticipates paying any dividends or
making distributions, except for amounts that may be distributed by Tality, LP
to cover income tax liabilities, if any, of its partners arising from any
taxable income of Tality, LP. Cash distributions by Tality, LP may also be
restricted by future debt covenants under any loan agreements we may enter into
in the future. As a result, stockholders of Tality Corporation should not expect
to receive dividends.

SUBSTANTIAL SALES OF OUR CLASS A COMMON STOCK FOLLOWING THE OFFERING COULD CAUSE
THE MARKET PRICE OF OUR CLASS A COMMON STOCK TO DROP SIGNIFICANTLY, REGARDLESS
OF THE PERFORMANCE OF OUR BUSINESS.

Sales of a substantial number of shares of Class A common stock after this
offering could cause the market price of our Class A common stock to decline and
could impair our ability to raise capital through the sale of additional equity
securities. Upon completion of this offering, we will have approximately
28,244,840 shares of Class A common stock outstanding or issuable upon exercise
of options, or approximately 30,157,340 shares if the underwriters' option to
purchase additional Class A shares is exercised in full. This number includes
the shares sold in this offering, which may be immediately resold into the
market upon completion of the offering.

Immediately after this offering, Cadence will own one share of our Class B
common stock that is convertible into, and limited partnership units in Tality,
LP that will be exchangeable for, 70,100,001 shares of Class A common stock.
Limited partnership units owned by Tality Corporation or any of its subsidiaries
are not exchangeable for shares of Class A common stock. Cadence has agreed with
the underwriters not to transfer its Class B common stock and limited
partnership units in Tality, LP, or any Class A common stock or Class C common
stock acquired by it, from the date of this offering through the date that is
180 days after the date of this prospectus, except with the prior

20
<PAGE> 24

written consent of Goldman, Sachs & Co. After the expiration of that 180-day
period, Cadence will no longer be restricted from transferring any of its common
stock of Tality Corporation or limited partnership units in Tality, LP to the
public or to its stockholders. If Cadence exercises the registration rights it
has with respect to Tality Corporation common stock, substantially all of these
shares will be eligible for immediate resale in the public market, which could
adversely affect the market price of our Class A common stock. In addition,
although Cadence currently has no plans to distribute its equity interests in
Tality Corporation and Tality, LP to Cadence stockholders, it could elect to do
so at any time following completion of the offering. If Cadence were to make
such a distribution, sales of Class A common stock in anticipation of or
following the distribution could reduce the market price of our Class A common
stock. Any sales of substantial amounts of Class A common stock or partnership
interests in Tality, LP in the public market, or the perception that such sales
might occur, could harm the market price of our Class A common stock.

WE EXPECT THE PRICE OF OUR CLASS A COMMON STOCK TO BE VOLATILE, AND YOU MAY NOT
BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.

Before this offering, there has been no public market for our Class A
common stock, and an active public market for our Class A common stock may not
develop or be sustained after this offering. We cannot assure you that you will
be able to resell your shares at or above the initial public offering price,
which will be determined by negotiations between the representatives of the
underwriters and us. The market price of our shares of Class A common stock is
likely to be highly volatile and could be subject to wide fluctuations in
response to a number of factors, including:

- actual or anticipated variations in our quarterly operating results;

- announcements of technological innovations;

- new services introduced by us or our competitors;

- changes in financial estimates of, or any shortfall in revenue or net
income or any increase in losses from levels expected by, securities
analysts or investors;

- fluctuations in the valuation of companies perceived by investors to be
comparable to us; and

- strategic actions by us or our competitors, such as acquisitions or
restructurings.

The stock markets in general, and the Nasdaq National Market and technology
companies in particular, have experienced extreme price and volume volatility
that have often been unrelated or disproportionate to the operating performance
of particular companies.

In the past, following periods of volatility in the market price of
companies' securities, class action litigation has often been brought against
these companies. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and distract
management's attention and resources, which would likely have a material adverse
effect on us.

INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE
BOOK VALUE OF THEIR SHARES.

The initial public offering price of our Class A common stock is
substantially higher than its per share book value. As a result, assuming
Cadence's Class B share were converted into, and all of its limited partnership
units were exchanged for, Class A common stock upon completion of this offering,
investors purchasing Class A common stock in this offering will incur immediate
and substantial dilution of $9.37 per share in pro forma net tangible book value
per share. We also have granted options to acquire 13,124,840 shares of Class A
common stock at prices below the initial public offering price. As outstanding
options are exercised, there will be further dilution.

21
<PAGE> 25

WE WILL HAVE BROAD DISCRETION IN THE USE OF THE PROCEEDS OF THIS OFFERING AND
OUR FAILURE TO APPLY SUCH FUNDS EFFECTIVELY COULD HARM OUR BUSINESS.

We have not designated any specific use for the net proceeds from this
offering. Tality Corporation will use the net proceeds of this offering to
purchase partnership interests in Tality, LP. Following the purchase of
partnership interests, we expect that Tality, LP will use the net proceeds
remaining after paying costs of separation primarily for general partnership
purposes, including working capital and potential investment or acquisition
opportunities. Management will have significant flexibility in applying the net
proceeds of the offering. Our failure to apply such funds effectively could harm
our business.

PROVISIONS OF DELAWARE LAW, OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND OUR BYLAWS COULD DELAY OR PREVENT AN ACQUISITION OF US, WHICH
COULD PREVENT YOU FROM REALIZING A PREMIUM OVER THE MARKET PRICE OF OUR CLASS A
COMMON STOCK.

Provisions of Delaware law, our amended and restated certificate of
incorporation and our bylaws could make it difficult for another company to
acquire control of us, even if doing so would be beneficial to our stockholders.
For example, our amended and restated certificate of incorporation:

- provides for a classified board of directors with staggered, three-year
terms; and

- authorizes the issuance of preferred stock having such rights and powers
as determined by our board of directors without stockholder approval.

These provisions and provisions of Delaware law could limit the price that
certain investors would be willing to pay for our Class A common stock and could
delay, prevent or allow our board of directors to resist an acquisition, even if
the proposed transaction was favored by a majority of our independent
stockholders.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This prospectus contains forward looking statements that involve risks and
uncertainties. We generally use words such as "believes", "intends", "expects",
"anticipates", "plans" and similar expressions to identify forward looking
statements. You should not place undue reliance on these forward looking
statements, which apply only as of the date of this prospectus. Our actual
results could differ materially from those anticipated in these forward looking
statements for many reasons, including the risks described under "Risk Factors"
above and elsewhere in this prospectus.

Although we believe that the expectations reflected in our forward looking
statements are reasonable, we cannot assure you that our future results, levels
of activity, performance, achievements or other matters covered in these forward
looking statements will meet these expectations. Except as may be required under
applicable law, we are under no duty to update any of these forward looking
statements after the date of this prospectus to conform these statements to
actual results or to changes in our expectations.

22
<PAGE> 26

OUR SEPARATION FROM CADENCE

OVERVIEW

Since 1995, we have operated as the internal design services group of
Cadence. On July 17, 2000, Cadence announced its plan to restructure its
electronics design services group as a separate company focused on providing
design solutions and proprietary technology to electronic products companies and
integrated circuit manufacturers. We expect that the separation of our business
from Cadence will be substantially completed prior to the completion of this
offering. Until that time, substantially all of our business will continue to
operate as Cadence's electronics design services group. See "Prospectus Summary"
for a chart describing the relationship between Cadence and Tality immediately
following completion of this offering.

BENEFITS OF THE SEPARATION AND IPO

We believe that we will realize substantial benefits from our separation
from Cadence and this initial public offering. These benefits include:

GREATER STRATEGIC FOCUS. Cadence generates significant revenue from lines
of business other than its design services business, including the development
and sale of electronic design automation software products and methodology
services. As a separate company, we will focus on developing clients, businesses
and strategic opportunities for our electronics design services and related
technology. This effort will be supported by our own board of directors,
management team and employees.

INCREASED SPEED AND RESPONSIVENESS. As a result of our smaller size and
strategic focus, we expect to make decisions more quickly, deploy resources more
rapidly and efficiently and operate more flexibly than we could as part of a
larger organization. In addition, we expect to enhance our responsiveness to
clients and companies with which we have developed strategic relationships.

BETTER INCENTIVES FOR EMPLOYEES AND GREATER ACCOUNTABILITY. By tying our
incentive compensation plans to the market performance of our Class A common
stock, we expect to strengthen employee motivation and management focus. Our
separation from Cadence, in conjunction with our initial public offering, will
enable us to offer our employees compensation that is directly linked to the
performance of our business and stock price, which we expect will enhance our
ability to attract and retain qualified personnel.

DIRECT ACCESS TO CAPITAL MARKETS. As a separate company with
publicly-traded stock, we will have direct access to the capital markets to
issue debt and equity securities and to grow through acquisitions.

SEPARATION AND CORPORATE SERVICES AGREEMENTS

We and Cadence have entered into an amended and restated master separation
agreement and several other agreements and, prior to completion of this
offering, will enter into additional agreements providing for the separation of
our business from Cadence. These agreements generally provide for, among other
things:

- the transfer by Cadence to us of assets and the assumption by us of
liabilities relating to our business;

- the allocation of intellectual property between us and Cadence; and

- various ongoing relationships between us and Cadence, including joint
development of new technology and intellectual property.

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<PAGE> 27

STOCK OWNERSHIP BY CADENCE

Upon completion of this offering, the share of Class B common stock and
limited partnership units in Tality, LP held by Cadence Holdings, Inc. will be
convertible into or exchangeable for approximately 82.3% of the outstanding
shares of our Class A common stock. With the 510,000 shares of Class A common
stock held by Cadence Design Systems, Inc., Cadence would hold approximately
82.9% of our common stock if it were to convert its share of Class B common
stock and exchange its limited partnership interests. While Cadence does not
currently plan to distribute its equity interests in Tality Corporation and
Tality, LP, Cadence will have the right at any time to convert its Class B
common stock into, and exchange its limited partnership units in Tality, LP for,
shares of Class A common stock and thereafter sell some or all of its shares of
Class A common stock. In addition, if Cadence chooses to distribute its equity
interests in Tality Corporation and Tality, LP to Cadence stockholders, it will
have the right to convert its Class B common stock into, and exchange all of its
limited partnership units in Tality, LP for, an equal number of shares of our
Class C common stock. Cadence has agreed with the underwriters not to transfer
its Class B common stock and limited partnership units in Tality, LP, or any
Class A common stock or Class C common stock it acquires upon conversion or
exchange of its Class B common stock or partnership units, through the date that
is 180 days after the date of this prospectus, except with the prior written
consent of Goldman, Sachs & Co. After the expiration of this 180-day period,
Cadence will no longer be restricted from transferring any of its common stock
of Tality Corporation or limited partnership units in Tality, LP to the public
or its stockholders. Any such distribution could adversely affect the market
price of our Class A common stock. Cadence has advised us that it currently
expects that the principal factors that it would consider in determining whether
and when to exchange, convert, sell or distribute to its stockholders any of its
shares or partnership units include:

- the relative market prices of our Class A common stock and Cadence's
common stock;

- the ability of an affiliate of Tality to make sales under Rule 144 of the
Securities Act of 1933 or under an effective registration statement
covering Cadence's shares of our Class A common stock;

- the absence of any court order or other regulation prohibiting or
restricting such sales; and

- other conditions affecting our business or Cadence's business.

Cadence also retains the right to sell any or all of its Tality, LP limited
partnership units to one or more third parties for strategic or other reasons,
and any purchaser of Cadence's limited partnership units would retain the right
to exchange each limited partnership unit for one share of our Class A common
stock.

ABOUT CADENCE

Cadence is the world's largest supplier of electronic design automation
software products and methodology services used to accelerate and manage the
design of semiconductors, computer systems, networking and telecommunications
equipment, consumer electronics and other electronics-based products.

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<PAGE> 28

USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be
approximately $126.8 million, or $146.4 million if the underwriters' option to
purchase additional shares in the offering is exercised in full, based on an
assumed initial public offering price of $11 per share and after deducting an
assumed underwriting discount and estimated offering expenses payable by us. We
intend to use the proceeds of this offering to purchase additional partnership
interests in Tality, LP, resulting in a 1% general partnership interest and an
approximately 16.7% limited partnership interest, or an approximately 18.5%
limited partnership interest if the underwriters exercise in full their option
to purchase additional shares in the offering. The price of the partnership
units to be acquired by Tality Corporation will equal the net proceeds to it
from this offering.

Tality, LP may use the net proceeds of this offering for:

- paying costs related to our separation from Cadence incurred after the
separation date;

- funding working capital requirements and operating losses;

- capital expenditures to support anticipated growth in operations,
infrastructure for design services and development of proprietary
technology;

- marketing, advertising and branding expenses to establish the Tality
brand;

- potential acquisitions of, or investments in, other businesses or
technologies; and

- other general partnership purposes.

Pending the uses described above, we intend to cause Tality, LP to invest
the net proceeds of this offering in high quality, income-producing securities
such as short-term investment grade or United States Government interest-bearing
securities.

DIVIDEND AND DISTRIBUTION POLICY

We have never paid, and do not anticipate paying in the foreseeable future,
any cash dividends on our common stock. In addition, Tality, LP has never
declared any distributions to its partners nor does it expect to pay any cash
distributions for the foreseeable future, except for distributions to its
partners to the extent necessary to enable them to pay taxes incurred with
respect to any taxable income of Tality, LP. Except for these distributions, we
currently intend to cause Tality, LP to retain any future earnings for use in
the growth and ongoing operations of our business.

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<PAGE> 29

CAPITALIZATION

Our capitalization as of July 1, 2000 is presented:

- on an actual basis for Tality Corporation and Tality, LP;

- on a pro forma basis for the consolidated results of Tality Corporation
and Tality, LP to give effect to the following:

- the retention by Cadence at the time of separation of all of Tality,
LP's working capital except the current portion of capital lease
obligations and deferred revenue, as provided in the amended and
restated master separation agreement between Cadence and Tality
Corporation, as though this retention had occurred as of July 1, 2000;

- the purchase by Cadence, in exchange for a promissory note, of
2,150,000 shares of Tality Corporation's Class A common stock at $6.25
per share; and

- the purchase by Tality directors of 220,000 restricted shares of Class
A common stock at $6.25 per share; and

- on a pro forma as adjusted basis for the consolidated position of Tality
Corporation and Tality, LP to give effect to the following:

- the receipt of the estimated net proceeds from the sale of 12,750,000
shares of Class A common stock in this offering and the purchase by
Tality Corporation of partnership interests in Tality, LP; and

- the reclassification of the equity interest of Cadence to a minority
interest.

The number of shares of Class A common stock in the table below excludes
13,124,840 options exercisable for shares of Class A common stock issued under
our 2000 Equity Incentive Plan, our 2000 Broad Based Equity Incentive Plan, and
our Directors Stock Option Plan.

The capitalization information in the table below is qualified by the more
detailed consolidated financial statements and related notes contained elsewhere
in this prospectus. You should read this table in conjunction with those
consolidated financial statements and related notes and the sections of this
prospectus titled "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

<TABLE>
<CAPTION>
JULY 1, 2000
-----------------------------------------------------
TALITY
TALITY TALITY CORPORATION
CORPORATION TALITY, LP CORPORATION PRO FORMA
ACTUAL ACTUAL PRO FORMA AS ADJUSTED
----------- ---------- ----------- ------------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term liabilities, less current portion........... $ -- $ 3,242 $ 3,242 $ 3,242
Minority interest..................................... -- -- -- 163,386
Cadence's net investment.............................. -- 117,607 70,342 --
-------- -------- -------- --------
Stockholders' equity:
Class A common stock, $.001 par value; 0 shares
authorized, issued and outstanding, actual;
300,000,000 shares authorized, 2,370,000 shares
issued and outstanding, pro forma; 300,000,000
shares authorized, 15,120,000 issued and
outstanding, pro forma as adjusted................ -- -- 2 15
Class B common stock, $.001 par value; 0 shares
authorized issued and outstanding, actual; 1,000
shares authorized, 1 share issued and outstanding,
pro forma and pro forma as adjusted............... -- -- -- --
Class C common stock, $.001 par value; 0 shares
authorized, issued and outstanding, actual;
160,000,000 shares authorized, 0 shares issued and
outstanding, pro forma and pro forma as
adjusted.......................................... -- -- -- --
Note receivable from Cadence.......................... -- -- (13,438) (13,438)
Additional paid-in capital............................ -- -- 14,186 48,562
-------- -------- -------- --------
Total stockholders' equity........................ -- -- 750 35,139
-------- -------- -------- --------
Total capitalization.............................. $ -- $120,849 $ 74,334 $201,767
======== ======== ======== ========
</TABLE>

26
<PAGE> 30

DILUTION

As of July 1, 2000, our pro forma net tangible book value was approximately
$12.2 million, or $0.17 per share of common stock. Pro forma net tangible book
value per share represents the amount of our total tangible assets less total
liabilities, divided by the number of our shares outstanding, which number
includes 1,640,000 shares of Class A common stock held by Cadence employees,
220,000 shares of Class A common stock held by Tality non-employee directors and
510,000 shares of Class A common stock held by Cadence, and assumes the exchange
of all outstanding limited partnership units for, and the conversion of
Cadence's share of Class B common stock into, shares of Class A common stock
upon the completion of this offering. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of our Class A common stock in this offering and the net tangible book value per
share of our Class A common stock immediately following this offering.

Purchasers of Class A common stock in this offering will experience
immediate and substantial dilution. Without taking into account any changes in
net tangible book value after July 1, 2000, other than to give effect to the
sale of the shares of Class A common stock offered by us at an assumed initial
public offering price of $11 per share, and after deducting an assumed
underwriting discount and estimated offering expenses payable by us, our pro
forma net tangible book value as of July 1, 2000 would have been $139.0 million,
or $1.63 per share of common stock. This amount represents an immediate increase
in pro forma net tangible book value of $1.46 per share to the existing
stockholders and an immediate dilution in pro forma net tangible book value of
$9.37 per share to new investors purchasing shares in this offering. The
following table illustrates this dilution in pro forma net tangible book value
per share.

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share at July 1,
2000................................................... $0.17
Increase per share attributable to new investors.......... 1.46
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.63
------
Dilution per share to new investors......................... $9.37
======
</TABLE>

The following table summarizes, as of July 1, 2000, on the pro forma basis
described above, the relative investment in Tality Corporation by Cadence and
new investors purchasing shares of our Class A common stock in this offering.
The table below assumes the exchange of all of Cadence's outstanding limited
partnership units in Tality, LP for, and the conversion of its share of Class B
common stock into, 70,100,001 shares of Class A common stock. The table assumes
no exercise of the underwriters' option to purchase additional shares of our
Class A common stock.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 72,470,001 85% $ 14,812,500 9.6% $ 0.20
New investors............ 12,750,000 15 140,250,000 90.4 11.00
---------- --- ------------ ----
Total.......... 85,220,001 100% $155,062,500 100%
========== === ============ ====
</TABLE>

The total consideration from existing stockholders consists of $14,812,500
paid for the shares of Class A common stock purchased by Cadence, including
those shares of Class A common stock sold by Cadence to certain Cadence
employees, and $1,375,000 paid for restricted shares of Class A common stock
purchased by non-employee directors of Tality.

The discussion and tables above assume no exercise of any stock options
outstanding. At July 1, 2000, there were no outstanding options for shares of
Class A common stock. On September 28, 2000, there were outstanding options to
purchase 13,124,840 shares of Class A common stock at an exercise price of $6.25
per share. To the extent that any of these options are exercised, there will be
further dilution to investors.

27
<PAGE> 31

SELECTED FINANCIAL DATA

You should read the following selected financial data with the consolidated
financial statements and related notes contained elsewhere in this prospectus
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial data appearing elsewhere in this prospectus. The
consolidated statements of operations data for each of the three fiscal years
ended January 3, 1998, January 2, 1999 and January 1, 2000 and the consolidated
balance sheet data as of January 2, 1999 and January 1, 2000 are calculated from
financial statements that have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report thereon included elsewhere in
this prospectus. The consolidated statements of operations data for the years
ended December 30, 1995 and December 28, 1996 and the consolidated balance sheet
data as of December 30, 1995, December 28, 1996 and January 3, 1998 are derived
from our unaudited consolidated financial data that is not included in this
prospectus. The consolidated statements of operations data for the six months
ended July 3, 1999 and July 1, 2000 and the consolidated balance sheet data as
of July 1, 2000 are derived from unaudited consolidated financial statements
included in this prospectus and, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals, that are necessary
for a fair presentation of our financial position and results of operations for
these periods. The historical financial information included in this prospectus
is not necessarily indicative of our future performance and does not necessarily
reflect what our financial position and results of operations would have been
had we operated as a separate, stand-alone entity during the periods presented.
The results of our operations for any fiscal year or quarter do not necessarily
predict or suggest results to be expected for any future period.

Also set forth below are the pro forma net loss and pro forma net loss per
share data for Tality Corporation for each of the fiscal years ended January 3,
1998, January 2, 1999 and January 1, 2000 and for the six months ended July 1,
2000. The pro forma data reflects the following:

- the consolidation of Tality Corporation and Tality, LP for each of the
periods presented;

- the ownership of Tality, LP just prior to the effectiveness of this
offering, consisting of a 1% general partner interest and 2% limited
partner interest held by Tality Corporation and a 97% limited partner
interest held by Cadence Holdings;

- the allocation of 97% of the net losses of Tality, LP to Cadence; and

- the issuance of 2,150,000 shares of Class A common stock and 1 share of
Class B common stock of Tality Corporation as having been issued at the
beginning of each period presented.

Also set forth below are the pro forma as adjusted net loss and pro forma
as adjusted net loss per share data for Tality Corporation for the year ended
January 1, 2000 and the six months ended July 1, 2000. The pro forma as adjusted
data of Tality Corporation reflects the following:

- the structure of Tality Corporation and Tality, LP as of the date of the
completion of this offering, Tality Corporation's receipt of estimated
net proceeds of $126.8 million from this offering and the purchase by
Tality Corporation of additional partnership interests of Tality, LP,
resulting in a 1% general partnership interest and an approximately 16.7%
limited partnership interest; and

- the allocation of approximately 82.3% of the net losses of Tality, LP to
Cadence.

28
<PAGE> 32

<TABLE>
<CAPTION>
TALITY, LP
---------------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
----------------------------------------------------- -------------------
DEC. 30, DEC. 28, JAN. 3, JAN. 2, JAN. 1, JULY 3, JULY 1,
1995 1996 1998 1999 2000 1999 2000
-------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenue............................................. $ 47,249 $ 88,400 $ 90,690 $ 105,262 $128,873 $ 57,520 $ 90,284
Costs and expenses
Cost of revenue.................................... 38,950 69,686 91,632 129,257 113,141 55,026 70,178
Sales and marketing................................ 16,043 27,169 29,327 35,862 32,799 16,339 16,669
Research and
development...................................... 2,174 4,282 5,029 7,176 9,588 5,229 5,797
General and
administrative................................... 9,340 18,343 23,632 33,208 28,546 13,407 15,679
Amortization of acquired intangibles............... -- -- 36 3,277 5,116 2,383 6,307
Unusual items...................................... -- -- 1,711 46,317 -- -- 741
-------- -------- -------- --------- -------- -------- --------
Total costs and expenses......................... 66,507 119,480 151,367 255,097 189,190 92,384 115,371
-------- -------- -------- --------- -------- -------- --------
Loss from operations................................ (19,258) (31,080) (60,677) (149,835) (60,317) (34,864) (25,087)
Other income (expense), net......................... -- (42) 28 215 33 246 1,129
-------- -------- -------- --------- -------- -------- --------
Loss before provision for income taxes and minority
interest........................................... (19,258) (31,122) (60,649) (149,620) (60,284) (34,618) (23,958)
Provision for income taxes.......................... 199 487 585 1,640 1,969 1,123 1,064
-------- -------- -------- --------- -------- -------- --------
Net loss............................................ $(19,457) $(31,609) $(61,234) $(151,260) $(62,253) $(35,741) $(25,022)
======== ======== ======== ========= ======== ======== ========

TALITY CORPORATION PRO FORMA AMOUNTS:
Net loss before minority interest.................. $(61,234) $(151,260) $(62,253) $(25,022)
Minority interest.................................. 59,397 146,722 60,385 24,271
-------- --------- -------- --------
Pro forma net loss................................. $ (1,837) $ (4,538) $ (1,868) $ (751)
======== ========= ======== ========
Basic and diluted pro forma net loss per share..... $ (0.85) $ (2.11) $ (0.87) $ (0.35)
======== ========= ======== ========
Shares used in computing basic and diluted pro
forma net loss per share......................... 2,150 2,150 2,150 2,150

TALITY CORPORATION PRO FORMA AS ADJUSTED AMOUNTS:
Net loss before minority interest.................. $(62,253) $(25,022)
Minority interest.................................. 51,234 20,593
-------- --------
Pro forma as adjusted net loss..................... $(11,019) $ (4,429)
======== ========
Basic and diluted pro forma as adjusted net loss
per share........................................ $ (0.73) $ (0.29)
======== ========
Shares used in computing basic and diluted pro
forma as adjusted net loss per share............. 15,120 15,120
</TABLE>

Unusual items include write-offs of acquired in-process research and
development of approximately $1.7 million for 1997 and $28.5 million for 1998,
restructuring charges totaling $17.8 million in 1998 and $0.7 million of
separation costs in 2000.

The pro forma balance sheet data for Tality, LP below gives effect to the
retention by Cadence of all of Tality, LP's working capital except the current
portion of capital lease obligations and deferred revenue, as provided in the
amended and restated master separation agreement.

The pro forma as adjusted balance sheet data reflect, for the consolidated
financial position of Tality Corporation and Tality, LP:

- the reclassification of the equity interest of Cadence to minority
interest; and

- the receipt of proceeds of $1,375,000 from the purchase by three
directors of 220,000 restricted shares of Class A common stock for $6.25
per share under the 2000 Equity Incentive Plan.

29
<PAGE> 33

<TABLE>
<CAPTION>
TALITY
TALITY, LP CORPORATION
------------------------------------------------------------------------- -----------
YEAR ENDED JULY 1, 2000
-------------------------------------------------- -----------------------
DEC. 30, DEC. 28, JAN. 3, JAN. 2, JAN. 1, JULY 1, PRO FORMA
1995 1996 1998 1999 2000 2000 PRO FORMA AS ADJUSTED
-------- -------- ------- ------- -------- -------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents............... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $128,183
Working capital......................... 596 10,692 25,094 16,135 23,844 40,744 (6,521) 121,662
Total assets............................ 17,632 35,643 54,920 90,868 142,531 156,478 80,105 208,288
Long-term liabilities................... 66 126 104 3,956 4,318 3,242 3,242 3,242
Minority interest....................... -- -- -- -- -- -- -- 163,386
Partners' net investment................ 6,019 19,534 37,691 58,178 102,545 117,607 70,342 --
Stockholders' equity.................... -- -- -- -- -- -- -- 35,139
</TABLE>

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<PAGE> 34

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

You should read the following discussion with the consolidated financial
statements and related notes and "Cautionary Note Regarding Forward Looking
Statements" located elsewhere in this prospectus.

OVERVIEW

Since 1995, we have operated as the electronics design services group of
Cadence. On July 17, 2000, Cadence announced its plan to separate its
electronics design services group into a separate company focused on providing
design solutions and proprietary technology to electronic products companies and
integrated circuit manufacturers. We expect that the separation of our business
from Cadence, including the transfer of related assets, liabilities and
intellectual property rights, will be substantially complete prior to the
completion of this offering. Until that time, most of our business will continue
to operate as Cadence's electronics design services group. Tality Corporation is
a holding company whose principal assets immediately following completion of
this offering will be a 1% general partnership interest and an approximately
16.7% limited partnership interest in Tality, LP. As a result, except as
otherwise stated, the discussion of the financial condition and results of
operations in this prospectus relates to Tality, LP. Subsequent to the offering,
Tality Corporation's consolidated financial statements will include the
financial statements of Tality, LP and its subsidiaries.

BASIS OF PRESENTATION

Our consolidated financial statements have been carved out from the
consolidated financial statements of Cadence using the historical results of
operations and historical bases of the assets and liabilities of Cadence's
electronics design services group. The consolidated financial statements also
include charges for services provided by Cadence to Tality, LP for real estate
functions, information technology, tax, legal, accounting, treasury, sales,
corporate marketing and other corporate and infrastructure services. The charges
for the services provided by Cadence were determined on bases that we and
Cadence consider to be reasonable reflections of utilization of the services
provided to us or the benefit received by us based on relative revenue,
headcount, square footage or amounts of actual usage.

The financial information presented in this prospectus may not be
indicative of our financial position, results of operations or cash flows in the
future, nor is it necessarily indicative of what our financial position, results
of operations or cash flows would have been had we been a separate, stand-alone
entity for the periods presented. The financial information presented in this
prospectus does not reflect the many significant changes, such as increased
costs and expenses in our funding and operations, that will occur after this
offering as a result of our becoming a stand-alone entity, including increased
costs associated with reduced economies of scale, increased marketing expenses
relating to building a separate brand identity and increased costs associated
with being a publicly traded, stand-alone company.

We have entered and will enter into various agreements related to our
separation from and our ongoing relationships with Cadence. Cadence has agreed
to provide to us certain services and support in the areas of information
technology systems, facilities, human resources, administration, treasury,
legal, and finance and accounting. Although the fees for the services provided
under these agreements are intended to represent the fair market value of these
services, we cannot assure you that these fees necessarily reflect the costs of
obtaining the services from unrelated third parties or of our providing these
services internally. However, we believe that purchasing these services from
Cadence is an efficient means of obtaining these services.

We also must negotiate agreements with various third parties as a separate
entity, although we will continue to be an affiliate of Cadence immediately
after completing the offering. We cannot assure you that the terms we will be
able to negotiate with third parties will be as favorable as those that we

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<PAGE> 35

enjoyed when we were part of Cadence. In addition, as part of Cadence, we
benefited from various economies of scale, including shared global
administrative functions, facilities and volume purchase discounts. We expect
our costs will increase as a result of the loss or re-negotiation of these
arrangements, although the amount of the cost increase is not determinable at
this time.

REVENUE. We bill for our services primarily under three pricing
arrangements: fixed price, scoped time and materials and defined level of
effort, which generally extend up to one year, but in some cases may be longer.
Under time and materials and defined level of effort contracts, revenue is
recognized as services are performed. For fixed price contracts, revenue is
recognized using the percentage-of-completion method of accounting and based on
the percentage that incurred contract costs to date bear to total estimated
contract costs after giving effect to the most recent estimates of total cost.
We cannot assure you that our estimates will be accurate, and if they are not,
our operating results and financial condition in subsequent periods could be
harmed. The effect of changes to total estimated contract costs is recognized in
the period in which these changes are determined. Provisions for losses are made
in the period in which the loss first becomes estimable and probable.

COST OF REVENUE. Cost of revenue includes costs associated with providing
electronics design services to customers, including salaries and benefits, cost
of software, depreciation, facilities and project management.

SALES AND MARKETING. Sales and marketing expense consists of costs and
salaries associated with our sales and marketing organizations and costs of
marketing communications, public relations and other promotional expenditures.

Effective January 1999, we implemented a new sales model. Under the old
model, sales functions and processes were centralized for all Cadence business
units. Under the new model, a dedicated sales force was established for
Cadence's electronics design services group. This dedicated sales force assumed
responsibility for the sales process, while other aspects of the sales function
continued to be provided by Cadence. The new model has enabled us to focus more
specifically on our markets and offerings, which has improved our sales
efficiency.

RESEARCH AND DEVELOPMENT. Research and development expense represents our
investment in developing intellectual property, comprised of know-how, trade
secrets, hardware, software and patents related to our design services and
client projects. We derive intellectual property from internal research and
development activities as well as through performing client projects. Only the
cost of internal activities is classified as research and development expense.

GENERAL AND ADMINISTRATIVE. General and administrative expense consists of
expenses associated with administration, finance, accounting, human resources,
information technology, legal, bad debt and other support costs.

PROVISION FOR INCOME TAXES. Until the separation, we will have only
commenced our foreign operations, will have no operations in the U.S. and,
accordingly, we expect that we will have only minimal income tax liabilities.
Income tax benefits from losses recorded by our business prior to the separation
have been fully utilized by Cadence. Our historical provision for income tax has
therefore been limited to current and deferred foreign taxes. Immediately
following the offering, Tality Corporation will own approximately 17.7% of the
partnership interests of Tality, LP and will be allocated a pro rata share of
any taxable income and loss generated from Tality, LP's operations. Deferred tax
assets allocable to Tality Corporation, however, may be subject to a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some portion of the deferred tax assets will not be realized.

MATERIAL ACQUISITIONS

In December 1999, we acquired all of the outstanding stock of Diablo
Research Company LLC for $39.9 million in cash in a transaction accounted for as
a purchase. Diablo was a high-technology

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<PAGE> 36

engineering services firm with expertise in wireless communications, global
positioning satellite solutions, data transfer markets and home automation
markets. In connection with the acquisition, Tality acquired goodwill of $40.9
million, which is being amortized over five years.

In February 1998, we acquired all of the outstanding stock of Symbionics
Group Limited for approximately one million shares of Cadence common stock and
$21.3 million of cash. Symbionics provided product development design services
and intellectual property to leading electronics manufacturers in the wireless
communications market. The total purchase price was $46.1 million and the
acquisition was accounted for as a purchase. In connection with the acquisition,
management estimated that $28.5 million of the purchase price represented
acquired in-process research and development that had not yet achieved
technological feasibility and had no alternative future use. This amount was
charged to expense upon consummation of the acquisition. The remaining goodwill
of $5.9 million and acquired intangibles of $11.5 million, representing
assembled workforce, are being amortized over five years.

RESTRUCTURING

Management determined in 1998 that our rapid expansion of design capacity,
including design sites and personnel, exceeded our demand for that capacity.
This resulted in a restructuring in the fourth quarter of 1998 and the
refocusing of business on communications-related target markets. In connection
with this restructuring, we recorded $17.8 million of restructuring charges,
consisting of $12.2 million to terminate 184 employees and $5.6 million to
downsize and close excess facilities. Terminated employees included support
staff, design engineers and management personnel. In 1998, approximately $4.5
million of the employee termination costs resulted from the acceleration of
stock options vesting under employment agreements for prior management.
Management estimates that the restructuring resulted in annualized cost
reductions of approximately $15.8 million in salary and benefit costs and $3.4
million in facility costs. See note 9 of the notes to Tality, LP's consolidated
financial statements included elsewhere in this prospectus.

DEFERRED STOCK COMPENSATION EXPENSE

In connection with the grant of stock options and restricted shares of
Class A common stock to employees and non-employee directors in July, August and
September 2000, we expect to record an aggregate deferred stock compensation
expense of approximately $64 million, representing the difference between the
deemed fair market value of the Class A common stock on the date of grant for
accounting purposes and the option exercise price or restricted share purchase
price. This amount will be recorded as a reduction of stockholders' equity and
will be amortized over the four-year vesting period of the applicable options.
The aggregate deferred stock compensation expense is expected to be amortized in
the amount of approximately $8 million for the remainder of 2000, approximately
$16 million for each of 2001, 2002 and 2003, and approximately $8 million for
2004.

SEPARATION COSTS

Separation costs are those costs associated with the process of becoming a
stand-alone, publicly-held company, including consulting and professional fees.
Separation costs incurred through the date of separation will be paid by Cadence
and recorded as an expense by Tality, LP. For the six months ended July 1, 2000,
approximately $0.7 million of costs had been incurred by Tality, LP and paid by
Cadence in connection with the separation. In addition, in the quarter ending
September 30, 2000, we expect to incur accounting, legal and administrative
costs of approximately $2.0 million associated with the separation. Thereafter,
we expect to incur separation costs through 2001 at less than $0.5 million per
quarter, which will be funded by working capital. Prior to incurring such
separation costs, Cadence incurred various costs associated with exploring and
planning for the separation. These pre-separation costs have been expensed in
the Cadence financial statements.

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<PAGE> 37

DEVELOPMENT OF INTELLECTUAL PROPERTY

As part of our strategy, we will continue to develop proprietary technology
in conjunction with our electronics design services. We plan to focus on
generating revenue under which fees will be paid for the use of our intellectual
property. We expect to derive revenue from licensing our technology, including
technology developed at our own direction and expense as well as technology
developed in the course of performing our services for clients. We expect
research and development expense to increase as we increase our focus on
developing licensable technologies.

RESULTS OF OPERATIONS

The following table sets forth our consolidated statements of operations
data for the years indicated and for the six months ended July 3, 1999 and July
1, 2000 as a percentage of revenue.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
------------------------------------ -----------------
JANUARY 3, JANUARY 2, JANUARY 1, JULY 3, JULY 1,
1998 1999 2000 1999 2000
---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue................................. 100% 100% 100% 100% 100%
Costs and expenses
Cost of revenue....................... 101 123 88 96 78
Sales and marketing................... 32 34 25 29 19
Research and development.............. 6 7 7 9 6
General and administrative............ 26 31 22 23 17
Amortization of acquired
intangibles........................ -- 3 4 4 7
Unusual items......................... 2 44 -- -- 1
--- ---- --- --- ---
Total costs and expenses........... 167 242 146 161 128
--- ---- --- --- ---
Loss from operations.................... (67) (142) (46) (61) (28)
Other income (expense), net............. -- -- -- 1 1
--- ---- --- --- ---
Loss before provision for income
taxes................................. (67) (142) (46) (60) (27)
Provision for income taxes.............. 1 2 2 2 1
--- ---- --- --- ---
Net loss................................ (68)% (144)% (48)% (62)% (28)%
=== ==== === === ===
</TABLE>

SIX MONTHS ENDED JULY 3, 1999 AND JULY 1, 2000

REVENUE. Revenue increased $32.8 million, or 57%, from $57.5 million in the
first half of 1999 to $90.3 million in the first half of 2000. The increase in
revenue resulted from an increase in the total size of active client engagements
and an increase in total client service hours billed, of which $10.0 million was
attributable to the Diablo acquisition.

COST OF REVENUE. Cost of revenue increased $15.2 million, or 28%, from
$55.0 million, or 96% of revenue, in the first half of 1999 to $70.2 million, or
78% of revenue, in the first half of 2000. The increase in cost of revenue
resulted from hiring additional design engineers, including those employed by
Diablo at the time of its acquisition. The decrease in cost of revenue as a
percentage of revenue in the first half of 2000 was a result of improved
engineering staff utilization and increased use of reusable intellectual
property.

SALES AND MARKETING. Sales and marketing expense increased $0.4 million, or
2%, from $16.3 million, or 29% of revenue, in the first half of 1999 to $16.7
million, or 19% of revenue, in the first half of 2000. Substantially all of the
increase in sales and marketing expense was attributable to a $0.4 million
increase in the marketing support and sales channel referral activities
performed by Cadence on behalf of Tality, LP, offset by a $0.2 million decrease
in direct selling expense. The

34
<PAGE> 38

improvement as a percentage of revenue was attributable to improved efficiency
of our dedicated sales force, which was established in the first quarter of
1999.

RESEARCH AND DEVELOPMENT. Research and development expense increased $0.6
million, or 11%, from $5.2 million, or 9% of revenue, in the first half of 1999
to $5.8 million, or 6% of revenue, in the first half of 2000. The increase in
research and development expense was attributable to increased efforts in the
development of reusable intellectual property. The decrease in research and
development expense as a percentage of revenue was due to a 57% increase in
revenue in the first half of 2000, as compared to an 11% increase in research
and development expense during the same period. We expect that research and
development expense will increase in absolute dollars in future periods as we
increase our focus on the development of reusable intellectual property.

GENERAL AND ADMINISTRATIVE. General and administrative expense increased
$2.3 million, or 17%, from $13.4 million, or 23% of revenue, in the first half
of 1999 to $15.7 million, or 17% of revenue, in the first half of 2000.
Substantially all of the increase in general and administrative expense was
attributable to a $1.8 million increase in general and administrative activities
undertaken by Cadence on our behalf, a $0.7 million increase in information
technology services provided by Cadence and a $0.6 million increase in
administrative and related costs associated with the Diablo acquisition, offset
in part by a $1.0 million decrease in provision for bad debts. The overall
growth of our business, including growth in both revenue and headcount, required
higher levels of support from Cadence.

AMORTIZATION OF ACQUIRED INTANGIBLES. Amortization expense increased $3.9
million, or 165%, from $2.4 million, or 4% of revenue, in the first half of 1999
to $6.3 million, or 7% of revenue, in the first half of 2000. The increase in
amortization expense was attributable to the amortization of intangibles
associated with the Diablo and Westport Technology, Inc. acquisitions.

SEPARATION COSTS. Separation costs increased $0.7 million from $0 in the
first half of 1999 to $0.7 million in the first half of 2000, consisting
primarily of consulting and professional fees. The process of separating
Tality's business from Cadence began in the second quarter of 2000.

YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000

REVENUE. Revenue increased $23.6 million, or 22%, from $105.3 million in
1998 to $128.9 million in 1999. The increase resulted from an increase in the
total size of active client engagements and an increase in total client service
hours billed, which resulted from higher utilization of our design engineers.

Revenue increased $14.6 million, or 16%, from $90.7 million in 1997 to
$105.3 million in 1998. Substantially all of the growth in revenue was
attributable to the acquisition of Symbionics.

COST OF REVENUE. Cost of revenue decreased $16.2 million, or 12%, from
$129.3 million, or 123% of revenue, in 1998 to $113.1 million, or 88% of
revenue, in 1999. The decrease in cost of revenue in 1999 resulted from the
restructuring of the electronics design services business in the fourth quarter
of 1998. The restructuring significantly reduced the number of design engineers.

Cost of revenue increased $37.7 million, or 41%, from $91.6 million, or
101% of revenue, in 1997 to $129.3 million, or 123% of revenue, in 1998. The
increased cost in absolute dollars and as a percentage of revenue in 1998 was
the result of adding design engineers, including those added as a result of the
Symbionics acquisition.

We expect continued improvement in our gross margin. Any improvement in our
gross margin will depend on our ability to improve staff utilization and
realization and to increase our use of reusable intellectual property and other
methodologies.

SALES AND MARKETING. Sales and marketing expense decreased $3.1 million, or
9%, from $35.9 million, or 34% of revenue, in 1998 to $32.8 million, or 25% of
revenue, in 1999. The decrease in sales and marketing expense was a result of a
more focused and efficient direct sales model, which

35
<PAGE> 39

resulted in a reduction of personnel and a cost savings of $5.7 million. The
savings were partially offset by an increase in the sales and marketing services
provided by Cadence of $1.9 million and other marketing expenses of
approximately $0.8 million.

Sales and marketing expense increased $6.6 million, or 22%, from $29.3
million, or 32% of revenue, in 1997 to $35.9 million, or 34% of revenue, in
1998. Substantially all of the increase in sales and marketing expense was
attributable to a $5.4 million increase in sales-related personnel costs and an
increase of $0.9 million in direct marketing expense.

RESEARCH AND DEVELOPMENT. Research and development expense increased $2.4
million, or 34%, from $7.2 million, or 7% of revenue, in 1998 to $9.6 million,
or 7% of revenue, in 1999. Research and development expense increased $2.2
million, or 43%, from $5.0 million, or 6% of revenue, in 1997 to $7.2 million,
or 7% of revenue, in 1998. The increase in research and development expense in
both 1998 and 1999 was due to an increased emphasis on developing products and
design methodologies and processes, which resulted in the assignment of more
design engineering personnel to these research and development activities.

GENERAL AND ADMINISTRATIVE. General and administrative expense decreased
$4.7 million, or 14%, from $33.2 million, or 31% of revenue, in 1998 to $28.5
million, or 22% of revenue, in 1999. Substantially all of the decrease in
general and administrative expense was related to direct administrative cost
reductions of $3.6 million associated with the restructuring in the fourth
quarter of 1998 and reduced provisions for bad debts of $1.4 million. The
decrease in general and administrative expense was partially offset by a $0.3
million increase in information technology services provided by Cadence.

General and administrative expense increased $9.6 million, or 41%, from
$23.6 million, or 26% of revenue, in 1997 to $33.2 million, or 31% of revenue,
in 1998. The increase in general and administrative expense was attributable to
a $5.4 million increase in compensation and related costs associated with the
expansion of our administrative staff to support the growth of our operations, a
$4.0 million increase in the provision for bad debts and a $0.8 million increase
in information technology services provided by Cadence. The increase in general
and administrative expense was partially offset by a $0.7 million decrease in
human resource staffing services provided by Cadence.

AMORTIZATION OF ACQUIRED INTANGIBLES. Amortization expense increased $1.8
million, or 56%, from $3.3 million, or 3% of revenue, in 1998 to $5.1 million,
or 4% of revenue, in 1999. The increase in amortization expense was attributable
to the amortization of intangibles resulting from the Diablo, Symbionics and
Detente acquisitions. Amortization of acquired intangibles increased to 4% of
revenue in 1998 from 3% of revenue in 1999.

Amortization expense increased $3.3 million from $.04 million, or 0% of
revenue, in 1997 to $3.3 million, or 3% of revenue, in 1998. The increase in
amortization expense was attributable to the amortization of intangibles
acquired in the Symbionics and Detente acquisitions.

UNUSUAL ITEMS

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

Upon consummation of our acquisition of Symbionics, we recorded a charge of
$28.5 million that represented acquired in-process research and development that
had not yet reached technological feasibility and had no alternative future use.
See note 9 to the notes to the Tality, LP consolidated financial statements
included elsewhere in this prospectus. The value was determined by estimating
the costs to develop the acquired in-process research and development into
commercially viable products, estimating the resulting net cash flows from those
projects and discounting the net cash

36
<PAGE> 40

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 research and development. The in-process projects were
commercially viable by the end of 1999. Expenditures to complete these projects
did not exceed $6 million.

At the time of the acquisition, Symbionics was working on several
significant research and development projects that, if successful, were expected
to meet future market needs. These efforts involved digital television, wireless
home networking, cellular roaming and digital voice technologies and were
intended to ensure the long-term success and survival of the company. The
efforts required to complete the research and development projects related to
the completion of all planning, designing, prototyping, verification and testing
activities 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 that were underway at
Symbionics were used to value the acquired in-process research and development
at the time of acquisition and were based on management's estimates of revenue,
cost of revenue, research and development costs, selling, general and
administrative costs, and income taxes from those projects. The revenue
projections were based on the potential market size that the projects addressed,
our ability to gain market acceptance in these segments and the life cycle of
the in-process research and development.

Estimated total revenue at the time of acquisition from the acquired
in-process research and development was expected to peak in 2001 and 2002 and
decline rapidly thereafter as other new products entered the market. In
addition, a portion of the anticipated revenue has been attributed to
enhancements of the base technology under development and has been excluded from
net cash flow calculations. Existing technology was valued at $6 million. There
can be no assurance that these assumptions will prove accurate or that we will
realize the anticipated benefit of the acquired in-process research and
development. The net cash flows generated from the acquired in-process research
and development were expected to reflect earnings before interest and taxes and
were estimated to be approximately 39% of the sales generated from Symbionics'
in-process research and development.

The discount rates applied to the net cash flows to calculate their present
value were based on the weighted average cost of capital at the time of
acquisition. The discount rates used to discount the net cash flows from the
acquired in-process research and development range from 22.5% to 27.5%. The
discount rates are sometimes higher than the weighted average cost of capital
due to the inherent uncertainties in the estimates, including the uncertainty
surrounding the successful development of the acquired in-process research and
development, 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 the time.

RESTRUCTURING. In 1998, Tality recorded $17.8 million of restructuring
charges associated with a worldwide restructuring plan. The restructuring plan
and associated costs consisted of $12.2 million to terminate 184 employees and
$5.6 million to downsize and close excess facilities. The restructuring plan was
aimed at reducing the cost of excess personnel and capacity and refocusing the
business on communications-related target markets. Management estimates that the
restructuring resulted in annualized cost reductions of approximately $15.8
million in salary and benefit costs and approximately $3.4 million in facility
costs.

Severance costs in the restructuring included severance benefits, notice
pay and outplacement services. Terminated employees included support staff,
design engineers and management personnel. Approximately $4.5 million of these
costs resulted from the acceleration of stock options vesting under employment
agreements for prior management. All terminations and termination benefits were
communicated to the affected employees prior to the end of 1998 and all
severance benefits were paid prior to the end of 1999.

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<PAGE> 41

Facilities consolidation charges of $5.6 million were incurred in
connection with the downsizing and closing of 13 sites. Closure and exit costs
included payments required under lease contracts, less any applicable sublease
income after the properties were abandoned, lease buyout costs, restoration
costs associated with certain lease arrangements and costs to maintain
facilities during the period after abandonment. Asset related costs written off
consisted of leasehold improvements of facilities that were abandoned and whose
estimated fair market value was zero. As of January 1, 2000, substantially all
of the closed 13 sites had been vacated.

The following table summarizes our restructuring activity from January 3,
1998 to January 1, 2000:

<TABLE>
<CAPTION>
SEVERANCE
AND EXCESS
BENEFITS FACILITIES ASSETS TOTAL
--------- ---------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, January 3, 1998................... $ -- $ -- $ -- $ --
1998 restructuring charges............... 12,190 1,996 3,631 17,817
Non-cash charges......................... (4,502) -- -- (4,502)
Cash charges............................. (6,305) (1,996) (3,631) (11,932)
------- ------- ------- --------
Balance, January 2, 1999................... 1,383 -- -- 1,383
Non-cash charges......................... -- -- -- --
Cash charges............................. (1,383) -- -- (1,383)
------- ------- ------- --------
Balance, January 1, 2000................... $ -- $ -- $ -- $ --
======= ======= ======= ========
</TABLE>

38
<PAGE> 42

QUARTERLY RESULTS OF OPERATIONS

The following table presents selected unaudited consolidated financial
information for each of the six quarters ending July 1, 2000. We restructured
our business in the fourth quarter of 1998. We believe that the presentation of
quarterly results of operations for periods subsequent to the restructuring may
be useful to investors for the purpose of evaluating our current business model.
In our opinion, this unaudited information has been prepared on a basis
consistent with our audited consolidated financial statements and includes all
adjustments, consisting only of normal recurring accruals, necessary to present
fairly our unaudited quarterly results when read in conjunction with our audited
financial statements included elsewhere in this prospectus. The results of
operations for any quarter are not necessarily indicative of our future results
of operations.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------
APRIL 3, JULY 3, OCTOBER 2, JANUARY 1, APRIL 1, JULY 1,
1999 1999 1999 2000 2000 2000
-------- -------- ---------- ---------- -------- --------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 26,825 $ 30,695 $ 33,794 $ 37,559 $ 43,027 $ 47,257
Costs and expenses
Cost of revenue......... 27,736 27,290 28,546 29,569 33,438 36,740
Sales and marketing..... 7,505 8,834 7,836 8,624 7,943 8,726
Research and
development.......... 2,663 2,566 2,129 2,230 2,772 3,025
General and
administrative....... 6,563 6,844 7,194 7,945 7,875 7,804
Amortization of acquired
intangibles.......... 1,221 1,162 1,022 1,711 3,042 3,265
Unusual items........... -- -- -- -- -- 741
-------- -------- -------- -------- -------- --------
Total costs and
expenses........... 45,688 46,696 46,727 50,079 55,070 60,301
-------- -------- -------- -------- -------- --------
Loss from operations...... (18,863) (16,001) (12,933) (12,520) (12,043) (13,044)
Other income (expense),
net..................... (189) 435 (305) 92 62 1,067
-------- -------- -------- -------- -------- --------
Loss before provision for
income taxes............ (19,052) (15,566) (13,238) (12,428) (11,981) (11,977)
Provision for income
taxes................... 454 669 641 205 514 550
-------- -------- -------- -------- -------- --------
Net loss.................. $(19,506) $(16,235) $(13,879) $(12,633) $(12,495) $(12,527)
======== ======== ======== ======== ======== ========
</TABLE>

39
<PAGE> 43

The following table sets forth our unaudited consolidated statements of
operations data as a percentage of total revenue for the periods indicated.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
APRIL 3, JULY 3, OCTOBER 2, JANUARY 1, APRIL 1, JULY 1,
1999 1999 1999 2000 2000 2000
-------- ------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue........................... 100% 100% 100% 100% 100% 100%
Costs and expenses
Cost of revenue................. 103 89 85 79 78 78
Sales and marketing............. 28 29 23 23 19 18
Research and development........ 10 8 6 6 6 6
General and administrative...... 24 22 21 20 18 17
Amortization of acquired
intangibles.................. 5 4 3 5 7 7
Unusual items................... -- -- -- -- -- 2
--- --- --- --- --- ---
Total costs and expenses..... 170 152 138 133 128 128
--- --- --- --- --- ---
Loss from operations.............. (70) (52) (38) (33) (28) (28)
Other income (expense), net....... (1) 1 (1) -- -- 2
--- --- --- --- --- ---
Loss before provision for income
taxes........................... (71) (51) (39) (33) (28) (26)
Provision for income taxes........ 2 2 2 1 1 1
--- --- --- --- --- ---
Net loss.......................... (73)% (53)% (41)% (34)% (29)% (27)%
=== === === === === ===
</TABLE>

FACTORS AFFECTING OPERATING RESULTS

COST OF REVENUE

Cost of revenue decreased $0.4 million, or 2%, from $27.7 million, or 103%
of revenue, in the first quarter of 1999 to $27.3 million, or 89% of revenue, in
the second quarter of 1999 principally due to reduced headcount and related
personnel costs in the second quarter of 1999 resulting from the restructuring
that occurred in the fourth quarter of 1998.

Cost of revenue increased $1.2 million, or 5%, from $27.3 million, or 89%
of revenue, in the second quarter of 1999 to $28.5 million, or 85% of revenue,
in the third quarter of 1999 principally due to increased outside contract
services costs incurred to accommodate the growth in business and associated
revenue during the period. The decrease in cost of revenue as a percentage of
revenue during the third quarter was a result of improved engineering staff
utilization.

Cost of revenue increased $1.1 million, or 4%, from $28.5 million, or 85%
of revenue, in the third quarter of 1999 to $29.6 million, or 79% of revenue, in
the fourth quarter of 1999 principally due to increased headcount and
personnel-related costs, resulting primarily from the acquisition of Diablo in
December 1999. The decrease in cost of revenue as a percentage of revenue during
the fourth quarter was a result of improved engineering staff utilization.

Cost of revenue increased $3.8 million, or 13%, from $29.6 million, or 79%
of revenue, in the fourth quarter of 1999 to $33.4 million, or 78% of revenue,
in the first quarter of 2000 principally due to increased headcount and
personnel-related costs, including personnel employed by Diablo at the time of
its acquisition, partially offset by a decrease in outside contract service
costs.

Cost of revenue increased $3.3 million, or 10%, from $33.4 million, or 78%
of revenue, in the first quarter of 2000 to $36.7 million, or 78% of revenue, in
the second quarter of 2000 principally due to increased headcount and
personnel-related costs.

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<PAGE> 44

SALES AND MARKETING

Sales and marketing expense increased in absolute amounts in the second and
fourth quarter of 1999 as compared to the first and third quarter, respectively,
and the second quarter of 2000 compared to the first quarter of 2000,
principally due to the implementation of a new direct sales model in the first
quarter of 1999 and higher sales commissions and bonuses. Sales commissions and
bonuses have been historically higher in the second and fourth quarters of each
year due to the structure of the sales compensation plans, which provide for
commission and bonus payments based on achievement of semi-annual quotas.

GENERAL AND ADMINISTRATIVE

General and administrative expense increased in each of the first three
quarters of 1999 principally due to increased administrative, legal and
information technology services provided by Cadence.

General and administrative expense remained constant at $7.9 million, or
20% of revenue, in the fourth quarter of 1999 and $7.9 million, or 18% of
revenue, in the first quarter of 2000 and decreased $0.1 million, or 1%, in the
second quarter of 2000 principally due to increased administrative costs
associated with the Diablo acquisition that were offset by a reduction of bad
debt expense during the second quarter of 2000.

AMORTIZATION OF ACQUIRED INTANGIBLES

Amortization of acquired intangibles from the acquisition of Symbionics is
recorded in British pounds and translated into U.S. dollars each period using
the average of the beginning and ending of period exchange rates. During each of
the first three quarters of 1999, amortization of acquired intangibles was
between $1.0 million and $1.2 million, or between 5% and 3% of revenue, due to
the fluctuation in average currency exchange rates between the U.S. dollar and
the British pound.

Amortization of acquired intangibles increased both in the fourth quarter
of 1999 and the first quarter of 2000 substantially due to the additional
goodwill amortization expense resulting from the acquisition of Diablo in
December 1999.

Amortization of acquired intangibles increased in the second quarter of
2000 from the first quarter of 2000 primarily due to the additional goodwill
amortization expense resulting from the acquisition of Westport Technology in
March 2000.

SEPARATION COSTS

Separation costs of $0.7 million, consisting primarily of consulting and
professional fees, were incurred in the second quarter of 2000 in connection
with separation of Tality's business from Cadence.

We expect to experience significant fluctuations in our future quarterly
and annual results of operations due to a variety of factors, many of which are
outside our control. These factors include:

- variations in our ability to develop and market our services and
technology on a timely and effective basis;

- our long sales cycle and potential delays by clients in the approval or
commencement of projects;

- changes in demand for our services and technology;

- increased competition and changes in our pricing as a result of increased
competitive pressure;

41
<PAGE> 45

- changes in the mix of fee arrangements, which have different gross
margins; and

- the failure to effectively manage, or any underestimation by us of the
costs necessary to complete, fixed price engagements.

Due to these factors, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and should not be relied upon
as indications of future results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Historically, Cadence has managed cash on a centralized basis. Cash
receipts associated with our business have been retained by Cadence because
Cadence has fully funded our operations. Accordingly, we currently have no cash
or cash equivalents.

In accordance with the amended and restated master separation agreement and
certain related agreements we have entered or will enter with Cadence, Cadence
has transferred or will transfer to Tality, LP or its subsidiaries the assets
and liabilities that relate to our business. However, under the terms of the
amended and restated master separation agreement, Cadence will retain all
current assets and current liabilities, excluding the current portion of capital
lease obligations and deferred revenue, which will be transferred to us.

Net cash used in operating activities was $36.8 million in the first half
of 1999 compared to $28.7 million in the first half of 2000. Net cash used in
operating activities was $67.6 million in 1997, $102.7 million in 1998 and $55.4
million in 1999. In these periods, net cash used in operating activities
resulted primarily from our net losses, increases in receivables, prepaid
expenses and other current assets, offset in part by depreciation and
amortization charges and provisions for losses on accounts receivable. Net cash
used in operating activities was also offset in part by the write-off of
acquired in-process research and development in the amount of $1.7 million in
1997 and $28.5 million in 1998, and by $4.5 million of non-cash restructuring
charges recorded in 1998.

Net cash used in investing activities was $7.3 million in the first half of
1999 compared to $10.1 million in the first half of 2000. Net cash used in
investing activities was $11.7 million in 1997, $68.6 million in 1998 and $50.9
million in 1999.

Investing activities consisted primarily of business acquisitions,
purchased software and other assets and purchases of property, plant and
equipment. Capital expenditures were $5.9 million for the first half of 1999,
$4.7 million for the first half of 2000, $8.8 million for 1997, $13.6 million
for 1998 and $10.3 million for 1999. Expenditures for acquired intangibles,
purchased software and other assets totaled $1.4 million for the first half of
1999, $0.6 million for the first half of 2000, $0.5 million for 1997, $11.3
million for 1998 and $1.8 million for 1999. In addition, $2.4 million in cash
was used to acquire Advanced Microelectronics in 1997, $43.7 million was used to
acquire Symbionics and Detente in 1998, $38.8 million was used to acquire Diablo
in 1999 and $4.8 million was used to acquire Westport Technology in the first
half of 2000.

Cash provided by financing activities was $44.1 million for the first half
of 1999 and $38.7 million for the first half of 2000. Cash provided by financing
activities was $79.3 million for 1997, $171.3 million for 1998 and $106.2
million for 1999. Cash provided by financing activities resulted from transfers
by Cadence to finance our business.

The liquidity and capital resources considerations are different for Tality
Corporation, which is a holding company, and Tality, LP, through which we will
conduct our operating activities. Tality Corporation currently does not have any
cash or cash equivalents and may not maintain significant assets, including cash
and cash equivalents, under the terms of the limited partnership agreement.
Tality Corporation's principal sources of funds will be distributions from
Tality, LP. Tality Corporation's primary uses of funds will be payment of
corporate expenses, including the costs associated with being a public company.

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<PAGE> 46

Tality, LP's primary uses of funds will be working capital, capital
expenditures and payment of operating expenses, including marketing and sales
expense, research and development expense, general and administrative expense
and potential acquisitions of, or investments in, complementary businesses or
technologies. Pending these uses, we intend to cause Tality, LP to invest the
net proceeds of this offering in high quality, income-producing securities such
as short-term investment grade or United States Government interest-bearing
securities. Cadence will continue to fund our operations, as it has done
historically, through the date that we receive the net proceeds from this
offering. We believe that the net proceeds from this offering and our future
cash flows from operations will be sufficient to satisfy our cash requirements
for at least the next 12 months. However, we could require additional funds
within this time period. Our capital requirements during that period and in the
longer term will depend on many factors, including our future operating results,
capital expenditures, research and development and marketing expenditures and
working capital management. If we need to raise additional funds, we cannot be
sure that financing will be available on favorable terms or at all. Future
equity financings could be dilutive to existing stockholders. Future debt
financings could impose restrictive covenants that reduce our financial and
operating flexibility.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

As of July 1, 2000, our exposure to market risks for changes in interest
rates was minimal. While we will be exposed with respect to interest rate
fluctuations in foreign jurisdictions where we are located, we anticipate that
our interest income and expense will be most sensitive to fluctuations in the
general level of U.S. interest rates. However, we do not expect our operating
results or cash flows to be affected to any significant degree by the effect of
a sudden change in market interest rates.

FOREIGN CURRENCY EXCHANGE RISK

Our operations include transactions in foreign currencies, and as such, we
benefit from a weaker U.S. dollar while being adversely affected by a strong
U.S. dollar, relative to major currencies worldwide. Accordingly, the primary
effect of foreign currency transactions on our results of operations is a
reduction in revenue from a strengthening U.S. dollar, partially offset by a
smaller reduction in expenses.

Historically, our exposure to foreign exchange rate risk has been managed
on a enterprise-wide basis as part of Cadence's risk management strategy. This
strategy has utilized foreign exchange forward and option contracts to hedge
certain balance sheet exposures and intercompany balances against future
movements in specific foreign exchange rates. Cadence enters into foreign
currency forward contracts and purchases foreign currency put options with
approved financial institutions, primarily to protect against currency exchange
risks. Forward contracts and put options are not accounted for as hedges;
therefore, the unrealized gains and losses are recognized in other income and
expense, net in advance of the actual foreign currency cash flows, with the fair
value of these forward contracts and put options being recorded as accrued
liabilities.

As of September 28, 2000, Tality did not have any outstanding forward
contracts or put options related to currency exchange risk.

We anticipate that our management of foreign currency risk will be similar
to the strategy deployed by Cadence. While we anticipate actively managing our
foreign currency risks on an ongoing basis, there can be no assurance that our
foreign currency hedging activities will substantially offset the impact of
fluctuations in currency exchange rates on our results from operations, cash
flows and financial position. On a net basis, foreign currency fluctuations did
not have a material impact on our results of operations and financial position
for the first six months of 2000.

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<PAGE> 47

EQUITY SECURITY PRICE RISK

We do not own any equity investments.

NEW ACCOUNTING STANDARDS

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

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, or SAB, No. 101, "Revenue Recognition". SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. We adopted SAB 101 retroactively for all periods presented. The
adoption of this statement did not have a material impact on our financial
results.

In March 2000, the FASB issued interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of APB
Opinion No. 25. This interpretation provides guidance regarding the application
of APB Opinion No. 25 to stock compensation involving employees. This
interpretation was effective July 1, 2000 and did not have a material effect on
our financial statements.

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<PAGE> 48

BUSINESS

INDUSTRY BACKGROUND

THE COMMUNICATIONS INDUSTRY

Rapid proliferation of the Internet and the increasing need for
connectivity have fueled dramatic growth in the global demand for communications
products. Examples of products that have experienced strong growth include
high-speed network equipment, together with the various devices used to access
these networks, such as mobile phones, information appliances and advanced two-
way television set-top boxes. These products rely on highly miniaturized,
complex integrated circuits to deliver high performance and enhanced
functionality.

Continuous advances in integrated circuit technologies and rapidly evolving
communications standards have required communications-related product
manufacturers to dedicate substantial resources to the product development
process. Manufacturers in these high growth markets are also experiencing a
number of pressures, including increased technological and business complexity,
growing competition, resource constraints and the need to introduce products to
market quickly with minimal risk. As a result, communications-related product
manufacturers are seeking cost-effective solutions to help them manage these
pressures in this dynamic environment.

TREND TOWARDS OUTSOURCING

To address the issues of increased complexity, competition, resource
constraints and time-to-market pressure, communications-related companies are
increasingly relying on relationships with external service providers to offer
expertise in areas that fall outside their core competencies and areas of
competitive differentiation. These relationships allow companies to concentrate
their efforts where they add the greatest value, while enabling them to benefit
from the specialized expertise of external service providers. These arrangements
allow companies to more quickly and easily introduce new products to market.
Examples of this trend include the expanded role of electronics contract
manufacturers in performing services in all areas of the supply chain, such as
components procurement, logistics management, assembly, fulfillment and client
support, and the emergence of independent foundries to provide integrated
circuit fabrication. In recent years this trend has led to the emergence of
independent electronics design services companies and intellectual property
providers.

The growing reliance by electronic products manufacturers and chip
companies on external service providers has increased the need to minimize the
risks inherent in these relationships. These risks result from the lack of
predictable availability of external resources, inconsistent or different
technical and business processes of third-party suppliers and lack of clear
hand-off criteria between suppliers. To help address these risks, electronic
products manufacturers and chip companies are increasingly building longer term
strategic relationships with their supply chain participants. These strategic
relationships are becoming increasingly important in streamlining the process of
bringing products to market. We believe that the trend toward outsourcing and
the formation of longer term strategic supply chain relationships will continue
to grow at a rapid pace.

THE TALITY SOLUTION

We are a leading global provider of innovative engineering services for the
design of complex electronic systems and integrated circuits. We focus on the
design of products within the growing communications market. Our engineering
expertise encompasses all aspects of electronic products design, including
complete system, sub-system and advanced integrated circuit design. We have
developed an extensive knowledge of communications-related applications and
relevant industry technology standards, upon which we are building a growing
portfolio of complementary intellectual property. We also have invested
significantly in our design infrastructure and project management capabilities.
As the world's largest independent electronics design company, we have more than
1,000 engineers in design sites located in the United States and abroad.

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<PAGE> 49

The key aspects of our solution include:

DEPTH AND BREADTH OF DESIGN EXPERTISE

We have developed extensive expertise in our targeted segments of the
communications market. For example, we have over 400 engineers experienced in
the design of wireless products. This depth of expertise includes knowledge of
and expertise in the leading-edge technologies underlying these products, such
as analog, radio frequency and system-on-a-chip design as well as physical
design of integrated circuits targeted at the most advanced manufacturing
processes. Coupled with this product expertise, we have the ability to conduct
all stages of the design process from conceptualization through implementation
for production manufacturing. Our engineering professionals have significant
experience in system design, embedded software and firmware design, printed
circuit board design and chip-level implementation, as well as full system
integration. The knowledge we have gained from completing over 500 client
projects in the last two years, coupled with our participation and leadership
roles in industry standards organizations, underlie our understanding of current
and emerging industry standards and technology trends. The depth and breadth of
our expertise provides the foundation for delivering comprehensive electronics
design solutions to our clients.

EXTENSIVE INTELLECTUAL PROPERTY PORTFOLIO

Our extensive experience in electronic systems and integrated circuit
design has enabled us to accumulate a growing portfolio of intellectual
property, consisting primarily of block- and platform-level intellectual
property. Block-level intellectual property performs specific, narrowly-defined
functions and can be implemented as a printed circuit board, integrated circuit
or embedded software module. Platform-level intellectual property, a combination
of various block-level intellectual property, performs the functions of a
complete system targeted at a specific end market and can be implemented as a
printed circuit board or integrated circuit. We derive our intellectual
property, including know-how, trade secrets and patents, from internal research
and development activities as well as through client projects. We integrate our
intellectual property into the design services we perform for clients. We have
developed and maintain a library of tested and verified intellectual property.
Access to this library speeds clients' time-to-market and reduces technological
and business risk.

ESTABLISHED DESIGN INFRASTRUCTURE

Our substantial and continuous investment in the development and
maintenance of a design infrastructure is a key component of the value of our
design services. Our investment in the requisite design automation tools,
computing infrastructure and laboratory environments saves our clients the time
and expense of establishing and maintaining their own design infrastructure.
This, in turn, facilitates cost-effective design and faster time-to-market.

PROJECT MANAGEMENT CAPABILITIES

The electronics design process is a creative, iterative and increasingly
complex process that is affected by rapidly changing and evolving market
requirements. As a result, project management skills are critical to managing
the product development process and maintaining accurate development schedules
and budgets. Because many technology companies do not devote significant
resources to developing extensive project management skills, our capabilities in
this area may prove critical for successfully guiding projects through the
development process. In addition to managing the growing complexities of the
design phase of product development, we offer assistance in developing a
reliable and predictable path between the steps and participants in our clients'
supply chains. This capability has become more important as the trend toward
outsourcing in the electronics industry has grown, resulting in an increasing
number of participants being involved in the process of bringing a product to
market.

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<PAGE> 50

SIZE AND INTERNATIONAL PRESENCE

We are the world's largest independent electronics design services
provider, with more than 1,000 engineers engaged in design services and research
and development. Our engineers are located in 14 design sites in the United
States, Canada, the United Kingdom and India including the U.S. sites of Silicon
Valley and San Diego, California and Research Triangle Park, North Carolina;
Ottawa, Canada; and Cambridge and Livingston in the United Kingdom. Our presence
in strategic international markets supports our expansion by facilitating our
access to top engineering talent.

THE TALITY STRATEGY

Our goal is to be the preferred global design partner and intellectual
property provider for electronics products companies and integrated circuit
manufacturers in communications-related markets. To achieve our goal, we intend
to:

TARGET HIGH GROWTH SEGMENTS OF THE ELECTRONICS MARKET

We primarily target selected segments of the communications market that we
believe offer strong potential for rapid and sustainable growth exceeding that
of the broader electronics market.

These segments include:

- wireline and wireless communications infrastructure equipment;

- high speed data access equipment; and

- consumer communications products.

Our target markets are characterized by technical standards, product design
complexity, intense time-to-market pressure, short product lifecycles and
extensive use of integrated circuits.

GROW OUR BASE OF INTELLECTUAL PROPERTY

We intend to build on our existing portfolio of communications-related
intellectual property. We will do this through focused research and development
efforts and by developing intellectual property in the course of performing
design projects. We will seek to contractually retain rights to reuse and
license intellectual property developed in the course of these projects. We
believe that there are two significant benefits to increasing our portfolio of
intellectual property:

- increased opportunities to generate complementary and recurring revenue
streams in the form of licensing fees and royalties; and

- increased operational efficiencies through the development of reusable
technology building blocks that can be deployed repeatedly in client
projects.

STRENGTHEN RELATIONSHIPS WITH SELECTED CLIENTS

Clients often initially seek our services for a specific design project or
to address a discrete design issue. Once we have established business and
technical credibility with a client, we have the opportunity to develop a
collaborative relationship in which we play a continuing strategic role in its
product development activities. Many of our current engagements are with clients
for whom we have previously provided design services. We are actively pursuing
collaborative relationships with clients that we believe are or will be leaders
in their respective markets. In many cases, we expect that the strategic nature
of these relationships will allow us to participate in the commercial success of
these clients on an incentive basis.

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<PAGE> 51

DEVELOP AN EXTENSIVE SUPPLY CHAIN NETWORK

We have built strategic relationships with participants in our clients'
supply chains to integrate our technical offerings and business practices. These
relationships create the framework to reduce error and delay and to improve
predictability. We intend to further broaden and strengthen our existing
relationships and to create new relationships. We frequently assist clients in
the management of their supply chains by applying our in-depth knowledge of, and
experience in, technical and business engagement processes. Our involvement
reduces clients' risk associated with reliance on external suppliers. To
facilitate our ability to provide these services, we are working to develop an
extensive network of relationships across the electronics supply chain,
including hardware and software providers, electronics manufacturing service
providers, application specific integrated circuit suppliers, intellectual
property providers, integrated circuit foundries and component distributors.
Ultimately, we intend to offer expanded services to select clients involving the
designation and management of their entire product development supply chain.

GROW THROUGH ACQUISITIONS

Historically, we have achieved growth both organically and through
acquisitions. While we currently have no specific understandings, commitments or
agreements regarding any acquisition, we regularly evaluate and discuss with
third parties possible acquisitions, and we will continue to pursue
acquisitions, investments or other strategic relationships with complementary
businesses and technologies to grow our engineering talent and expand our
intellectual property portfolio.

EXPAND SALES AND MARKETING ACTIVITIES

We currently sell our services and intellectual property primarily through
our direct sales force of over 70 dedicated professionals located in North
America, Europe, Japan and Asia. We believe our direct sales force is a source
of competitive differentiation. We have augmented our direct sales force by
developing referral relationships with established companies in other segments
of the electronics supply chain, such as intellectual property developers,
electronics manufacturing service providers, integrated circuit foundries,
integrated circuit companies and component distributors. We intend to continue
developing these relationships. In addition, we expect to continue benefiting
from our relationship with Cadence's sales organization by entering into a
formal sales agreement with Cadence prior to completion of this offering. This
agreement will provide for joint selling activities and referrals of potential
clients. As we complete our separation from Cadence, we intend to conduct a
marketing campaign to establish and build our brand and develop market awareness
of the benefits of our services and competitive advantages.

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The following describes our role in the stages of the electronic product
design process from concept to manufacturing.

ELECTRONIC PRODUCT DESIGN PROCESS

ELECTRONICS DESIGN PROCESS

OUR SERVICES

We offer a broad range of hardware and software development services to
create products that meet clients' functionality, price and performance
requirements. In some cases, we augment a client's internal design team. In
other cases, we act as a client's primary product design organization. We
categorize our offerings as either systems design services or integrated circuit
design services.

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<PAGE> 53

SYSTEMS DESIGN SERVICES

We provide services to our clients with respect to the most critical parts
of the product design process, from specification to prototype, and often
undertake post-design services such as obtaining regulatory approvals. The range
of our services includes:

<TABLE>
<C> <S>
- Systems architecture design and development
SYSTEMS DESIGN - Partitioning systems into hardware and software elements
- Materials specification and selection
- Planning to ensure conformance with applicable standards

- Application software porting
- Developing software for processing communications
protocols
EMBEDDED - Graphical user interface design and development
SOFTWARE DESIGN - Developing interfaces between the application software
program and real time operating system
- Real time operating system porting

BOARD-LEVEL - Generating electrical schematics
SUBSYSTEM DESIGN - Printed circuit board layout, assembly and test
- Digital, analog and radio frequency design

- Hardware and software integration and verification
SYSTEMS - Mechanical and industrial design
INTEGRATION - Prototyping
- System verification and field testing
- Supporting and coordinating the manufacturing process
</TABLE>

INTEGRATED CIRCUIT DESIGN SERVICES

Our integrated circuit design service offerings include digital, analog and
mixed-signal design, and extend from conceptualization through the handoff to
volume manufacturing. Our expertise encompasses highly-integrated
system-on-a-chip design as well as discrete integrated circuit design.
System-on-a-chip design is the integration of entire electronic systems onto a
single chip instead of a circuit board, requiring both systems and integrated
circuit design expertise. Our designs are applied to the entire range of
integrated circuit manufacturing processes, including complementary metal oxide
semiconductor, bipolar complementary metal oxide semiconductor, bipolar, silicon
germanium and gallium arsenide processes. Currently, we target manufacturing
processes with minimum feature sizes of as small as 0.12 micron. Our integrated
circuit design service offerings include:

<TABLE>
<C> <S>
- Chip architecture design and development
- Hardware and software intellectual property specification
and selection
SYSTEM-ON-A-CHIP DESIGN - Embedded software development and porting
- Hardware and software integration and verification
- Test program development

- Specification
BLOCK-LEVEL DESIGN - Functional design
- Physical design of third party intellectual property

- Physical design of complete integrated circuits
- Digital, analog and mixed signal design
SILICON IMPLEMENTATION - Application specific integrated circuit, application
specific standard product, or custom integrated circuit
design
</TABLE>

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<PAGE> 54
<TABLE>
<C> <S>
- Prototype testing
- Test program development and debugging
PRODUCT ENGINEERING - Device performance modeling and analysis
- Failure analysis
- Handoff to volume manufacturing

ADAPTATION FOR SPECIFIC - Adapting designs for new fabrication processes
MANUFACTURING PROCESSES - Adapting designs for additional fabrication facilities
</TABLE>

INTELLECTUAL PROPERTY

In connection with our client engagements and through our internal
development efforts, we have developed, and are continuing to develop, a
portfolio of platform and block-level intellectual property. We do not currently
derive a significant portion of our revenue from licensing. However, in selected
situations, we license some of this technology to clients under specific license
arrangements. As part of our strategy, we intend to grow our base of
intellectual property and to expand our licensing activities. Selected examples
of our intellectual property include:

PROTOCOL STACKS. We have a portfolio of protocol stacks for current and
emerging communications standards. A protocol is an agreed-upon format for
transmitting data between two devices. The term stack refers to the software
that processes the protocols. Stacks are incorporated into integrated circuits.
A representative list of our protocol stacks includes:

- BLUETOOTH: a short-range radio technology aimed at simplifying
communications among devices and between devices and the Internet.

- 3G: a standard identified by the International Telecommunications Union,
or ITU, as a successor to today's analog and digital mobile communication
technologies.

- W-CDMA: a proposed radio transmission technology that is one of the
leading candidates currently being considered by the ITU as a successor
to the current global standards for mobile communication systems.

- 802.11B: a standard for transmitting data across a 2.4 gigahertz band
wireless local area network.

INTEGRATED CIRCUIT BLOCKS. We have a portfolio of reusable integrated
circuit blocks that are integrated into complex chips called systems-on-a-chip.
We supply these integrated circuit blocks to clients in the form of a database
that contains design information or as prototype-tested chips. Representative
examples include:

- BLUETOOTH RADIO FREQUENCY TRANSMITTER-RECEIVER: a device that both
transmits and receives signals transported across a Bluetooth network.

- 802.3AB 1000BASET PHYSICAL LAYER INTERFACE: a physical interface to an
ethernet network that transmits and receives data at 1000 million bits
per second. Ethernet is a widely utilized local area networking standard
used in devices such as modems, cable modems, routers and switches.

- 802.3Z SERIAL/DESERIALIZER: a high speed interface that translates data
from a network that transmits sequentially over a single wire to or from
a network that transmits data simultaneously over a group of wires.

- OC192 INTERFACE: a high speed interface to a network conforming to
synchronous optical networks, which is a standard for connecting
fiber-optic transmission systems.

INTEGRATION PLATFORMS. Our integration platforms are fully-tested printed
circuit board-level subsystems that consist of a number of reusable hardware and
software components built around an

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<PAGE> 55

industry standard processor or digital signal processor. They are designed to be
quickly customized for specific clients. Representative examples include:

- TRI-BAND GSM PHONE: a platform containing critical technology required
for a GSM phone that can interact with networks operating in three common
radio frequency standards used in Europe, Asia and the United States.

- HANDHELD COMPUTER: a computer that is developed around a low power,
reduced instruction set microprocessor and that can be customized to run
multiple real-time operating systems.

MARKETS AND APPLICATIONS

We target selected segments of the communications market that we believe
have high potential for rapid and sustainable growth. Representative products in
these markets for which we have design expertise and intellectual property
include:

<TABLE>
<C> <S>
- Routers and Hubs
NETWORK - Switches
INFRASTRUCTURE - Video Multiplexers
- Digital Subscribers
- Line Multiplexers
WIRELESS - Base Stations
INFRASTRUCTURE
- Enterprise:
- Routers
- Switches
NETWORK ACCESS - Private Branch Exchanges
- Small/Home Office/Residential:
- Routers
- High Speed Modems
- Residential Gateways
- Mobile Handsets
MOBILE ACCESS - Information Appliances
- Personal Communicators
</TABLE>

CLIENTS

Our clients consist primarily of communications-related companies and
integrated circuit manufacturers of all sizes, ranging from start-up companies
to large, multinational organizations. During 1999 and the first six months of
2000, no single client accounted for 10% or more of our total revenue. In 1999,
our top three clients by revenue were Texas Instruments, Unisys and Philips
Business Communications.

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<PAGE> 56

A representative list of our current clients, grouped by market segment,
includes:

<TABLE>
<C> <S>
- Advanced Fiber Communications
COMMUNICATIONS - Alcatel Bell Telephone
INFRASTRUCTURE - Centerpoint Solutions
- Ironbridge
- Lucent Technologies
- Conexant
HIGH SPEED DATA ACCESS - Efficient Networks
- Terayon Corporation
- 3Com
- Mitsubishi
- NEC
CONSUMER COMMUNICATIONS - Philips Business Communications
PRODUCTS - Sony Electronics
- T-Nova
- Toshiba
</TABLE>

Some examples of our client relationships and recently completed design
projects include:

APLIO/TRIO(TM) SYSTEM-ON-A-CHIP FOR VOICE-OVER-INTERNET-PROTOCOL. Aplio,
Inc. engaged us to develop a single-chip processor that could simultaneously
handle voice-processing and telephony functions and run software that processes
Voice-over-Internet-Protocol. Aplio previously designed an initial version of
the product utilizing a printed circuit board-based design and lower-performance
discrete components. With Aplio's Voice-over-Internet-Protocol and our
system-on-a-chip design expertise, we integrated the required functionality onto
a single chip, and we modified and completed Aplio's original software to run on
this new hardware platform. The resulting system-on-a-chip contains an
ARM7TDMI(TM) embedded microcontroller and two OakDSPCores(TM) digital signal
co-processors. Aplio is currently marketing the Aplio/Trio System-on-a-Chip to
manufacturers of Internet phones, e-mail phones and screen phones, in addition
to using it for its own devices. Aplio is a subsidiary of Net2Phone, a leading
provider of voice-enhanced Internet communications services to individuals and
business worldwide.

NOKIA WIRELESS BASE STATION DESIGNS. Nokia Networks/Radio Access Systems
engaged us to collaborate on the design of a wireless base station. Successful
completion of the initial project led to a joint endeavor to develop future
Nokia products targeted at enhanced Global System for Mobile Communications, or
GSM, standards. We believe this relationship resulted from demonstration of our
expertise in hardware and radio frequency design, as well as our adherence to
design processes that meet Nokia's standards.

MATSUSHITA GSM-COMPLIANT RADIO FREQUENCY SUBSYSTEM MODULE. Jointly with
Matsushita Electronic Components Co., Ltd., during 1997 and 1998, we developed a
GSM 900-compliant radio frequency subsystem module, which is the radio interface
between the cellular phone and the cellular base station. These radio interfaces
are subject to strict compliance standards of both regulatory authorities and
cellular telephony service providers. Radio frequency design is one of the most
challenging aspects of cellular phone design and a frequent cause of late
product entry, or even product failure. Matsushita leveraged our expertise in
radio frequency design for cellular and other radio applications to develop a
reusable solution, utilizing off-the-shelf components wherever possible. We
leveraged Matsushita's leading technology and expertise in the field of
miniature high frequency radio modules. The module is designed to operate with a
number of the digital baseband controllers commonly utilized in GSM 900 phones.

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<PAGE> 57

RESEARCH AND DEVELOPMENT

We engage in research and development activities to create opportunities
for complementary and recurring revenue streams through license and royalty
fees, and to develop and enhance our design methodologies and processes. These
efforts include:

DEVELOPMENT OF INTEGRATED CIRCUIT BLOCKS. Integrated circuit blocks are
reusable groups of hardware or software components that perform specific
functions and are designed to be integrated into sophisticated chips. The
functions these blocks perform range from a simple operation, such as addition,
to more complex functions, like those performed by a Universal Serial Bus
interface.

DEVELOPMENT OF INTEGRATION PLATFORMS. Integration platforms are fully
tested systems, implemented in a chip or printed circuit board-level system,
that consist of a number of reusable hardware and software components built
around an industry standard microprocessor or a digital signal processor. These
platforms are designed to be quickly customized for specific clients. These
platforms typically contain both hardware and software derived from a
combination of our intellectual property and the intellectual property of
others.

DEVELOPMENT OF PROTOCOL STACKS. A protocol is an agreed-upon format for
transmitting data between two devices. The term stack refers to the software
that processes the protocols. An example is the Transmission Control
Protocol/Internet Protocol stack, which is a protocol used to connect host
computers on the Internet. This intellectual property typically includes a
defined software architecture, software source code, test procedures and related
documentation.

Our research and development efforts relating to design methodologies and
processes consist of:

DEVELOPMENT OF ADVANCED DESIGN METHODOLOGIES. In addition to investments in
specific design intellectual property, we make significant investments in the
development of advanced design methodologies and processes. Through these
advanced design processes and methodologies, we define ways to link commercially
available design automation software programs and intellectual property to form
a complete design system. This enables us to create more efficient, predictable
and repeatable processes for designing complex systems.

MEMBERSHIP IN INDUSTRY ASSOCIATIONS. Our clients compete in markets
characterized by rapid technological advances, changes in industry standards and
frequent new product introductions and improvements. To stay at the forefront
and participate in the creation of these changing standards, we are a member of
a number of standards and industry bodies, such as Cable Labs, VDSL Alliance,
USB 2.0, Home PNA, 802.3ae, the European Telecommunications Standards Institute,
the National Television Standards Committee, the Advanced Television Standards
Committee, HomeRF Committee, Institute of Electrical and Electronics Engineers,
Associate of Radio Industries and Businesses and the Digital Video Broadcasting
Project.

INVOLVEMENT IN RESEARCH PROGRAMS. We are currently involved in research
programs with a number of university and independent research groups worldwide.
In some of these programs, we provide input regarding engineering program
curricula. We also sponsor pre-defined research programs through which we obtain
licenses to use the intellectual property developed by these programs.

SALES AND MARKETING

We maintain a direct sales force to sell our design services. We have the
largest sales force of any independent electronics design services company,
which provides us with an important competitive advantage. As of September 28,
2000, we had over 70 dedicated sales professionals, supported by our marketing
organization. To increase our reach to potential clients, we also have referral
arrangements with a number of companies, such as Altima, IBM, Insight
Electronics and Wyle Electronics. Following our separation from Cadence, we
expect to continue benefitting from our

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<PAGE> 58

relationship with Cadence's sales organization by entering into a formal sales
agreement with Cadence prior to completion of this offering. This agreement will
provide for joint sales efforts to specified potential clients and a referral
arrangement under which Cadence will refer potential clients to us for a fee.
See "Arrangements between Tality and Cadence -- Joint Sales Agreement".

We employ traditional marketing approaches to promote our services,
including contributing articles to industry journals, presenting conference
papers, issuing press releases and advertising through print and web-based
media. Our representatives regularly participate in trade shows, seminars and
panel discussions. As we complete our separation from Cadence, we intend to
conduct a campaign to build our brand and develop general market awareness of
the benefits of our offerings.

SUPPLY CHAIN RELATIONSHIPS

We have developed relationships with various technology companies that we
anticipate will play important roles in clients' supply chains. Our most common
relationships are ones in which we combine and jointly market the products and
services of third parties with our services and intellectual property to offer
more comprehensive solutions to potential clients. These relationships enable us
to define technical and business interactions between a supplier and our design
services and intellectual property. We manage these relationships under our
SureLink program, which currently includes 25 participants.

We also establish expanded relationships with selected supply chain
participants to pursue specific market opportunities that call for more tightly
integrated technical and business offerings. These relationships are focused on
ensuring compatibility of our offerings in narrowly defined target markets. We
recently established our SurePath program as a vehicle to market these
relationships. SurePath program participants are currently Advanced
Semiconductor Engineering, Inc., Artisan Components, Inc., NurLogic Design, Inc.
and Taiwan Semiconductor Manufacturing Company.

SELLING ARRANGEMENTS

The primary business arrangements for delivery of our services and
intellectual property to clients are fee-based. Our project arrangements with
clients typically fall into one of the following three categories:

FIXED PRICE. Under our fixed price arrangements, clients pay a fixed price
for a completed project. If the client decides to request a deviation from the
agreed-upon work plan, we generate an engineering change order and negotiate a
price increase associated with the change. With this type of pricing
arrangement, we bear the risk that our expenses and resources dedicated to the
project will exceed our expectations, resulting in reduced margins to us and
loss of opportunities to pursue other projects. Alternatively, we can realize
higher than planned margins when we execute projects with greater efficiency
than anticipated in negotiating the agreed-upon price.

SCOPED TIME AND MATERIALS. Similar to our fixed price arrangements, scoped
time and materials projects involve developing a statement of work with our
client and specifying deliverables, timing, acceptance criteria and client
responsibilities. However, for scoped time and materials arrangements, a rate
per engineering hour plus cost of materials is negotiated, and changes to the
original statement of work are billed at the same hourly rate. In these
arrangements, the client bears the risk that the expenses will exceed
expectations.

DEFINED LEVEL OF EFFORT. Under defined level of effort arrangements, a
client contracts to use a specified number of engineering hours at an
established rate per hour over a designated period of time, typically a
renewable one-year term. Under these arrangements, the client will be billed for
the entire contract commitment, regardless of whether time is used.

To date, we have derived most of our revenue from electronics design
services under fixed price or scoped time and material arrangements, and we
expect this to continue in future periods.

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<PAGE> 59

PROPRIETARY TECHNOLOGY

Our success depends, in part, upon our proprietary technology. We generally
rely on patents, copyrights, trademarks and trade secret laws to establish and
protect our proprietary rights. We have filed trademark applications for the
name "Tality" in the United States and several other countries. Upon our
separation from Cadence, we will have approximately 20 issued U.S. patents, 20
foreign patents, 20 U.S. patent applications pending and 13 foreign patent
applications pending. We cannot assure you that third parties will not
challenge, invalidate or circumvent these patents. We also cannot assure you
that the rights granted under our patents will provide us with any competitive
advantages, that patents will be issued on any of our pending applications, or
that future patents will be sufficiently broad to protect our technology.
Furthermore, the laws of foreign countries may not protect our proprietary
rights in those countries to the same extent as U.S. law protects these rights
in the United States.

We have expended and will continue to expend considerable resources in
seeking patents to protect our intellectual property. While our ability to
compete is enhanced by our ability to protect our intellectual property, we
believe that, in view of the rapid pace of technological change, the combination
of the technical experience and innovative skills of our employees may be as
important to our business as the legal protection of our patents and other
proprietary information.

There are numerous patents in the electronics industry and new patents are
being issued at a rapid rate. As a result, from time to time, we may be forced
to respond to or prosecute intellectual property infringement claims to protect
our rights or defend a client's rights. These claims, regardless of merit, could
consume valuable management time and focus, divert resources and result in
costly litigation, any of which could seriously harm our business. In settling
these claims, we may be required to enter into royalty or licensing agreements
with those claiming infringement. These royalty or licensing agreements, if
available, may not have terms acceptable to us. Being forced to enter into a
license agreement with unfavorable terms could seriously harm our business,
operating results and financial condition.

Our business also requires us to license the software and other
intellectual property of Cadence and other third parties. For example, following
our separation from Cadence, we will license Cadence's electronic design
automation software and methodology intellectual properties. See "Arrangements
Between Tality and Cadence -- Master Intellectual Property Ownership And License
Agreement".

COMPETITION

Our principal competitors are the internal research and development and
product development organizations of electronics product companies and
integrated circuit manufacturers.

From time to time, we also face competition from:

- numerous existing small- and medium-size engineering services companies
such as Dot Wireless, Intrinsix, PA Consulting and TTP Communications;

- design services organizations of electronic product company suppliers,
integrated circuit foundries, electronics manufacturing service
providers, intellectual property companies, application specific
integrated circuit vendors, and real-time operating systems companies,
any of which may decide to increase their electronics design services
offerings to complement their existing design products and services.
These competitors include BSquare, Fujitsu, Hitachi, LSI Logic, NEC,
Philips/VLSI, Parthus Technologies, Phoenix Technologies, Toshiba and
Wind River Systems; and

- professional engineering services firms that may enter the market.

We believe that the difficulty in attracting and retaining adequate numbers
of qualified professionals, the difficulty of developing expertise across the
range of technologies required to

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<PAGE> 60

provide comprehensive electronics design services, together with the costs of
developing and maintaining a design infrastructure present barriers to entry in
this industry. To effectively compete in the electronics design services
industry, we must deliver design capabilities superior to those of the internal
research and development and product development departments of potential
clients and those of other independent service providers. Because of the depth
and breadth of our design expertise, our growing intellectual property portfolio
and our investment in supply chain relationships, we believe that we are
competitive in delivering design solutions that meet clients' requirements.
However, we cannot assure you that we will have the financial resources,
technical expertise, marketing or support capabilities to compete successfully
in this industry.

EMPLOYEES

As of September 15, 2000, we employed approximately 1,200 persons,
excluding independent contractors and temporary employees, with approximately
100 engaged in sales, marketing and client service activities, over 1,000 in
engineering and research and development, and approximately 100 in management,
administration and finance. None of our employees are represented by a labor
union, and we have experienced no work stoppages. We believe that our employee
relations are good.

LITIGATION

From time to time, we are involved in various disputes and litigation
matters that arise in the ordinary course of business. These matters include
disputes and lawsuits related to intellectual property, licensing, contract law
and employee relations matters.

In connection with our separation from Cadence, we have agreed to indemnify
Cadence for liabilities arising from our business prior to the separation,
including any damages arising from the pending litigation described below.

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 commenced. A trial date has been scheduled for
January 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.

Cadence has been sued by a former design services employee alleging that
Cadence owes compensation for transactions with a specific client and severance
pay. This employee seeks unspecified damages claiming breach of contract, breach
of the covenant of good faith and fair dealing and violations of the
Pennsylvania Wage Payment and Collection Law. Cadence filed a motion for summary
judgment as to all claims, which was granted in August 2000. An appeal of the
summary judgment was filed by the plaintiff on September 5, 2000. No hearing
date has been set for this appeal.

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 are 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 has filed a motion to dismiss the defendant's counterclaims and
a hearing on this motion is scheduled for October 2, 2000. Cadence believes that
it has defenses to and disputes the allegations made by IMI Telecommunications,
Inc. and intends to defend the action vigorously.

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While Tality cannot predict the results or estimate the possible loss, or
range of loss, if any, associated with the litigation matters described above,
Tality does not expect the outcome of any of these matters to have a material
adverse effect on its business.

FACILITIES

Our principal executive offices are located in San Jose, California and
consist of approximately 94,000 square feet in two buildings that are leased
under an agreement with Cadence that expires in 2005. We also lease a facility
of approximately 58,000 square feet in one building in Livingston, United
Kingdom. We lease additional facilities for our design sites, research and
development facilities and sales offices located in the United States and
various foreign locations, including Canada, Europe, Japan, India and other
parts of Asia. We believe that these facilities are adequate for our current
needs and that suitable additional or substitute space will be available as
necessary to accommodate any expansion of our operations.

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

Our executive officers, directors and key employees, and their ages and
positions as of September 15, 2000, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Robert P. Wiederhold....... 41 President and Chief Executive Officer; Director
Duane W. Bell.............. 49 Senior Vice President, Chief Financial Officer, Secretary
Ronald R. Barris........... 57 Director, Compensation Committee Member
H. Raymond Bingham......... 54 Chairman of the Board, Compensation Committee Member
Michael G. Keith........... 51 Director, Audit Committee Member
Kenneth Levy............... 55 Director, Audit Committee Member
John M. Scanlon............ 58 Director, Audit Committee Member
John C. Adams.............. 51 Vice President and General Manager, Livingston Design Centre
James P. Douglas........... 39 Vice President, Marketing
Dale W. Gaines............. 37 Vice President and General Manager, Worldwide Electronic Infusion
Timothy F. Henricks........ 47 Vice President and Co-General Manager, Analog/Mixed Signal
Integrated Circuits
Brent C. Hudson............ 37 Vice President and General Manager, Wireless and Multimedia Design
Robert S. Johnson, Jr...... 40 Vice President, Worldwide Sales
Rakesh Kumar............... 53 Vice President and General Manager, Silicon Technology Services
Eric H. Naviasky........... 43 Vice President and Co-General Manager, Analog/Mixed Signal
Integrated Circuits
Ajay P. Shingal............ 42 Vice President and General Manager, Digital Integrated Circuit
Design Services Group
Alan G. Strelzoff.......... 63 Vice President and General Manager, Datacom/Telecom Design Group
and Industrial Electronics
</TABLE>

EXECUTIVE OFFICERS

ROBERT P. WIEDERHOLD has served as President and Chief Executive Officer
and a director of Tality since its incorporation in July 2000. Mr. Wiederhold
rejoined Cadence in December 1996 as a result of its acquisition of High Level
Design Systems, Inc., an electronics design automation software company. He was
named Vice President and General Manager of the Deep Submicron Business Unit in
December 1996 and became Senior Vice President of Cadence's Worldwide Design
Services Group in July 1998. From 1994 through 1996, he served as Executive Vice
President, Chief Operating Officer and Director of High Level Design Systems.
From 1985 to 1994, he held various positions with Cadence, the last being Vice
President, Marketing for the Systems Division.

DUANE W. BELL has served as Senior Vice President, Chief Financial Officer
and Secretary of Tality since July 2000. From March 2000 to June 2000, Mr. Bell
served as Chief Financial Officer and Secretary of Globeset, Inc., an e-commerce
infrastructure company. From January 1999 to February 2000, Mr. Bell was Chief
Financial Officer of KPMG Consulting, the consulting unit of KPMG LLP. From July
1998 to January 1999, Mr. Bell served as Director, Planning and Analysis for
KPMG LLP. From November 1996 to June 1998, he was Director of National
Operations for KPMG LLP's Information, Communications and Entertainment line of
business. From 1995 to November 1996, Mr. Bell served as Senior Vice President,
Chief Financial Officer and Secretary of Cotelligent, Inc., a technology
consulting firm.

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DIRECTORS

RONALD R. BARRIS has been a director of Tality since its incorporation in
July 2000. Mr. Barris served Cadence as Senior Vice President for Strategy and
Electronic Infusion from December 1999 to July 2000, and has served as Senior
Vice President, Services and Strategy, since August 2000. From 1989 to 1999, Mr.
Barris was a high technology consulting partner with Coopers & Lybrand and was
the Managing Partner for the World Wide Semiconductor Practice of
PricewaterhouseCoopers.

H. RAYMOND BINGHAM has been a director of Tality since its incorporation in
July 2000 and is chairman of the board. Mr. Bingham has served as President and
Chief Executive Officer of Cadence since May 1999. Mr. Bingham has also been a
director of Cadence since November 1997. From 1993 to April 1999, Mr. Bingham
served as Executive Vice President and Chief Financial Officer of Cadence. Prior
to joining Cadence, Mr. Bingham was Executive Vice President and Chief Financial
Officer of Red Lion Hotels and Inns, an owner and operator of a chain of hotels,
for eight years. Mr. Bingham is a director of Legato Systems, Inc., Onyx
Software Corporation, TenFold Corporation and Chairman of the Board of Directors
of Integrated Measurement Systems, Inc.

MICHAEL G. KEITH has been a director of Tality since September 2000. Mr.
Keith has served as President and Chief Executive Officer, AT&T Fixed Wireless
Services of the AT&T Wireless Group since January 2000. Mr. Keith has held
numerous sales and marketing positions at AT&T since he joined the company in
1978, including Vice President and General Manager for Business Customer Care in
1996, Vice President and General Manager -- Global Services in 1997, and
President -- AT&T Business Services in 1999.

KENNETH LEVY has been a director of Tality since September 2000. Mr. Levy
co-founded KLA Instruments and served as its President and Chief Executive
Officer from 1976 until its merger with Tencor in 1997. Mr. Levy has served as
Chief Executive Officer and a Director of the merged company, KLA-Tencor
Corporation and currently serves as its Chairman of the Board. Mr. Levy also
serves on the boards of directors of Ultratech Stepper, Inc. and Speedfam-IPEC.

JOHN M. SCANLON has been a director of Tality since September 2000. Mr.
Scanlon has served as Vice Chairman of the board of directors of Asia Global
Crossing since November 1999 and was Chief Executive Officer of Asia Global
Crossing from November 1999 to February 2000. Mr. Scanlon has been a director of
Global Crossing since April 1998 and was its Chief Executive Officer from April
1998 to February 1999. Mr. Scanlon was President and General Manager of the
Cellular Networks and Space Sector of Motorola, Inc. from 1997 to 1998 and had
been an executive with Motorola since 1990. Mr. Scanlon was Chief Operating
Officer of Cambridge Technology Group from 1988 to 1990 and also spent 24 years
with AT&T Corp. and Bell Laboratories, becoming Group Vice President at AT&T
Corp. Mr. Scanlon serves on the boards of directors of Hutchison Global Crossing
and Centennial Communications Corp.

KEY EMPLOYEES

JOHN C. ADAMS has served as Vice President, General Manager of Livingston
(Scotland) Design Centre of Tality, a position he has held since its
incorporation in July 2000. From July 1991 to July 2000, Mr. Adams served as a
Vice President of Research and Development of the design services group of
Cadence.

JAMES P. DOUGLAS has served as Vice President of Marketing of Tality since
its incorporation in July 2000. From November 1998 to June 2000, Mr. Douglas
served as Vice President and General Manager of the Information Appliances
design group of Cadence. From November 1997 to October 1998, Mr. Douglas was
Vice President of Business Development for the design services group of Cadence.
Prior to joining the design services group in 1997, Mr. Douglas spent six years
with Cadence in various management positions including vice president of
marketing.

DALE W. GAINES has served as Vice President and General Manager, Worldwide
Electronics Infusion of Tality since its incorporation in July 2000. From March
1999 to July 2000, Mr. Gaines

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served as Vice President and Client Partner of the Electronics Infusion Group of
Cadence. From 1989, Mr. Gaines held various positions with Cadence, including
Vice President of Sales and Vice President, Worldwide Sales Development.

TIMOTHY F. HENRICKS has served as Vice President and Co-General Manager of
the Analog/Mixed Signal Integrated Circuits group of Tality since its
incorporation in July 2000. Since 1996, he held the same position in the design
services group of Cadence. Prior to joining Cadence, he spent 20 years with
Westinghouse as an analog/mixed-signal designer, systems architect and
analog/mixed-signal technical advisor.

BRENT C. HUDSON has served as the Vice President and General Manager,
Wireless and Multimedia Design of Tality since its incorporation in July 2000.
He previously held the same position in the design services group of Cadence.
Mr. Hudson previously served as Vice President and General Manager of Symbionics
Ltd, the wireless and digital television design services company acquired by
Cadence in February 1998. Prior to his employment with Symbionics, Mr. Hudson
held senior management posts with Xebec Multimedia, Critchley Group PLC and
KPMG.

ROBERT S. JOHNSON, JR. has served as the Vice President, Worldwide Sales of
Tality since its incorporation in July 2000. From 1999 to July 2000, Mr. Johnson
served as Vice President, Worldwide Sales of the design services group of
Cadence. Mr. Johnson joined Cadence in December 1996 with its acquisition of
High Level Design Systems, Inc., an electronic design automation software
company. While at Cadence, Mr. Johnson served in various sales management
positions for both its EDA and Design Services businesses. From 1993 through
1996, Mr. Johnson served as Regional Sales Manager for High Level Design
Systems.

RAKESH KUMAR has served as the Vice President and General Manager of
Tality's Silicon Technology Services group since its incorporation in July 2000
and previously held the same position in the design services group of Cadence
since 1997. He joined Cadence in March 1995 as a director of the Silicon
Technology Services business unit. Prior to joining Cadence, Dr. Kumar spent 19
years at Unisys Corporation, most recently directing the Silicon, Integrated
Circuit Packaging and Test activities.

ERIC H. NAVIASKY has served as the Vice President and Co-General Manager of
the Analog/Mixed-Signal Integrated Circuits design group of Tality since its
incorporation in July 2000. He previously held the same position in the design
services group of Cadence. Before joining Cadence, Mr. Naviasky spent 18 years
with Westinghouse as an analog/mixed-signal designer and analog/mixed-signal
technical advisor.

AJAY P. SHINGAL has served as the Vice President and General Manager of
Tality's Digital Integrated Circuit Design Services Group since its
incorporation in July 2000 and previously held the same position in the design
services group of Cadence. Before joining Cadence, he was Senior Vice President
of Cambridge Design Systems, Inc. He managed and directed all hardware and
embedded software business units. Prior to Cambridge, he worked in senior
management positions with IBM, AT&T, Intel and Hewlett Packard.

ALAN G. STRELZOFF has served as Vice President and General Manager of
Tality's Datacom/ Telecom design group and Embedded Controls design group of
Tality since its incorporation in July 2000. He previously held the same
position in the design services group of Cadence. Dr. Strelzoff joined Cadence
in October 1997 as Vice President, Research and Development, of Logic Design and
Verification. Previously, he held various positions at Modicon/Schneider
Automation from 1988 through 1997, most recently as Vice President and Chief
Scientist.

BOARD STRUCTURE

Our board of directors is divided into three classes serving staggered
three-year terms. Messrs. Wiederhold's and Keith's initial terms will expire in
2001. Messrs. Levy's and Barris' initial terms will expire in 2002. Messrs.
Bingham's and Scanlon's initial terms will expire in 2003.

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EXECUTIVE OFFICERS

Executive officers are elected by our board of directors and serve until
their successors have been duly elected and qualified or until their resignation
or removal. The executive officers of Tality also constitute the executive
officers of Tality, LP, each holding the same office with both entities.

BOARD COMMITTEES

Our board of directors has established a compensation committee, whose
members include Messrs. Barris and Bingham, both of whom are neither employees
nor officers of Tality, and an audit committee, whose members include Messrs.
Keith, Levy and Scanlon, all of whom are independent directors.

The compensation committee generally will:

- review compensation of all officers, employees and consultants of Tality
and its subsidiaries;

- determine and grant awards of compensation, benefits and bonus, including
awards of stock or options and changes to stock option programs, for
officers, employees and consultants, except:

- all awards which give rise to a potential loss of an exemption
pursuant to the rules under Section 16 of the Securities Exchange Act
of 1934 will be approved by the full board of directors, and

- all awards that are intended to qualify for the "performance-based
compensation" exception to the limit on compensation deductions under
Section 162(m) of the Internal Revenue Code will be granted by a
committee of the full board of directors that is comprised solely of
two or more outside directors;

- review, study and approve proposals for company-wide benefit programs;

- review and request studies of the competitiveness of Tality's
compensation structure; and

- review and approve commission plans.

Our audit committee will review our auditing, accounting, financial
reporting and internal control functions and will make recommendations to our
board of directors for the selection of independent public accountants. In
addition, the committee will monitor the quality of our accounting principles
and financial reporting, as well as the independence of and the non-audit
services provided by our independent public accountants. In discharging its
duties, the audit committee will:

- review and approve the scope of the annual audit and the independent
public accountant's fees;

- meet independently with our internal auditing staff, our independent
public accountants and our senior management; and

- review the general scope of our accounting, financial reporting, annual
audit and internal audit program, matters relating to internal control
systems as well as the results of the annual audit.

To date, all determinations regarding compensation have been made by the
compensation committee of the board of directors of Tality Corporation.

BOARD COMPENSATION

Non-employee directors will be entitled to purchase up to 100,000 shares of
Class A common stock subject to a one year right of repurchase by Tality and
receive an initial option grant of 50,000 shares of Class A common stock upon
becoming a director of Tality, which options will vest over a four-year period
in equal installments. Thereafter, non-employee directors will also receive an
annual option grant under our Directors Stock Option Plan to purchase 12,500
shares of Class A common

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stock. The chairman of the board will be entitled to receive an initial option
grant of 100,000 shares of Class A common stock and an annual option grant
thereafter for 25,000 shares of Class A common stock under our Directors Stock
Option Plan. See "Management -- Stock Options". We also intend to pay the
expenses of our non-employee directors in attending Board and committee
meetings. Directors are not expected to receive any cash compensation for
service as a director of Tality.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No interlocking relationship exists between our board of directors and the
board of directors or compensation committee of any other company, except that
H. Raymond Bingham, a director of Tality Corporation, is also a director and the
President and Chief Executive Officer of Cadence and Ronald R. Barris, a
director of Tality Corporation, is also an executive officer of Cadence.

Prior to the separation date, all of our employees, including our officers,
will be employed by Cadence and a number of our directors and executive officers
own a substantial amount of Cadence common stock and options to purchase Cadence
common stock. In addition, in connection with our separation from Cadence, we
have entered and will enter into agreements governing the separation and our
ongoing business relations with Cadence after the separation. See "Arrangements
Between Tality and Cadence".

EXECUTIVE COMPENSATION

Prior to the separation, Tality employees, including officers of Tality,
were compensated by Cadence. Following the separation, the executive officer
named below and all other Tality employees will be compensated by Tality. The
following information summarizes the compensation paid by Cadence to Mr.
Wiederhold, our Chief Executive Officer and our sole executive officer whose
total annual salary and bonus exceeded $100,000 during the fiscal year ended
January 1, 2000. While this compensation table indicates the compensation paid
by Cadence to Mr. Wiederhold in 1999, it does not necessarily indicate the
compensation that we or Tality, LP will pay to him or any other executive
officer after the separation. The table does not include compensation
information for Duane W. Bell, our Senior Vice President, Chief Financial
Officer and Secretary, who commenced employment with us in July 2000 and whose
annual salary and bonus would have exceeded $100,000 during our last fiscal
year, had he been an employee of Cadence in 1999. Mr. Bell's salary on an
annualized basis is $270,000, and he is eligible to receive an annual bonus
targeted at $135,000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
--------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Robert P. Wiederhold.................... $281,250 $172,371 350,000 $40,198(1)
President and Chief Executive Officer
</TABLE>

---------------
(1) Includes Cadence's contributions to Mr. Wiederhold's 401(k) savings plan and
the value of accrued but unused vacation converted into cash.

Mr. Wiederhold served as Senior Vice President of Cadence's Worldwide
Design Services Group prior to the separation and has been our President and
Chief Executive Officer and a director since our formation.

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OPTION GRANTS IN LAST FISCAL YEAR

The following table shows certain information regarding options granted to
the named executive officer during the fiscal year ended January 1, 2000. Except
as noted below, the grants relate to options to purchase Cadence common stock.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN OR BASE OPTION TERM(2)
OPTIONS FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(1) YEAR ($/SH) DATE 10% 5%
---- ---------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert P.
Wiederhold......... 100,000 * $12.59 5/12/09 $2,007,119 $ 792,014
250,000 1 $10.34 7/30/09 $4,121,318 $1,626,282
</TABLE>

---------------
* less than 1%

(1) We expect that in connection with the separation, Mr. Wiederhold will elect
to convert all of his unvested options to purchase shares of Cadence common
stock to options to purchase shares of Tality's Class A common stock. The
converted options will vest in one lump sum on the seventh anniversary of
the option's grant date, although that vesting schedule may be accelerated
under the conditions described elsewhere in "Management -- Employee Plans".

(2) Potential realizable values are net of exercise price, but before deduction
of taxes associated with exercise. These amounts represent certain assumed
rates of appreciation only, based on Securities and Exchange Commission
rules, and do not represent our estimate of future stock prices. No gain to
an optionee is possible without an increase in stock price which will
benefit all stockholders commensurately. A zero percent gain in stock price
will result in zero dollars for the optionee. Actual realizable values, if
any, on stock option exercises are dependent on the future performance of
our common stock, overall market conditions and the optionholders' continued
employment through the vesting period.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES

The table below sets forth information regarding options exercised during
1999 by the named executive officer, as well as the aggregate value of
unexercised options held by that officer at January 1, 2000. The value of
unexercised "in-the-money" options is based on the closing price of the Cadence
common stock of $22.81 at December 30, 1999, less the applicable option exercise
price for all shares underlying the option and on the average exercise price of
Cadence's stock options. We have no outstanding stock appreciation rights.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
OF SHARES YEAR END AT FISCAL YEAR END($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Wiederhold....... 50,000 $680,590 135,499 522,501 $1,213,469 $4,607,014
</TABLE>

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EMPLOYEE PLANS

401(K) PLAN

Through December 31, 2000, eligible U.S. employees of Tality, LP may
participate in Cadence's 401(k) savings plans which provide retirement benefits
through tax deferred salary deductions. Cadence generally makes matching
contributions of 50% for every dollar contributed by our employees, which
matching contributions cannot exceed six percent of the annual aggregate
salaries of those employees eligible to participate. Effective January 1, 2001,
we expect to establish our own 401(k) plans.

STOCK OPTIONS

2000 EQUITY INCENTIVE PLAN

We have adopted the Tality 2000 Equity Incentive Plan, which provides for
awards of restricted shares of Class A common stock, options to purchase shares
of our Class A common stock and stock appreciation rights in our Class A common
stock to:

- our employees, directors and consultants; and

- employees and consultants of any of our affiliates. These affiliates may
act as participating employers in the plan.

NUMBER OF SHARES. We adopted the plan effective as of July 13, 2000, and it
will continue in effect for ten years. The plan, as amended in September 2000,
currently allows for grants of, or options to purchase, an aggregate of
7,500,000 shares of our Class A common stock. The number of shares available
under the plan will increase annually by 2,000,000 shares per year for four
years, beginning on July 2, 2001 and ending on July 2, 2004. Awards for
6,350,000 shares of Class A common stock are currently outstanding under the
plan.

If a stock award expires or otherwise terminates without having been
exercised in full, or if we repurchase any unvested shares acquired pursuant to
a stock award, the share shall revert to and again become available for issuance
under the plan.

Option grants under the plan may provide for a reload right, which permits
the optionholder to exercise an option, in whole or in part, by surrendering
shares of Class A common stock in an amount not more than the number of shares
subject to grant under the option exercised, and to receive upon exercise a new
option, provided that:

- the number of shares subject to the new option will equal the number of
shares surrendered;

- the new option will have the same expiration date as the exercised
option;

- the new option will have an exercise price equal to 100% of the fair
market value on the date of exercise of the option; and

- the new option will not contain a reload right.

PLAN ADMINISTRATION. A committee consisting of one or more members of the
board of directors will administer the plan. Under the plan, the administration
committee determines the employees eligible to receive awards under the plan and
the provisions of the agreements governing the awards, including term, exercise
price and vesting schedule.

Employees of Cadence transferring to us who hold unvested options to
purchase Cadence common stock and who do not surrender their unvested Cadence
options will generally vest 100% on the seventh anniversary of the grant.
Employees of Cadence transferring to us who hold unvested options to purchase
Cadence common stock and who surrender all unvested Cadence options will
generally vest over four years. Under the four-year vesting schedule, the first
25% will vest one month after the first anniversary of the completion of this
offering and the remainder of the option will vest

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monthly over the next three years. Grants of options under the plan to
participants that do not hold Cadence options will vest according to a vesting
schedule determined by our board of directors.

The plan limits the number of shares for which options or other awards may
be granted to any employee in one year. All awards granted under the plan will
have a term of 10 years or less. Options and stock appreciation rights will have
a minimum exercise price of 100% of the fair market value of the underlying
shares on the grant date, except that we may grant options with a discounted
exercise price under an assumption or substitution for another option in a
manner satisfying the provisions of Section 424(a) of the Internal Revenue Code.

Holders of awards under the plan may generally not transfer the awards
other than by will or the laws of descent and distribution. However, the
administration committee may approve gift transfers to family members or family
controlled entities to the extent permitted by securities laws.

The exercise price for an option may be paid:

- in cash;

- by delivery of previously owned shares held for at least six months
unless the plan administration committee determines otherwise;

- according to a deferred payment or other similar arrangement approved by
the administration committee; or

- any other method approved by the plan administration committee.

The payment in settlement of a stock appreciation right may be made in cash,
shares of Class A common stock or a combination of shares and cash. The board
will determine the terms of restricted stock awards under the plan.

A participant whose employment is terminated for cause would forfeit all
outstanding awards under the 2000 Equity Incentive Plan. Upon a participant's
death, the participant's estate may exercise vested awards for 12 months
following the participant's death. In the event of termination due to
disability, the participant may exercise vested awards for 12 months from his
termination of employment. Upon termination for any other reason, a participant
may exercise vested awards for a period of three months after the date of
termination, except that unvested restricted stock may be repurchased as of the
date of termination. In each of these cases, the period during which a
participant can exercise an option after termination will end earlier if the
options expires according to its terms.

The administration committee can determine that transferring employment to
one of our affiliates does not constitute termination.

CHANGE IN CONTROL. If a change in control occurs:

- the surviving or successor corporation may provide for continuation of
awards under the plan by assuming outstanding awards or substituting
similar awards; or

- in the event the surviving or successor corporation does not assume the
outstanding awards or provide similar awards, outstanding awards held by
plan participants who are then employees will accelerate, and the already
vested and accelerated awards may be exercised prior to the change in
control. Awards that are not exercised would then terminate upon the
change in control.

CHANGE IN CONTROL DEFINITION. Under the plan, a change in control occurs:

- upon the sale of all or substantially all of our assets;

- if we merge with or into another corporation for any purpose other than
to change our state of incorporation, and our stockholders do not
beneficially own at least a majority of the voting securities of the
acquiring corporation;

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- if, with specified exceptions, any person acquires a majority of our
voting securities; or

- upon our liquidation or dissolution.

A change in control also occurs if at any time during any two-year period
the members of our board of directors at the beginning of the two-year period do
not constitute a majority of our board of directors. Any new director who is
approved by two-thirds of the directors who constituted the board at the
beginning of the two-year period is considered as if he or she were a member of
the board of directors at the beginning of the two-year period.

A change in control, however, does not include:

- a distribution to Cadence's or another affiliate's stockholders of all or
any portion of our securities held by Cadence or another affiliate;

- a sale of all or any portion of our equity interests held by Cadence or
another affiliate in an underwritten public offering; or

- reaching a stock ownership threshold because we acquire our own
securities.

2000 BROAD BASED EQUITY INCENTIVE PLAN

We have adopted the Tality 2000 Broad Based Equity Incentive Plan, which
provides for awards of restricted shares of Class A common stock and options to
purchase shares of our Class A common stock to:

- our employees and consultants; and

- employees and consultants of any or our affiliates. These affiliates
would act as participating employers in the plan.

Our officers and directors will not be eligible to receive awards under
this plan.

NUMBER OF SHARES. We adopted the plan effective as of July 13, 2000, and it
will continue in effect for ten years. The plan, as amended in September 2000,
currently allows for grants of, or options to purchase, an aggregate of
10,000,000 shares of our Class A common stock. The number of shares available
under the plan will increase by 2,500,000 shares per year for four years,
beginning on July 2, 2001 and ending on July 2, 2004. Awards for 6,744,840
shares of Class A common stock are currently outstanding under the plan.

The remaining terms of this plan are substantially identical to the terms
of the 2000 Equity Incentive Plan.

DIRECTORS STOCK OPTION PLAN. We have adopted the Tality Directors Stock
Option Plan, which provides for awards of options to purchase shares of our
Class A common stock to non-employee directors. Non-employee directors are those
directors who are not employees of Tality or of any of our direct or indirect
majority-owned subsidiaries. Non-employee directors may include employees of
Cadence. The plan will remain in effect for ten years from the date of its
adoption by the board of directors.

NUMBER OF SHARES. The plan allows for grants of options to purchase an
aggregate of 675,000 shares of our Class A common stock. If a stock option
expires or otherwise terminates without having been exercised in full, the
shares shall revert to Tality and again become available for issuance under the
plan. Awards for 250,000 shares of Class A common stock are currently
outstanding under the plan.

OPTION GRANTS. The plan provides for automatic grants of options to
purchase 50,000 shares of our Class A common stock upon election to the board
and an additional 50,000 shares if elected as chairman of the board. Beginning
July 1, 2001, each non-employee director other than the chairman of the board
will automatically receive an option to purchase an additional 12,500 shares of
Class A common stock every July 1 of each calendar year other than the year in
which the director was

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appointed. A non-employee director serving as chairman of the board will
automatically receive an option to purchase 25,000 shares of Class A common
stock every July 1 of each calendar year other than the year in which the
director was elected chairman of the board. The plan does not provide for reload
or repurchase rights or for discretionary grants other than the automatic grants
described above.

PLAN ADMINISTRATION. A committee of the board may be established to
administer the plan. The options granted under the plan will vest over four
years, with 25% of each option vesting on the first through fourth anniversaries
of the date of the grant of the option.

Holders of the options under the plan may not transfer the options other
than by will or the laws of descent and distribution. However, the committee may
approve other transfers to the extent permitted by securities laws.

The exercise price will not be less than the fair market value of the stock
on the date of the grant. The exercise price may be paid:

- in cash;

- by payment under an arrangement with a broker where payment is made
pursuant to an irrevocable direction to the broker to deliver all or part
of the proceeds from the sale of the option shares to us;

- by the surrender of shares of Class A common stock owned by the holder
exercising the option that have a fair market value on the date of
exercise equal to the exercise price, provided that surrender of the
shares does not result in an accounting charge to us; or

- by any combination of the foregoing or any other manner determined by the
committee or the board.

If authorized by the board, we may make loans to the holder of the option
to pay the exercise price and the tax liability resulting from exercise of the
options. Other terms of the options may be set by the board of directors or the
administrative committee, to the extent those terms do not conflict with the
plan.

2000 EMPLOYEE STOCK PURCHASE PLAN

We intend to adopt a 2000 Employee Stock Purchase Plan to be effective upon
completion of this offering. We plan to submit it for approval by our
stockholders prior to the completion of this offering. A total of 2,000,000
shares of common stock has been reserved for issuance under our employee stock
purchase plan, subject to adjustment for dilutive events.

Our 2000 Employee Stock Purchase Plan, which would not qualify under
Section 423 of the Internal Revenue Code, would be administered by the board of
directors or by a committee appointed by the board. Employees, including our
officers and employee directors but excluding 5% or greater stockholders, would
be eligible to participate if they meet the employment requirements set by the
plan or by the board of directors. Our 2000 Employee Stock Purchase Plan would,
for offering periods other than the first offering period, permit eligible
employees to purchase common stock through payroll deductions, which, except for
the first offering period, may not exceed 15% of an employee's compensation. All
of our employees will initially automatically be enrolled in the plan for the
first eligible offering period, with the purchase price for the first offering
period to be paid in a lump sum. After completion of this offering, employees
would be allowed to change the amount to be purchased, switch the method of
payment from lump sum to payroll deduction or withdraw from the plan. In
addition, after the completion of this offering, employees would be able to
elect to use payroll deductions for future offering periods.

The 2000 Employee Stock Purchase Plan will be implemented during a series
of offering periods, with new offering periods commencing on dates determined by
the board of directors. During each offering period other than the first
offering period, payroll deductions will accumulate without interest.

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On the last business day of each offering period, other than the first offering
period, accumulated payroll deductions will be used to purchase Class A common
stock. The initial offering period is expected to commence on the date of this
offering.

The purchase price will be equal to 85% of the fair market value per share
of common stock on either the first or last day of the offering period,
whichever is less, or such other date established by the board of directors.
Employees may withdraw their accumulated payroll deductions at any time.
Participation in our 2000 Employee Stock Purchase Plan ends automatically upon
termination of employment with us.

TREATMENT OF CADENCE OPTIONS

As described above, generally our employees who hold options to purchase
shares of Cadence common stock will either retain or surrender their unvested
Cadence options. Our employees will continue to hold their vested Cadence
options and will be able to exercise them according to their terms.

EMPLOYMENT AGREEMENTS

On July 14, 2000, we entered into an at-will employment agreement with
Robert Wiederhold. For services as our President and Chief Executive Officer,
Mr. Wiederhold is initially entitled to receive an annual base salary of
$350,000 per year and is eligible to receive an annual performance bonus
targeted at $250,000. In addition, through a separate option agreement, we
granted Mr. Wiederhold an option to purchase 3,825,000 shares of Class A common
stock, subject to vesting requirements.

If we terminate Mr. Wiederhold without cause:

- we must pay Mr. Wiederhold's base salary for 12 months immediately
following termination;

- we must pay Mr. Wiederhold's prorated target bonus through the date of
his termination and an additional twelve months' bonus at the same rate;
and

- all of Mr. Wiederhold's options immediately vest and become exercisable
for the period specified in the relevant option agreement.

Constructive termination includes a material adverse change in Mr.
Wiederhold's position, a 10% or greater reduction in compensation, his
relocation to a workplace over 30 miles from his current workplace or any
failure of a successor to our company to assume the obligations of this
agreement.

In the event of a change of control of Tality and resulting termination
without cause of Mr. Wiederhold, by us or our successor:

- Mr. Wiederhold would be entitled to receive his base salary for 12 months
following the termination date;

- Mr. Wiederhold would be entitled to receive a prorated target bonus
through the date of termination and an additional 12 months' bonus at the
same rate; and

- all options or stock awards immediately vest and become exercisable for
the period specified in the relevant option agreements.

Mr. Wiederhold has also agreed not to compete with us, solicit any of our
employees, or interfere with our business for one year after termination of
employment with us.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Our amended and restated certificate of incorporation contains a provision
eliminating or limiting the personal liability of our directors for monetary
damages for breaches of their fiduciary duties as directors, except for
liability for any breach of their duty of loyalty to the corporation or its
stockholders, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, unlawful payments of dividends or
unlawful stock repurchases or redemptions as

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provided in Section 174 of the Delaware General Corporation Law or any
transaction from which the director derived an improper personal benefit.

Our bylaws require us to indemnify our officers, directors, employees and
other agents to the full extent permitted by law. Our bylaws also permit us to
advance expenses incurred by an indemnified officer, director, employee or other
agent in connection with the defense of any action or proceeding arising out of
such individual's status or service, subject to the requirements of the Delaware
General Corporation Law that indemnitees who receive an advance of expenses in
their capacity as an officer or director enter into an undertaking to repay such
advances if it is ultimately determined that such director or officer is not
entitled to such indemnification. We intend to enter into indemnification
agreements with our officers and directors.

All of our directors and officers will be covered by insurance policies
maintained by us against certain liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act of 1933. In
addition, we will enter into indemnity agreements with our directors and
executive officers.

RELATED PARTY TRANSACTIONS

During July, August and September 2000, Tality Corporation granted options
to Cadence to purchase up to 13,124,840 shares of Class A common stock under the
2000 Equity Incentive Plan and the 2000 Broad Based Incentive Plan at an
exercise price of $6.25 per share. Cadence, in its capacity as a participating
employer in the plan, subsequently transferred the options purchased by Cadence
to certain Cadence employees whose services were leased by Tality, LP from
Cadence and who we expect to become employees of Tality, LP after the
separation. In September 2000, 220,000 shares of Class A common stock were
issued to Tality Corporation non-employee directors under our 2000 Equity
Incentive Plan subject to a one year right of repurchase at a purchase price of
$6.25 per share.

During July 2000, Tality Corporation issued to Cadence an aggregate of
2,150,000 shares of Class A common stock with an estimated fair value of $11 per
share for a price of $6.25 per share, 1,640,000 of which were resold to certain
Cadence employees at the same price. The difference between the estimated fair
value of the 2,150,000 shares and the purchase price paid by Cadence totaled
approximately $10.2 million and was accounted for as a distribution by Tality
Corporation to Cadence.

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ARRANGEMENTS BETWEEN TALITY AND CADENCE

Below is a summary description of the amended and restated master
separation agreement we have entered into with Cadence, along with the related
agreements we will enter into with Cadence immediately prior to completing this
offering. This description, which summarizes the material terms of these
agreements, is not complete. You should read the full agreements, which have
been filed with the Securities and Exchange Commission as exhibits to the
registration statement of which this prospectus is a part.

AMENDED AND RESTATED MASTER SEPARATION AGREEMENT

THE SEPARATION. The amended and restated master separation agreement
contains provisions that govern our separation from Cadence, as well as certain
related matters including our initial public offering.

The amended and restated master separation agreement provides for the
transfer, effective on the separation date, from Cadence to Tality, LP of assets
and liabilities related to our business as described in this prospectus, to the
extent they have not already been transferred. The amended and restated master
separation agreement contemplates that we and Cadence will enter into a number
of other agreements to fully effectuate our separation. The forms of these other
agreements are exhibits to the master separation agreement and include:

- a general assignment and assumption agreement;

- a master agreement concerning rights to intellectual property, including
ownership, license and use rights, patents and trademarks;

- an employee matters agreement;

- a master corporate services agreement;

- a master real estate matters agreement;

- a master confidentiality agreement;

- an indemnification and insurance matters agreement; and

- certain agreements relating to joint marketing and sales, joint
technology development and support, access to electronic design tools and
other agreements governing our ongoing business relationships.

THE INITIAL PUBLIC OFFERING. Under the terms of the amended and restated
master separation agreement, we are obligated to use all our commercially
reasonable efforts to complete this offering. In connection with this offering,
we must satisfy the following requirements, unless waived by Cadence:

- the registration statement containing this prospectus must be declared
effective by the Securities and Exchange Commission;

- United States securities and state blue sky laws must be satisfied in
connection with this offering;

- our Class A common stock must be approved for quotation on The Nasdaq
Stock Market;

- all our obligations under the underwriting agreement for completion of
this offering must be met or waived by the underwriters;

- Cadence will own limited partnership units exchangeable for at least 80%
of our outstanding Class A common stock immediately following the
offering;

- no legal restraints preventing the separation or this offering may exist;

- the separation must have occurred; and

- the amended and restated master separation agreement must not have been
terminated.

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NO REPRESENTATIONS AND WARRANTIES. Cadence has made no representations or
warranties to us regarding:

- the value of any asset that Cadence will transfer;

- the character or extent of any liabilities Tality, LP will assume;

- whether there is a lien or encumbrance on any asset Cadence will
transfer; or

- the legal sufficiency of any conveyance of title to any asset Cadence
will transfer or of any liability Tality, LP will assume.

REGISTRATION RIGHTS. We have granted Cadence registration rights related to
our Class A and Class C common stock. Cadence has three demand registrations
that permit it to require us, at our expense, to register for sale to the public
under the securities laws, some or all of its shares of Class A and Class C
common stock issuable upon conversion of its Class B common stock and exchange
of its limited partnership units in Tality, LP, as well as any shares of Class A
or Class C common stock that Cadence later acquires. Cadence may not exercise
its demand rights until the expiration of the 180 day lock-up period following
completion of this offering. When we become eligible to register our securities
using Form S-3 of the Securities and Exchange Commission, Cadence generally will
have an unlimited amount of demand registrations on Form S-3. Cadence's demand
registrations on Form S-3 must include at least $5,000,000 worth of Class A or
Class C common stock. In the case of a demand by Cadence, on Form S-3 or
otherwise, we are not required to honor its demand if Cadence has caused us to
register any of its shares within the six-month period prior to such request.
Cadence may also require us, at our expense, to include its holdings in our
Class A or Class C common stock in other registered public offerings that we may
do. These registration rights are assignable and will terminate upon the earlier
of seven years after the separation date and the date on which all the shares
proposed to be sold by Cadence or its assignee pursuant to the exercise of its
registration rights can be sold in a single transaction in reliance on Rule 144
under the Securities Act.

We have agreed to indemnify Cadence for violations of federal or state
securities laws in connection with any registration statement in which Cadence
sells its shares pursuant to these registration rights. Cadence has in turn
agreed to indemnify us for federal or state securities laws violations that
occur in reliance upon written information it provides for use in the
registration statement.

COVENANTS BETWEEN CADENCE AND TALITY. In addition to our agreement to sign
documents that transfer control and ownership of various assets and liabilities
of Cadence relating to our business and entering into additional corporate
service and business agreements, we have agreed with Cadence to the following:

Approvals and Consents. We and Cadence will use all commercially reasonable
efforts to obtain any required consents, substitutions or amendments required to
novate or assign all rights and obligations under any contracts that will be
transferred to us in the separation. If an asset or liability cannot be
transferred due to lack of third-party consent, in the case of an asset, it will
be held by Cadence for our benefit or, in the case of a liability, we will act
as an agent for Cadence to satisfy the liability.

Information Exchange. We have agreed with Cadence to share information
relating to governmental, accounting, contractual and other similar requirements
of our ongoing businesses, unless sharing this information would be commercially
detrimental to either party. In this regard, Cadence and Tality have agreed to:

- maintain adequate internal accounting to allow the other party to satisfy
its own reporting obligations and prepare its own financial statements;
and

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- use commercially reasonable efforts to provide the other party with
assistance, records and documents which may be required in connection
with legal, administrative or other proceedings.

Accounting Matters. So long as Cadence is required to consolidate our
results of operations and financial position in its financial statements, we
have agreed to:

- use the same fiscal year as Cadence;

- use the same independent public accounting firm as Cadence;

- use reasonable commercial efforts to enable our independent public
accountants to date their opinion on our audited annual financial
statements on the same date as Cadence's independent public accountants
date their opinion on Cadence's financial statements; and

- exchange all relevant information needed and grant auditors access to
prepare our respective financial statements.

Dispute Resolution. If problems arise between us and Cadence and we are
unable to resolve them through negotiation, we have agreed to proceed to
non-binding mediation. If mediation fails, we may resort to binding arbitration.
In addition, nothing prevents either party acting in good faith from initiating
litigation at any time if failure to do so would cause serious and irreparable
injury to it or to others.

No Solicitation. For one year after the separation date, we have agreed not
to solicit or recruit employees of Cadence. However, this prohibition does not
apply to general recruitment efforts carried out through public or general
solicitation or where the employee initiates the solicitation.

Continuation of Employment Agreements. We will be entitled to enforce the
employment agreements of Cadence employees transferring to Tality, LP or one of
our other subsidiaries, but to the extent that Cadence continues to share any
rights under the employment agreements, we will enforce them to reasonably
protect the interests of Cadence.

EXPENSES. All of the costs and expenses related to this offering as well as
the costs and expenses related to the separation will be allocated between us
and Cadence as determined in Cadence's sole discretion. We anticipate that we
will bear all the costs and expenses associated with this offering and
substantially all the costs and expenses associated with the separation.

TERMINATION. Cadence, in its sole discretion, may terminate the amended and
restated master separation agreement at any time before the closing of this
offering. After this offering, we and Cadence must agree for the amended and
restated master separation agreement or any ancillary agreement to be
terminated.

GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT

The general assignment and assumption agreement identifies the assets
Cadence will transfer to Tality, LP and the liabilities Tality, LP will assume
from Cadence in the separation. This agreement also describes when and how these
transfers and assumptions will occur.

IDENTIFICATION OF ASSETS AND LIABILITIES. The assets and liabilities to be
transferred to Tality, LP will generally be identified by reference to their
inclusion on our consolidated balance sheet dated July 1, 2000, subject to the
following:

Specified Assets. Cadence will transfer to Tality, LP certain leasehold
interests, contractual rights and equipment that it holds related to our
business.

Excluded Assets. The general assignment and assumption agreement will
provide that Cadence will not transfer any cash, accounts receivable or other
current assets related to our business.

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Specified Liabilities. Tality, LP will assume liabilities from Cadence that
relate to the past, present and future conduct of our business, including the
current portion of capital lease obligations and deferred revenue.

Excluded Liabilities. The general assignment and assumption agreement also
provides that Tality, LP will not assume:

- any accounts payable or other current liabilities of Cadence other than
the current portion of capital lease obligations and deferred revenue;

- any liabilities that would otherwise be allocated to us but which are
covered by Cadence's insurance policies, of which we are not a
beneficiary; and

- liabilities specified by the parties.

Contingent Liabilities. Contingent liabilities included on our consolidated
balance sheet dated July 1, 2000, and contingent liabilities that would have
been included on that balance sheet had they not been subject to contingencies
as of that time, will be transferred by Cadence to Tality, LP, except that the
only liabilities transferred to Tality, LP in connection with existing
litigation will be those related to specified ongoing litigation, including
those matters specified "Business -- Litigation".

DELAYED TRANSFERS. If we have not received a required third party consent
or it is not otherwise practicable to transfer any assets or liabilities on the
separation date, those assets and liabilities will be transferred as promptly
after receipt of such consents or as promptly as is otherwise practicable after
the separation date. Pending the actual transfer of these assets and
liabilities, Cadence will continue to hold them for the benefit or account of
Tality.

TERMS OF OTHER ANCILLARY AGREEMENTS GOVERN. If another ancillary agreement
expressly provides for the transfer of an asset or an assumption of a liability,
the terms of the other ancillary agreement will govern that transfer.

MASTER INTELLECTUAL PROPERTY OWNERSHIP AND LICENSE AGREEMENT

The master intellectual property ownership and license agreement, or the
master IP agreement, allocates all Cadence intellectual property rights relating
to our business, including patents, copyrights, trade secrets and trademarks.
These intellectual property rights will be transferred directly or licensed to
Tality, LP by Cadence.

Cadence will assign to Tality, LP ownership rights in electronics design
intellectual property that was developed in our business prior to the
separation. This intellectual property is associated with client applications,
end uses and specific electronics products and includes the complete or partial
descriptions of a system, circuit or embedded software design. We will have
unlimited rights to use the assigned patents or other intellectual property
included in the electronics design intellectual property, except where doing so
would violate the terms of an agreement with a third party under which such
intellectual property was developed. Cadence may use the electronics design
intellectual property for certain internal purposes only with our consent and
only for two years after separation.

The master IP agreement provides that Cadence will retain ownership of all
methodology intellectual property, or methodology IP, developed prior to
separation, except where doing so would violate the terms of an agreement with a
third party under which such intellectual property was developed. This
methodology IP generally includes the practices, methods and utility software
used to combine commercially available tools and electronics design intellectual
property into a system or process to perform the design of electronic systems,
circuits or embedded software. Cadence will grant us a royalty-free,
non-exclusive perpetual license to this methodology IP for our internal use, and
to prepare derivative works, based on the methodology IP. We will own the
derivative works, subject to Cadence's ownership of the underlying methodology
IP on which such works are based. Our right to distribute or license derivative
works to our clients is subject to Cadence's prior consent. An exception is
permitted where we identify a sales opportunity that Cadence declines to pursue.

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Cadence has agreed to grant to us two years after separation a royalty-free
license to use the pre-separation methodology IP, for all purposes, including
sublicense.

LIMITED PARTNERSHIP AGREEMENT

Immediately following this offering, an approximately 16.7% ownership
interest in Tality, LP in the form of limited partnership units will be owned by
Tality Corporation and an approximately 82.3% ownership interest in Tality, LP
in the form of limited partnership units will be beneficially owned by Cadence
through a wholly-owned subsidiary. In addition, we will own a 1% general
partnership interest in Tality, LP and act as its sole managing general partner.

We will contribute the net proceeds of this offering to Tality, LP in
exchange for limited partnership and general partnership units in Tality, LP.
Cadence, on behalf of its wholly-owned subsidiary, will contribute certain
assets used in our foreign operations and will contribute the balance of the
assets to be transferred under the amended and restated master separation
agreement and ancillary agreements, in exchange for limited partnership units in
Tality, LP. No partner will have preemptive rights with respect to additional
contributions to the partnership or the issuance or sale of partnership
interests, except that Cadence Holdings, Inc. will have the right to purchase
additional limited partnership units to maintain its percentage interest in
Tality, LP in the event that additional units are issued under specified
circumstances to Tality Corporation or any other person or entity.

Under the terms of the limited partnership agreement, in the event Tality
Corporation issues shares of its common stock or other equity securities or
securities convertible into equity securities, it must transfer the proceeds
from the sale of those securities to Tality, LP, for which Tality Corporation
will receive an equivalent amount of additional limited partnership units in
return. If Tality Corporation acquires its shares of common stock, those shares
must be canceled, Tality, LP must reimburse Tality Corporation for any amount
paid for the acquisitions of those shares and Tality Corporation must surrender
an equivalent amount of limited partnership units. If Tality Corporation issues
shares of its Class A common stock to Tality, LP employees, Tality Corporation
will contribute the amount that it receives from the employees for the purchase
of those shares to the partnership, and Tality Corporation will receive a number
of limited partnership units equal to the number of shares of Class A common
stock that it issues to the employees. The partnership agreement also provides
holders of units other than Tality Corporation and its subsidiaries the right to
exchange those units for shares of Class A common stock. Partnership units held
by Tality Corporation or any of its subsidiaries are not exchangeable into
shares of Class A common stock.

In its role as general partner, Tality Corporation will manage Tality, LP.
Tality Corporation will not be compensated for managing the partnership, but
will be reimbursed on a quarterly basis by Tality, LP for expenses that Tality
Corporation incurs on behalf of the partnership. The partnership may admit
additional partners only if, in the case of an additional limited partner,
Tality Corporation has approved the admission, and in the case of a new or
additional general partner, the admission has been approved by all limited
partners. Any new partner must agree to be bound by the terms of the limited
partnership agreement. A partner may withdraw from the partnership only upon the
transfer of its entire limited partnership interest.

Tality, LP's tax basis in its assets generally will equal the tax basis
that Cadence has in the assets it is contributing, plus certain liabilities
assumed in connection with the separation from Cadence, plus the cash Tality
Corporation contributes to Tality, LP following this offering. We expect that
the basis in the assets being contributed by Cadence to Tality, LP will be
substantially lower than the "book" capital account Cadence will have in Tality,
LP, which will generally equal the value of Cadence's contribution. Under
applicable tax rules and the partnership agreement, the allocations of taxable
income to us may be greater, and thus our income tax liabilities may be higher,
than the allocations and tax liabilities that would have resulted if Cadence had
basis in the assets contributed equal to the value of those assets used to
determine its "book" capital account.

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Distributions of available cash of Tality, LP to its partners can be made
only with the approval of the general partner. However, the partnership is
required to distribute, pro rata among the partners based on their units, an
amount sufficient to enable the partners to pay their respective tax liabilities
arising from the partners' interest in the partnership.

The partnership agreement contains customary provisions relating to the
maintenance of capital accounts of the partners in accordance with applicable
tax rules. Partnership profits and losses are first allocated to each partner in
a manner so as to cause the partners' capital accounts to be in proportion to
their percentage interests, then ratably to each partner in accordance with its
percentage interest.

The partnership will be dissolved on December 31, 2099 or earlier upon the
written consent of Tality Corporation and Cadence, by the disposition of all or
substantially all partnership assets, by the lack of a general partner or any
limited partners. Upon a liquidation of Tality, LP, the proceeds will be
allocated to the debts and liabilities of the partnership, then to each partner
based on the positive balance in the partner's capital account, and any
distributions in excess of the capital accounts will be paid to each partner
ratably based on the partner's limited partnership units.

EMPLOYEE MATTERS AGREEMENT

We will enter into an employee matters agreement with Cadence to allocate
assets, liabilities and responsibilities relating to our current and former
employees and their participation in the benefits plans that Cadence currently
sponsors and maintains. Assets underlying liabilities to our employees will be
transferred to us or our related plans and trusts from trusts and other funding
vehicles associated with Cadence's benefits plans.

Generally, all our eligible employees will continue to participate in the
Cadence benefit plans on comparable terms and conditions as those applicable to
Cadence employees until the date Cadence's voting interest in Tality Corporation
falls below 80% or until we establish benefit plans for our employees, or elect
not to establish comparable plans. We intend to establish our own benefits
program as soon as practicable following the separation. After the separation
date, we will either pay directly or reimburse Cadence for our share of costs
associated with our participation in the Cadence plans.

MASTER CORPORATE SERVICES AGREEMENT

We will enter into a master corporate services agreement governing
Cadence's provision of specified corporate infrastructure and transitional
services to us and our provision of some services to Cadence. These services
include:

- information technology systems;

- human resources administration;

- facilities;

- finance and legal; and

- other specified infrastructure support.

The master corporate services agreement will also cover the provision of
additional services identified from time to time after the separation date that
were inadvertently or unintentionally omitted from the specified services or
services that are essential to effect an orderly transition under the amended
and restated master separation agreement. However, Cadence will not be required
to provide any additional services that would significantly disrupt its
operations or significantly increase its responsibility under the agreement.

We will pay Cadence or Cadence will pay us quarterly for these services at
prices based upon actual costs for the resources used, generally determined by
reference to headcount, revenue or square footage. The agreement has a term of
two years, although the term of specific services may

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vary. We can terminate the master corporate services agreement or specific
services with six months notice.

MASTER REAL ESTATE MATTERS AGREEMENT

After the separation we will continue to occupy facilities currently owned
or leased by Cadence. The real estate matters agreement provides that our use of
the facilities will take the form of leases, subleases, licenses or assignments
by Cadence.

The real estate matters agreement further provides that we will be required
to accept the transfer of all sites allocated to us, even if a site has been
damaged by a casualty before the separation date. Transfers with respect to
leased sites where the underlying lease is terminated due to casualty or action
by the landlord before the separation date will not be made, and neither party
will have any liability under that lease. We will agree to generally indemnify
Cadence for all losses incurred by Cadence as a result of our occupancy of
property as to which control is transferred to us.

MASTER CONFIDENTIALITY AGREEMENT

Under the master confidentiality agreement, each party will agree not to
disclose confidential information of the other party except in specified
circumstances. The agreement distinguishes between information that is
"confidential" and that which is "highly confidential", the latter including,
for example, source code, trade secrets and certain other information so
designated by each party. "Highly confidential" information must be protected
against disclosure in perpetuity, while "confidential" information must be
protected for a period of five years. We and Cadence also will agree not to use
this information in violation of any use restrictions in any of the other
written agreements between us.

INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT

GENERAL RELEASE OF PRE-SEPARATION CLAIMS. As of the separation date,
subject to specified exceptions, we will release Cadence and its affiliates,
agents, successors and assigns, and Cadence will release us and our affiliates,
agents, successors and assigns, from any and all liabilities arising from events
occurring on or before the separation date, including events occurring in
connection with the activities to effect the separation and this offering. This
provision will not impair a party's right to enforce the amended and restated
master separation agreement, any ancillary agreement or any arrangement
specified in any of these agreements.

INDEMNIFICATION. We will agree to indemnify Cadence and its affiliates,
agents, successors and assigns from all liabilities arising from and relating to
our business and any breach by us of the amended and restated master separation
agreement or any ancillary agreement.

Cadence has agreed to indemnify us and our affiliates, agents, successors
and assigns from all liabilities arising from its business other than our
business and any breach by Cadence of the amended and restated master separation
agreement or any ancillary agreement.

Amounts collected from insurance are deductible from any amount an
indemnifying party otherwise may be required to pay. The indemnifying party must
pay all costs of defending any third party claims and will ordinarily manage the
defense of such claims, while the indemnified party must reasonably cooperate in
the defense of such claims. A third party claim may not be settled unless the
indemnifying party consents to the settlement of the claim.

We will expressly agree to indemnify Cadence for all liabilities and costs
related to specified ongoing litigation. The specified litigation includes those
matters described above in "Business -- Litigation".

We will bear any liability arising from any untrue statement of a material
fact or any omission of a material fact in this prospectus.

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INSURANCE MATTERS. The agreement also contains provisions obligating
Cadence to maintain our insurance coverages for a period of up to one year after
the separation. We will agree to reimburse Cadence for premium costs related to
our coverage during this period. We also will agree with Cadence concerning the
administration of policies and the handling of claims, including such matters as
co-payment, deductibles and retrospective premium amounts. Our agreement also
addresses the allocation between us and Cadence of insurance proceeds, should
these be less than the amount as may be claimed under the relevant policies.
After this transition period, we will become responsible to obtain and maintain
our own insurance coverage.

ENVIRONMENTAL MATTERS. Cadence will agree to indemnify us and our
affiliates, agents, successors and assigns from all liabilities arising from
environmental conditions at its facilities that migrate to our facilities or
which arise out of Cadence's operations.

We will agree to indemnify Cadence and its affiliates, agents, successors
and assigns from all liabilities arising from environmental conditions which
arise out of our operations and from environmental conditions at our facilities
that migrate to Cadence's facilities.

Each party will be responsible for all liabilities associated with any
environmental contamination caused by that party after the separation.

JOINT SALES AGREEMENT

We will enter into an agreement to continue joint marketing of our
electronics design services with Cadence. We will provide compensation to
Cadence for sales support and referrals.

EDA TOOLS AGREEMENT

Following the separation, we will license Cadence's electronic design
automation, or EDA, tools that we use in our business under a subscription
arrangement. This arrangement will be consistent with Cadence's current
practices for large customers, will permit us to change the configuration of EDA
tool software on our design workstations and will give us rights to upgrade or
use new EDA tools. While we anticipate using Cadence's EDA tools primarily, we
are not obligated by this or any other agreement to use them exclusively.

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PRINCIPAL STOCKHOLDERS

Prior to this offering, all of the outstanding shares of our common stock
will be owned by a wholly-owned subsidiary of Cadence and certain Cadence
executives. After this offering, Cadence will beneficially own approximately
82.9%, or about 81.0% of our voting common stock if the underwriters fully
exercise their option to purchase additional shares of our outstanding Class A
common stock. The following table sets forth certain information regarding the
beneficial ownership of our common stock as of September 28, 2000, and as
adjusted to reflect the sale of 12,750,000 shares of Class A common stock by us,
by:

- each person or group known to us to be the beneficial owner of more than
5% of our outstanding common stock;

- each of our directors;

- the named executive officer; and

- all current directors and executive officers as a group.

Each of these persons has the sole voting and investment power with respect to
the shares owned. Except as otherwise indicated, the address of each holder
identified below is care of Tality Corporation, 555 River Oaks Parkway, Building
3, San Jose, California 95134.

<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES PERCENTAGE OF
NUMBER OF SHARES BENEFICIALLY TOTAL VOTING
BENEFICIALLY OWNED(1) OWNED(1) POWER
------------------------- ------------------- -------------------
BEFORE AFTER BEFORE AFTER BEFORE AFTER
NAME OFFERING OFFERING OFFERING OFFERING OFFERING OFFERING
---- ----------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Cadence Design Systems, Inc.(2)............ 70,610,001 70,610,001 97.4% 82.9% 97.4% 82.9%
Robert P. Wiederhold(3).................... -- -- -- -- -- --
Ronald R. Barris(4)........................ 100,000 100,000 * * * *
H. Raymond Bingham(5)...................... 300,000 300,000 * * * *
Michael G. Keith(6)........................ 20,000 20,000 * * * *
Kenneth Levy(7)............................ 100,000 100,000 * * * *
John M. Scanlon(8)......................... 100,000 100,000 * * * *
All directors and executive officers as a
group (7 persons)(9)..................... 620,000 620,000 * * * *
</TABLE>

---------------
* Represents less than 1%

(1) In calculating beneficial and percentage ownership, all shares of Class A
common stock that a named stockholder or specified group will have the right
to acquire within 60 days of the date of this prospectus upon exercise of
stock options are deemed to be outstanding for the purpose of computing the
ownership of such stockholder, but are not deemed to be outstanding for the
purpose of computing the percentage of common stock owned by any other
stockholder. As of September 28, 2000, an aggregate of 2,370,000 shares of
Class A common stock and one share of Class B common stock were outstanding.

(2) Represents one share of Class B common stock and 70,100,000 limited
partnership units of Tality, LP to be issued to Cadence in connection with
the separation of Tality Corporation from Cadence, each of which may be
converted or exchanged for one share of Class A common stock at any time at
the holder's election. Also includes 510,000 shares of Class A common stock
owned by Cadence.

(3) Does not include 3,825,000 shares issuable upon exercise of stock options
that have been granted but are not exercisable within 60 days after the date
of this prospectus.

(4) Represents 100,000 shares of Class A common stock subject to a one year
right of repurchase by Cadence. Does not include 50,000 shares of Class A
common stock issuable upon exercise of stock options that are not
exercisable within 60 days after the date of this prospectus.

(5) Represents 300,000 shares of Class A common stock subject to a one year
right of repurchase by Cadence. Does not include 50,000 shares of Class A
common stock issuable upon exercise of stock options that are not
exercisable within 60 days after the date of this prospectus.

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(6) Represents 20,000 shares of Class A common stock subject to a one year right
of repurchase by Tality. Does not include 50,000 shares of Class A common
stock issuable upon exercise of stock options that are not exercisable
within 60 days after the date of this prospectus.

(7) Represents 100,000 shares of Class A common stock subject to a one year
right of repurchase by Tality held by the Levy Family Trust, of which
Kenneth Levy is the trustee. Does not include 50,000 shares of Class A
common stock issuable upon exercise of stock options that are not
exercisable within 60 days after the date of this prospectus.

(8) Represents 100,000 shares of Class A common stock subject to a one year
right of repurchase by Tality. Does not include 50,000 shares of Class A
common stock issuable upon exercise of stock options that are not
exercisable within 60 days after the date of this prospectus.

(9) Does not include 4,585,000 shares of Class A common stock issuable upon
exercise of stock options that have been granted to all directors and
executive officers, consisting of seven persons, but are not exercisable
within 60 days after the date of this prospectus.

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DESCRIPTION OF CAPITAL STOCK AND PARTNERSHIP UNITS

GENERAL

The following description of our capital stock and provisions of our
amended and restated certificate of incorporation and bylaws, and the
descriptions of Tality, LP's partnership units and limited partnership
agreement, are summaries of these items and documents and are qualified by
reference to the amended and restated certificate of incorporation, bylaws and
limited partnership agreement, copies of which have been filed with the
Securities Exchange Commission as exhibits to our registration statement, of
which this prospectus is a part.

Our authorized capital stock consists of 300,000,000 shares of Class A
common stock, par value $.001 per share, 1,000 shares of Class B common stock,
par value $.001 per share, 160,000,000 shares of Class C common stock, par value
$.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per
share.

COMMON STOCK

Upon completion of this offering, there will be 15,120,000 shares of Class
A common stock issued and outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options, one share of Class
B common stock issued and outstanding, which will be held by Cadence through a
wholly-owned subsidiary, and no shares of Class C common stock issued or
outstanding. Shares of Class C common stock will only be issuable to Cadence or
its affiliates in connection with a tax-free distribution to Cadence
stockholders of Cadence's equity interests in Tality Corporation and Tality, LP.

VOTING RIGHTS. The holders of Class A, Class B and Class C common stock
generally have identical rights and will generally vote on all matters as a
single class, except that:

- each holder of Class A common stock is entitled to one vote per share;

- each holder of Class B common stock is entitled to an aggregate number of
votes equal to the sum of:

- the aggregate number of shares of Class B common stock owned by the
holder, plus

- the aggregate number of limited partnership units owned by the
holder; and

- each holder of Class C common stock is entitled to a vote per share such
that the aggregate voting power of all shares of Class C common stock,
when added to the voting power of any shares of Class A common stock then
held by Cadence or its affiliates, is equal to 80% of the sum of:

- the total combined voting power of all outstanding capital stock of
Tality Corporation, plus

- the number of votes underlying shares potentially issuable under any
right or contract.

In any event, if counsel to Cadence reasonably determines that the Class C
common stock vote per share should be higher than the figure produced by the
above formula in order to effectuate a tax-free distribution or if we and
Cadence agree that the Class C common stock vote per share can be lower than the
figure produced by the above figure without adversely affecting the tax-free
nature of the distribution, then the Class C common stock vote per share will be
changed accordingly.

DIVIDENDS. Holders of Class A, Class B and Class C common stock will share
ratably in any dividend or other distribution declared by our board of directors
based on the number of shares of common stock they hold, subject to any
preferential rights of any outstanding preferred stock. Dividends consisting of
shares of Class A, Class B and Class C common stock may be paid only as follows:

- shares of Class A common stock may be paid only to holders of shares of
Class A common stock, shares of Class B common stock may be paid only to
holders of Class B common

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stock, and shares of Class C common stock may be paid only to holders of
shares of Class C common stock; and

- shares will be paid proportionally with respect to each outstanding share
of Class A, Class B and Class C common stock.

Tality Corporation may not subdivide or combine shares of any class of its
common stock without at the same time proportionally subdividing or combining
shares of all other classes.

CONVERSION OF CLASS B COMMON STOCK AND EXCHANGE OF TALITY, LP PARTNERSHIP
UNITS. At the option of the holder, each share of Class B common stock is
convertible into, and each limited partnership unit of Tality, LP, other than
those owned by Tality Corporation or any of its subsidiaries, is exchangeable
for one share of Class A common stock. Any shares of Class B common stock
transferred to a person other than the original holder thereof or a subsidiary
of the original holder will automatically convert to an equal number of shares
of Class A common stock upon this transfer.

In addition, at any time that Cadence and its subsidiaries collectively own
30% or more of the total combined voting power of Tality Corporation, Cadence
and its subsidiaries may transfer all of their shares of Class B common stock
and limited partnership units to us in exchange for an equal number of shares of
Class C common stock in order to facilitate a tax-free distribution by Cadence
of its equity interests in Tality Corporation and Tality, LP to Cadence
stockholders.

OTHER RIGHTS. In the event of any merger or consolidation of Tality
Corporation with or into another company involving the conversion or exchange of
Tality Corporation common stock into or for shares of stock, other securities or
property, all holders of Tality Corporation common stock, regardless of class,
will be entitled to receive the same kind and amount of shares of stock and
other securities and property. However, the shares of stock received in the
merger may differ in their respective voting rights to the same extent as the
shares of Tality Corporation stock surrendered in the merger. In addition, in
the event of a merger of Tality Corporation with a subsidiary of Cadence for
purposes of facilitating a tax-free distribution of Tality Corporation's common
stock, the voting rights of the shares of stock held by Tality Corporation
stockholders after the merger may differ from the voting rights of the stock
surrendered in the merger.

In addition, for purposes of facilitating a tax-free distribution of Tality
Corporation common stock, Cadence will have the right to effect a merger of
Tality Corporation and a subsidiary of Cadence in which the shares of Class B
common stock and limited partnership units of Tality, LP held by the subsidiary
will be converted into an equal number of shares of Class C common stock, or
shares of the Cadence subsidiary having similar voting rights in the case of a
merger of Tality Corporation into a Cadence subsidiary.

Upon liquidation, dissolution or winding up of Tality Corporation, after
payment in full of the amounts required to be paid to holders of preferred
stock, if any, all holders of common stock, regardless of class, will be
entitled to share ratably in any assets available for distribution to holders of
shares of common stock.

No shares of any class of our common stock have preemptive rights to
purchase additional shares of our stock. However, because Cadence will have the
right to purchase additional limited partnership units of Tality, LP under
specified circumstances, Cadence will be able to acquire additional shares of
Class A common stock upon exchange of these additional limited partnership
units.

PREFERRED STOCK

Our board of directors will be authorized, without stockholder approval, to
issue from time to time up to an aggregate of 5,000,000 shares of Tality
Corporation preferred stock in one or more series and to fix or alter the
designations, powers, including voting powers, preferences and rights of, and
any qualifications, limitations or restrictions of the shares on, each such
series of preferred stock. However, no shares of non-voting preferred stock may
be issued without the prior approval of the

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majority of the voting power of the Class B common stock until such time as
there has been effected a tax-free distribution by Cadence or Cadence and its
affiliates own less than 30% of the total voting power of Tality Corporation.
Upon the closing of this offering, there will be no shares of preferred stock
outstanding. Tality Corporation has no present plans to issue any shares of
preferred stock.

OPTIONS

As of September 28, 2000, options to purchase a total of 13,124,840 shares
of Class A common stock, and 220,000 shares of Class A common stock subject to
one year right of repurchase, were outstanding, all of which are subject to
lock-up agreements entered into with the underwriters. An aggregate of 4,830,160
shares of Class A common stock are currently available for the granting of
additional options or shares subject to repurchase rights under the 2000 Equity
Incentive Plan, the 2000 Broad Based Equity Incentive Plan and the Directors
Stock Option Plan. See "Management -- 2000 Equity Incentive Plan",
"Management -- 2000 Broad Based Equity Incentive Plan," "Management -- Directors
Stock Option Plan" and "Shares Eligible for Future Sale".

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS

After this offering, Cadence will hold approximately 82.9% of the combined
voting power of Tality Corporation. As a result, Cadence will be able to decide
any matters presented to the stockholders, including an acquisition of Tality
Corporation or other change of control transaction.

Tality is subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a business
combination, which includes a merger or sale of more than 10% of the
corporation's assets with any interested stockholder, meaning a stockholder who,
together with affiliates and associates, owns or, within three years prior to
the determination of interested stockholder status, did own 15% or more of the
corporation's outstanding voting stock, unless:

- the transaction is approved by the board of directors prior to the date
the interested stockholder attained that status;

- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or

- on or subsequent to that date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by at least two-thirds of the outstanding voting stock that
is not owned by the interested stockholder.

This section may have an anti-takeover effect with respect to transactions
not approved in advance by the board of directors, including discouraging
attempts to acquire us that might result in a premium over the market price for
the shares of stock held by stockholders.

Portions of our amended and restated certificate of incorporation and
bylaws are intended to discourage certain types of transactions that may involve
an actual or threatened change of control of Tality Corporation. These
provisions are meant to encourage persons interested in acquiring control of
Tality Corporation to first consult with our board of directors to negotiate
terms of a potential business combination or offer. These provisions also
protect against an unsolicited proposal for a takeover of Tality Corporation
that may affect the long-term value of our stock or that may be otherwise unfair
to our stockholders.

CLASSIFIED BOARD OF DIRECTORS. Our board of directors is divided into three
classes of directors serving staggered three-year terms. As a result,
approximately one-third of the board of directors will be elected each year. The
board of directors will consist of between three and nine directors. The initial
number of directors will be three.

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A staggered board of directors may deter a stockholder from removing
incumbent directors and simultaneously gaining control of the board of directors
by filling the vacancies created by such removal with its own nominees.

SPECIAL MEETING OF STOCKHOLDERS. The bylaws provide that special meetings
of stockholders of Tality Corporation may be called only by a majority of the
board of directors, the chairman of the board, the chief executive officer, the
president or the holders of our Class B common stock.

ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our bylaws provide for advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of our board of
directors. The bylaws also specify certain requirements for the form and content
of a stockholder's notice. These provisions may preclude stockholders from
bringing matters before, or from making nominations for directors at, an annual
meeting of stockholders.

AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval. The existence of authorized but unissued shares of common
stock and preferred stock could discourage or make more difficult an attempt to
obtain control of Tality by means of a proxy contest, tender offer, merger or
otherwise.

AMENDMENTS. The Delaware General Corporation Law provides generally that
the approval of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
a corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our amended and restated certificate of
incorporation requires the affirmative vote of the holders of at least 66 2/3%
of the issued and outstanding common stock, voting as one class, to amend or
repeal any provision of our bylaws and at least 80% of the issued and
outstanding common stock, voting as one class, to amend or repeal any of the
provisions in our amended and restated certificate of incorporation concerning
limitations on director liability and certain provisions regarding powers of our
board of directors. It also requires the affirmative vote of the holders of at
least 90% of the issued and outstanding common stock, voting as one class, to
amend or repeal the provisions concerning corporate opportunities and
intercompany agreements that are described below. In addition, any amendment
adversely affecting the rights or powers of the shares of Class A common stock,
increasing the rights or powers of the shares of Class B common stock or Class C
common stock or authorizing the creation of a new class of common stock of
Tality Corporation will require the affirmative vote of a majority of the
outstanding shares of Class A common stock not held by Cadence or its
affiliates, voting as a separate class. The board of directors may from time to
time make, amend, supplement or repeal the bylaws by vote of a majority of the
board of directors.

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

LIMITATIONS ON LIABILITY OF CADENCE FOR CORPORATE OPPORTUNITIES AND
INTERCOMPANY AGREEMENTS. Our amended and restated certificate of incorporation
recognizes that Cadence may engage or invest and avail itself of opportunities
in the same or similar business activities or lines of business as ourselves.
Except in the case of a corporate opportunity, as narrowly defined in our
amended and restated certificate of incorporation, we will have no interest or
expectancy in any of these engagements, investments or opportunities. In
general, an opportunity is only a corporate

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opportunity, as defined in our amended and restated certificate of
incorporation, if it meets all of the requirements of that definition, including
the following:

- we are financially able to undertake it;

- the opportunity relates exclusively to the business of providing
electronics design engineering services to original equipment
manufacturers and other electronics device companies; and

- Cadence does not learn of the opportunity through any source other than
us (unless the opportunity is one that is offered to a Cadence director,
officer of employee by a third person solely in his or her capacity as a
director, officer or employee of us).

As to all opportunities that do not meet the narrow definition of corporate
opportunity in our amended and restated certificate of incorporation, Cadence
will not violate any duty to us by engaging, investing or availing itself of the
opportunity.

Our amended and restated certificate of incorporation also provides that in
any legal action by us or brought on our behalf against Cadence or its officers,
directors or employees which questions the fairness of any agreement or
transaction between us and Cadence, or in which any such person may have a
financial interest, the agreement or transaction will be presumed to be fair if
certain conditions are satisfied, including the following:

- The material facts of the transaction are disclosed or known to the board
of directors or relevant committee of Tality Corporation and a majority
of the disinterested members of the board or committee approves the
transaction;

- The transaction is consistent with guidelines approved by a majority of
the disinterested directors; or

- The terms of the transaction are not materially less favorable to Tality
Corporation than those made available by Cadence to unaffiliated third
parties.

The limited partnership agreement extends similar protections by Tality, LP
against liability to Cadence.

PARTNERSHIP UNITS

Immediately following this offering, under the limited partnership
agreement more fully summarized in "Arrangements Between Tality and Cadence", an
approximately 16.7% ownership interest in Tality, LP in the form of limited
partnership units will be owned by Tality Corporation and an approximately 82.3%
ownership interest in Tality, LP in the form of limited partnership units will
be beneficially owned by Cadence through a wholly-owned subsidiary. In addition,
Tality Corporation will own an approximately 1% general partnership interest in
Tality, LP and act as its sole managing general partner. Tality Corporation will
contribute the net proceeds of this offering in exchange for its general and
limited partnership units in Tality, LP. Cadence, on behalf of its wholly-owned
subsidiary, has contributed cash and certain assets used in our foreign
operations and will contribute the balance of the assets to be transferred under
the amended and restated master separation agreement and ancillary agreements,
in exchange for its limited partnership units in Tality, LP.

In connection with our separation from Cadence, we have authorized our
Class C common stock. No shares of Class C common stock will be outstanding upon
completion of this offering. These shares will only be issuable to Cadence or
its affiliates upon the acquisition by Tality Corporation of Cadence's share of
Class B common stock and its limited partnership units in connection with a tax-
free distribution to Cadence's stockholders of Cadence's equity interests in
Tality Corporation and Tality, LP. See "Description of Capital Stock and
Partnership Units".

REGISTRATION RIGHTS. We have granted Cadence registration rights related to
our Class A and Class C common stock. We have granted Cadence three demand
registrations that permit it to require us to register its shares of Class A and
Class C common stock issuable upon conversion of its share of Class B common
stock and exchange of its limited partnership units for sale under the

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securities laws. When we become eligible to use Form S-3 for registration,
Cadence will have an unlimited number of demand registrations, subject to
certain conditions. Cadence may also require us to include its shares of our
Class A and Class C common stock in other registrations that we do.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our Class A common stock is
ChaseMellon Shareholder Services, L.L.C., New York, New York.

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our Class A common
stock. Future sales of substantial amounts of our Class A common stock in the
public market could adversely affect our Class A common stock price. In
addition, because of contractual and legal restrictions on resale described
below, sales of substantial numbers of shares in the public market after these
restrictions lapse, or the perception that such sales could occur, could harm
the prevailing market price and could impair our ability to raise capital in the
future.

Following the offering, there will be 15,120,000 shares of our Class A
common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. An additional
70,100,001 shares of Class A common stock will be issuable upon the conversion
of the outstanding share of Class B common stock and exchange of limited
partnership interests not owned by us, which shares have certain registration
rights. See "Arrangements Between Tality and Cadence -- Amended and Restated
Master Separation Agreement" and "Description of Capital Stock and Partnership
Units -- Registration Rights". Of the shares of Class A common stock, all of the
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, except for any such shares held
by our "affiliates" as that term is defined under Rule 144 of the Securities
Act. The remaining shares held by existing stockholders are "restricted
securities" as that term is defined in Rule 144. In addition, shares held by
Cadence executives are subject to a one year right of repurchase by Cadence.
Restricted securities and any shares purchased in the offering by one of our
affiliates may not be sold in the public market without registration under the
Securities Act or in compliance with an applicable exemption from registration
as provided in Rule 144 or 701 under the Securities Act, which rules are
summarized below.

RULE 144 AND RULE 701

In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are aggregated, who has beneficially owned shares of our
Class A common stock that are restricted securities as defined in Rule 144 for
at least one year, including the holding period of any prior owner who is not
one of our affiliates, is entitled to sell within any three-month period
commencing 90 days after the date of this prospectus a number of shares or, in
the case of an affiliate, a number of such restricted securities and shares
purchased in the public market, that does not exceed the greater of:

- 1% of the shares of our Class A common stock then outstanding, which will
be approximately 151,200 shares immediately after this offering, or

- the average weekly trading volume of our Class A common stock in the
public market during the four calendar weeks immediately before such
sale.

Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and availability of current public information about us.

Under Rule 144(k), a person who has not been one of our affiliates at any
time during the three months before a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner who is not one of our affiliates is entitled to sell such
shares without regard to the volume limitations, manner of sale provisions,
availability of current public information about us or notice requirements of
Rule 144.

Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 of the Securities Act, as currently
in effect, permits the resale of securities originally purchased from us by our
employees, directors, officers, consultants or advisers prior to the closing of
this offering in connection with a compensatory stock or option plan or written
agreement, in reliance on Rule 144, but without compliance with certain
restrictions including the holding period requirement contained in Rule 144.

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LOCK-UP AGREEMENTS

All of our officers, directors and stockholders have agreed that they will
not, without the prior written consent of Goldman, Sachs & Co., which consent
may be withheld in its sole discretion, and subject to certain limited
exceptions, directly or indirectly, offer, sell, contract to sell, pledge, grant
any option to purchase, make any short sale or otherwise dispose of any shares
of our Class A common stock, options or warrants to acquire any shares of our
Class A common stock, or securities exchangeable or exercisable for, convertible
into or that represent the right to receive shares of our Class A common stock
currently owned either of record or beneficially by them, for a period beginning
on the date of this prospectus and continuing to and including the date which is
180 days after the date of this prospectus. Goldman, Sachs & Co. may, in its
sole discretion and any time without notice, release all or any portion of the
securities subject to these lock-up agreements. In addition, we have agreed
that, for a period of 180 days after the date of this prospectus, we will not,
without the prior written consent of Goldman, Sachs & Co., offer, sell, contract
to sell or otherwise dispose of any equity securities or securities convertible
into or exchangeable for equity securities substantially similar to Class A
common stock, or any partnership interests, except for options granted under the
2000 Equity Incentive Plan and the 2000 Broad Based Equity Plan.

Shares of Class A common stock sold by Cadence to certain of its employees
prior to completion of this offering are subject to a one year right of
repurchase by Cadence and may not be resold during that period. Shares of Class
A common stock sold by Tality to certain of its directors prior to completion of
this offering are subject to a one year right of repurchase by Tality and may
not be resold during that period. There are no restrictions on resale with
respect to any of our other securities, other than restrictions imposed by
lock-up agreements and applicable securities laws. As a result of the lock-up
agreements described above and the provisions of Rules 144, 2,150,000 restricted
shares will be available for sale in the public market immediately upon
expiration of the 180 day lock-up period, subject to the volume limitations and
other conditions of Rule 144. Substantial sales of our Class A common stock by
these stockholders, or the perception that such sales could occur, could harm
the trading price of our Class A common stock.

We have granted options to purchase up to 13,124,840 shares and issued
220,000 shares, subject to a one year right of repurchase by Tality, of Class A
common stock under our 2000 Equity Incentive Plan, our 2000 Broad Based Equity
Incentive Plan and our Directors Stock Option Plan. An additional 4,830,160
shares currently are reserved for issuance under these plans. Immediately after
this offering, we intend to register the sale of the shares of Class A common
stock issuable under the 2000 Equity Incentive Plan, 2000 Broad Based Equity
Incentive Plan and Directors Stock Option Plan under the Securities Act.
Accordingly, as awards under the plans vest, shares issued upon exercise of
these stock options will be freely tradable and available for sale in the open
market immediately after the 180 day lock-up agreements expire, except for
shares acquired by one of our affiliates.

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UNDERWRITING

Tality Corporation and the underwriters named below will enter into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter will severally agree to purchase the number
of shares indicated in the following table.

<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ----------
<S> <C>
Goldman, Sachs & Co.........................................
Lehman Brothers Inc.........................................
UBS Warburg LLC.............................................
SG Cowen Securities Corporation.............................
----------
Total................................................. 12,750,000
==========
</TABLE>

If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,912,500 shares from Tality Corporation to cover such sales. They may exercise
that option for 30 days. If any shares are purchased pursuant to this option,
the underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Tality Corporation. Such
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase 1,912,500 additional shares.

Paid by Tality

<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share......................................... $ $
Total............................................. $ $
</TABLE>

Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the underwriters may change the offering price and the
other selling terms.

Tality Corporation and its directors, officers and stockholders have agreed
with the underwriters not to sell, grant any option to purchase, make any short
sale, dispose of or hedge any of their Class A common stock or securities
convertible into or exchangeable for shares of Class A common stock during the
period from the date of this prospectus continuing through the date 180 days
after the date of this prospectus, except with the prior written consent of
Goldman, Sachs & Co. This agreement does not apply to any existing employee
benefit plans. See "Shares Available for Future Sale" for a discussion of
certain transfer restrictions.

Prior to the offering, there has been no public market for the shares of
Class A common stock. The initial public offering price will be negotiated among
Tality Corporation and the underwriters. Among the factors to be considered in
determining the initial public offering price of the shares, in addition to
prevailing market conditions, will be Tality's historical performance, estimates
of the business potential and earnings prospects of Tality, an assessment of
Tality's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.

Tality Corporation has applied for quotation of its Class A common stock on
the Nasdaq National Market under the symbol "TLTY".

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At the request of Tality Corporation, the underwriters are reserving up to
892,500 shares of Class A common stock for sale at the initial public offering
price to directors, officers, employees and persons with strategic or other
relationships with Tality through a directed share program. The number of shares
of Class A common stock available for sale to the general public in the offering
will be reduced to the extent these persons purchase these reserved shares. Any
shares not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered hereby.

In connection with the offering, the underwriters may purchase and sell
shares of Class A common stock in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of shares than they are required to purchase in the offering.
"Covered" short sales are sales made in an amount not greater than the
underwriters' option to purchase additional shares from Tality Corporation in
the offering. The underwriters may close out any covered short position by
either exercising their option to purchase additional shares or purchasing
shares in the open market. In determining the source of shares to close out the
covered short position, the underwriters will consider, among other things, the
price of shares available for purchase in the open market as compared to the
price at which they may purchase shares through the overallotment option.
"Naked" short sales are any sales in excess of such option. The underwriters
must close out any naked short position by purchasing shares in the open market.
A naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the common stock
in the open market after pricing that could adversely affect investors who
purchase in the offering. Stabilizing transactions consist of various bids for
or purchases of Class A common stock made by the underwriters in the open market
prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters have repurchased shares sold by
or for the account of such underwriter in stabilizing or short covering
transactions.

Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the Class
A common stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the common stock. As
a result, the price of the Class A common stock may be higher than the price
that otherwise might exist in the open market. If these activities are
commenced, they may be discontinued at any time. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.

The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

A prospectus in electronic format may be made available on the Internet web
sites maintained by one or more underwriters or securities dealers. In addition,
shares may be sold by the underwriters to securities dealers who resell shares
to online brokerage account holders.

Each underwriter has represented and agreed that (1) it has not offered or
sold and prior to the date six months after the date of issue of the shares of
Class A common stock will not offer or sell any shares to persons in the United
Kingdom, except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances that have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (2) it
has complied, and will comply with, all applicable provisions of the Financial
Services Act 1986 of Great Britain with respect to anything done by it in
relation to the shares in, from or otherwise involving the United Kingdom; and
(3) it has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issuance
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of the shares to a person who is of a kind described in Article 11(3) of the
Financial Services Act of 1986 (Investment Advertisements) (Exemptions) Order
1996 of Great Britain or is a person to whom the document may lawfully be issued
or passed on.

The shares of Class A common stock may not be offered, sold, transferred or
delivered in or from The Netherlands, as part of their initial distribution or
as part of any re-offering, and neither this prospectus nor any other document
in respect of the offering may be distributed or circulated in The Netherlands,
other than to individuals or legal entities which include, but are not limited
to, banks, brokers, dealers, institutional investors and undertakings with a
treasury department, who or which trade or invest in securities in the conduct
of a business or profession.

Tality estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $3,625,000.

Tality has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.

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<PAGE> 95

VALIDITY OF CLASS A COMMON STOCK

The validity of the issuance of the shares of Class A common stock offered
hereby will be passed upon for us by Gibson, Dunn & Crutcher LLP, San Francisco,
California, and for the underwriters by Sullivan & Cromwell, Palo Alto,
California.

EXPERTS

The consolidated financial statements and schedule of Tality Corporation
and Tality, LP included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.

The consolidated financial statements of Diablo Research Company LLC and
Subsidiary as of December 31, 1998 and 1997, and for the years then ended
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.

ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933, including the exhibits
and schedules to the registration statement, with respect to the shares of Class
A common stock sold in this offering. This prospectus does not contain all of
the information contained in the registration statement. For further information
about us and the Class A common stock offered by this prospectus, please refer
to the registration statement and the exhibits and schedules filed as a part of
the registration statement. Statements contained in this prospectus concerning
the contents of any contract or any other document referred to are not
necessarily complete; reference is made in each instance to the copy of such
contract or document filed as an exhibit to the registration statement. Each
such statement is qualified in all respects by such reference to such exhibit.

The registration statement, including exhibits and schedules to the
registration statement, may be inspected without charge at the Securities and
Exchange Commission's public reference facilities in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at the Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the registration statement may be obtained from such offices after payment of
fees prescribed by the Securities and Exchange Commission. You may call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of its public reference facilities. The Securities and Exchange
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
http://www.sec.gov.

92
<PAGE> 96

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TALITY CORPORATION, A DEVELOPMENT STAGE COMPANY
Report of Independent Public Accountants.................... F-2
Balance Sheet............................................... F-3
Statement of Changes in Stockholders' Equity................ F-4
Notes to Financial Statements............................... F-5

TALITY, LP, A LIMITED PARTNERSHIP
Report of Independent Public Accountants.................... F-8
Consolidated Balance Sheets................................. F-9
Consolidated Statements of Operations....................... F-10
Consolidated Statements of Partner's Net Investment......... F-11
Consolidated Statements of Cash Flows....................... F-12
Notes to Consolidated Financial Statements.................. F-13
Pro Forma Condensed Combined Statements of Operations....... F-32

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY
Unaudited Interim Financial Statements:
Condensed Consolidated Balance Sheets..................... F-35
Condensed Consolidated Statements of Operations........... F-36
Condensed Consolidated Statements of Cash Flows........... F-37
Notes to Condensed Consolidated Financial Statements...... F-38
Annual Financial Statements:
Independent Auditors' Report.............................. F-40
Consolidated Balance Sheets............................... F-41
Consolidated Statements of Operations..................... F-42
Consolidated Statements of Members' Equity................ F-43
Consolidated Statements of Cash Flows..................... F-44
Notes to Consolidated Financial Statements................ F-45
</TABLE>

F-1
<PAGE> 97

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Tality Corporation:

We have audited the accompanying balance sheet of Tality Corporation (a
Delaware corporation in the development stage) as of July 17, 2000 and the
related statement of changes in stockholders' equity for the period from
inception (July 13, 2000) to July 17, 2000. These financial statements are the
responsibility of Tality Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tality Corporation as of
July 17, 2000 and for the period from inception (July 13, 2000) to July 17,
2000, in conformity with accounting principles generally accepted in the United
States.

/s/ Arthur Andersen LLP

San Jose, California
July 17, 2000

F-2
<PAGE> 98

TALITY CORPORATION
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEET
JULY 17, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<S> <C>
ASSETS
Cash........................................................ $ --
--------
Total assets...................................... $ --
========
STOCKHOLDERS' EQUITY
Class A Common Stock; $0.001 par value; 99,999,000 shares
authorized; 2,150,000 shares issued and outstanding....... 2
Class B Common Stock; $0.001 par value; 1,000 shares
authorized; 1 share issued and outstanding................ --
Note receivable from Cadence................................ (13,438)
Paid-in capital............................................. 13,436
--------
Total stockholders' equity........................ $ --
========
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 99

TALITY CORPORATION

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JULY 13, 2000) THROUGH JULY 17, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
NOTE
CLASS A CLASS B RECEIVABLE
COMMON COMMON FROM PAID-IN
STOCK STOCK CADENCE CAPITAL TOTAL
------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Balances at inception (July 13, 2000).... $-- $-- $ -- $ -- $ --
Sale of 2,150,000 shares of Class A
common stock with a fair value of $11
per share to Cadence for $6.25 per
share.................................. 2 -- (13,438) 23,648 10,212
Distribution to Cadence for difference
between fair value of shares and price
paid by Cadence........................ -- -- -- (10,212) (10,212)
--- --- -------- ------- --------
Balances, July 17, 2000.................. $ 2 $-- $(13,438) $13,436 $ --
=== === ======== ======= ========
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 100

TALITY CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
JULY 17, 2000

1. ORGANIZATION

Tality Corporation (a Delaware corporation in the development stage) was
formed on July 13, 2000. Tality Corporation is a holding company whose principal
assets are expected to be its general and limited partnership interests in
Tality, LP. Tality Corporation will act as the sole general partner of Tality,
LP, a Delaware limited partnership, that provides innovative engineering
services for the design of complex systems and integrated circuits, with
expertise encompassing all aspects of product design, including full product,
sub-system, and advanced integrated circuit design. Tality, LP has not yet been
formed. Its partners are expected to be Tality Corporation and Cadence Holdings,
Inc., a Delaware Corporation and a wholly-owned subsidiary of Cadence Design
Systems, Inc. ("Cadence"). Subsequent to the offering, Tality Corporation's
consolidated financial statements will include the financial statements of
Tality, LP and its subsidiaries.

On July 14, 2000, Cadence and Tality Corporation entered into a Master
Separation Agreement. In exchange for a limited partner interest, Cadence will
transfer to Tality, LP certain Cadence-owned assets and liabilities which relate
to the operations of Tality, LP prior to the date of separation from Cadence
(the "Separation Date").

In connection with the separation, Cadence and Tality Corporation will
enter into a Master Corporate Services Agreement and other related agreements.
Significant expected provisions of the agreements are:

All eligible Tality, LP employees will continue to participate in the
Cadence benefit plans on comparable terms and conditions as applicable to
Cadence employees until the date Cadence's voting interest in Tality Corporation
falls below 80% or until Tality, LP establishes benefit plans for its employees.

Cadence will provide Tality, LP with specified corporate services. The
services include data processing and telecommunications services, information
technology support, as well as functions including accounting, financial
management, tax, payroll, legal, procurement and other administrative functions.
Such services will be billed to Tality Corporation under the Master Corporate
Services Agreement. The billings for the services provided by Cadence will be
based on head count, revenue, amounts of actual usage, square footage or other
methodology.

Tality, LP has agreed to indemnify Cadence for liabilities arising from
Tality, LP's business prior to and after the Separation Date. Cadence has also
agreed to indemnify Tality, LP and Tality Corporation for liabilities arising
from Cadence's business.

Cadence and Tality, LP have agreed to continue to jointly market to each
company's respective clients. This agreement allows Cadence's sales force to
"cross-sell" Tality, LP's services and for Tality, LP's sales force to identify
joint sales opportunities.

2. PUBLIC OFFERING

Tality Corporation filed a registration statement on Form S-1 with the
Securities and Exchange Commission (the "SEC") for an offering (the "Offering")
of shares of Class A Common Stock on July 17, 2000. Tality Corporation intends
to use the net proceeds of the Offering to purchase general and limited
partnership interests of Tality, LP.

F-5
<PAGE> 101
TALITY CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 17, 2000

3. STOCKHOLDERS' EQUITY

COMMON STOCK

There are two classes of common stock authorized: Class A common stock and
Class B common stock. Each holder of Class A common stock is entitled to one
vote per share, while each holder of Class B common stock is entitled to an
aggregate number of votes equal to the total number of Class B common shares
plus the total number of limited partnership units in Tality, LP owned by such
holder. In all other respects, the Class B common stock will have the same
rights as the Class A common stock. If Cadence decides in the future to
distribute its ownership interests in Tality Corporation and Tality, LP to
Cadence's stockholders, Cadence will have the right to convert its share of
Class B common stock and its limited partnership units in Tality, LP into Class
C common stock which such stock is not yet authorized. When authorized, the
Class C common stock can only be issued in connection with a tax-free
distribution. The shares of Class C common stock will have that number of votes
per share necessary so that the aggregate voting power of any shares of Class A
common stock held by Cadence and its subsidiaries equals 80% of the sum of (i)
the total combined voting power of all outstanding capital stock of Tality
Corporation plus (ii) the number of votes underlying shares potentially issuable
under any option, warrant, right or contract. In all other respects the Class C
common stock will have the same rights as the Class A common stock.

As the owner of Tality Corporation's only outstanding share of Class B
common stock, Cadence will be able to exercise control over all matters
requiring stockholder approval. Each share of Class B common stock is
convertible into, and each limited partnership unit in Tality, LP is
exchangeable for, one share of Class A common stock at any time at the holder's
option. Due to the influence that Cadence will have over the operations of
Tality Corporation based upon its expected equity ownership and company
structure, Cadence will consolidate Tality Corporation for financial reporting
purposes.

On July 13, 2000, Cadence, in exchange for a promissory note, purchased
2,150,000 shares of Tality Corporation Class A common stock at $6.25 per share,
1,640,000 shares of which were resold to certain Cadence employees at the same
price on July 16, 2000. The promissory note bears interest at an annual rate of
6.51% and is due in full 90 days from issuance. Other than H. Raymond Bingham
and Ronald R. Barris, who are directors of Tality Corporation and officers of
Cadence, the Cadence employees who purchased the Class A common stock were not
affiliated with and have not provided services to Tality Corporation. The
difference between the estimated fair value of the 2,150,000 shares and the
purchase price paid by Cadence totaled approximately $10.2 million and was
accounted for as a distribution to Cadence by Tality Corporation.

STOCK OPTION PLANS

On July 13, 2000, Tality Corporation adopted the 2000 Equity Incentive Plan
and the 2000 Broad Based Equity Incentive Plan. The 2000 Equity Incentive Plan
allows for grants of, or options to purchase, up to 7,000,000 shares of Class A
common stock of Tality Corporation to employees, directors and consultants of
Tality, LP plus an additional 2,000,000 shares per year for each year beginning
on July 2, 2001 until July 2, 2004. The Broad Based Equity Incentive Plan allows
for grants of, or options to purchase, up to 8,000,000 shares of Class A common
stock of Tality Corporation to employees and consultants of Tality, LP plus an
additional 2,500,000 shares per year for each year beginning on July 2, 2001
until July 2, 2004. Awards for 6,100,000 and 6,259,640 shares are outstanding as
of July 17, 2000 under the Equity Incentive and Broad Based Equity Incentive
Plans, respectively. The exercise price for all options outstanding is $6.25.

F-6
<PAGE> 102
TALITY CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 17, 2000

As of July 17, 2000, Tality, LP expects to record an aggregate deferred
compensation charge of approximately $60 million, representing the difference
between the deemed fair market value of the Class A common stock for accounting
purposes and the option exercise price upon the date of grant. This amount will
be recorded as a reduction of equity and will be amortized over the four-year
vesting period of the applicable options. The aggregate deferred stock
compensation expense is expected to be amortized in the amount of approximately
$7.5 million for the remainder of 2000, approximately $15 million for each of
2001, 2002 and 2003 and approximately $7.5 million in 2004. Such expense will be
recorded on the financial statements of Tality Corporation upon Tality
Corporation's purchase of its limited partnership interests in Tality, LP with
the net proceeds of the Offering.

Initial grants of options to employees of Cadence transferring to Tality,
LP will vest 100% on the seventh anniversary of the grant, provided that if the
optionee surrenders all unvested options to purchase Cadence common stock held
by the optionee, the Tality Corporation options will vest over four years as
follows: 25% will vest one month after the first anniversary of the completion
of the offering, and the remainder of the options will vest monthly over the
next three years.

F-7
<PAGE> 103

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

After the separation discussed in note 1 to Tality, LP's consolidated
financial statements, we expect to be in a position to render the following
report:

/s/ Arthur Andersen LLP

San Jose, California
July 17, 2000

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

To Tality, LP:

We have audited the accompanying consolidated balance sheets of Tality, LP,
a Delaware limited partnership, and subsidiaries as of January 2, 1999 and
January 1, 2000, and the related consolidated statements of operations,
partners' net investment and cash flows for each of the three years in the
period ended January 1, 2000. These financial statements are the responsibility
of Tality, LP's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tality, LP and subsidiaries
as of January 2, 1999 and January 1, 2000 and the results of their operations
and their cash flows for each of the three years in the period ended January 1,
2000, in conformity with accounting principles generally accepted in the United
States.

San Jose, California
, 2000

F-8
<PAGE> 104

TALITY, LP
A LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
PRO FORMA
JANUARY 2, JANUARY 1, JULY 1, JULY 1,
1999 2000 2000 2000
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance
for doubtful accounts of $6,667,
$3,197 and $3,616................... $20,428 $ 29,340 $ 37,576 $ --
Unbilled receivables................... 21,732 26,372 33,878 --
Prepaid expenses and other............. 2,709 3,800 4,919 --
------- -------- -------- -------
Total current assets................ 44,869 59,512 76,373 --
------- -------- -------- -------
Property, plant and equipment, net....... 17,507 20,335 20,578 20,578
------- -------- -------- -------
Goodwill and other intangibles, net of
accumulated amortization of $3,149,
$8,218 and $14,116..................... 18,167 53,541 50,864 50,864
Purchased software and other, net of
accumulated amortization of $1,599,
$4,194 and $6,344...................... 10,325 9,143 8,663 8,663
------- -------- -------- -------
Total assets........................ $90,868 $142,531 $156,478 $80,105
======= ======== ======== =======
LIABILITIES AND PARTNER'S NET INVESTMENT
Current liabilities:
Current portion of capital lease
obligations......................... $ 534 $ 2,056 $ 1,605 $ 1,605
Accounts payable....................... 3,523 5,062 4,836 --
Payroll and payroll related accruals... 13,568 15,433 19,247 --
Other accrued liabilities.............. 6,426 7,461 5,025 --
Deferred revenue....................... 4,683 5,656 4,916 4,916
------- -------- -------- -------
Total current liabilities........... 28,734 35,668 35,629 6,521
------- -------- -------- -------
Long-term liabilities:
Capital lease obligations, net of
current portion..................... 730 1,851 1,138 1,138
Deferred taxes......................... 3,226 2,467 2,104 2,104
------- -------- -------- -------
Total long-term liabilities......... 3,956 4,318 3,242 3,242
------- -------- -------- -------
Commitments and contingencies (notes 4
and 5)
Partner's net investment:
Cadence investment..................... 58,022 102,641 118,104 70,839
Accumulated other comprehensive income
(loss).............................. 156 (96) (497) (497)
------- -------- -------- -------
Total partner's net investment...... 58,178 102,545 117,607 70,342
------- -------- -------- -------
Total liabilities and partner's net
investment........................ $90,868 $142,531 $156,478 $80,105
======= ======== ======== =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 105

TALITY, LP
A LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 106

TALITY, LP
A LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF PARTNER'S NET INVESTMENT
(IN THOUSANDS)

<TABLE>
<CAPTION>
ACCUMULATED
OTHER
CADENCE COMPREHENSIVE
INVESTMENT INCOME (LOSS) TOTAL
---------- ------------- ---------
<S> <C> <C> <C>
Balances, December 30, 1996........................ $ 19,408 $ 126 $ 19,534
Components of comprehensive income (loss):
Net loss......................................... (61,234) -- (61,234)
Accumulated translation adjustments.............. -- (18) (18)
Net transfers from Cadence......................... 79,409 -- 79,409
--------- ----- ---------
Balances, January 3, 1998.......................... 37,583 108 37,691
Components of comprehensive income (loss):
Net loss......................................... (151,260) -- (151,260)
Accumulated translation adjustments.............. -- 48 48
Net transfers from Cadence......................... 171,699 -- 171,699
--------- ----- ---------
Balances, January 2, 1999.......................... 58,022 156 58,178
Components of comprehensive income (loss):
Net loss......................................... (62,253) -- (62,253)
Accumulated translation adjustments.............. -- (252) (252)
Net transfers from Cadence......................... 106,872 -- 106,872
--------- ----- ---------
Balances, January 1, 2000.......................... 102,641 (96) 102,545
UNAUDITED:
Components of comprehensive income (loss):
Net loss......................................... (25,022) -- (25,022)
Accumulated translation adjustments.............. -- (401) (401)
Net transfers from Cadence......................... 40,485 -- 40,485
--------- ----- ---------
Balances, July 1, 2000............................. $ 118,104 $(497) $ 117,607
========= ===== =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 107

TALITY, LP
A LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
------------------------------------ -------------------
JANUARY 3, JANUARY 2, JANUARY 1, JULY 3, JULY 1,
1998 1999 2000 1999 2000
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents at beginning of
period........................................ $ -- $ -- $ -- $ -- $ --
-------- --------- -------- -------- --------
Cash flow from operating activities:
Net loss...................................... (61,234) (151,260) (62,253) (35,741) (25,022)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization.............. 6,077 15,296 19,868 9,240 12,860
Write-off of acquired in-process research
and development.......................... 1,711 28,500 -- -- --
Provision for losses on trade accounts
receivables.............................. 200 4,152 2,710 1,430 420
Non-cash restructuring charges............. -- 4,502 -- -- --
Deferred income taxes...................... -- (569) (759) (354) (362)
Changes in operating assets and
liabilities, net of effect of acquired
companies:
Receivables.............................. (15,111) (2,931) (13,535) (4,115) (15,842)
Prepaid expenses and other............... (363) (1,212) (829) (5,862) (1,119)
Accounts payable and accrued
liabilities........................... 2,585 (158) (1,545) (2,474) 1,151
Deferred revenue......................... (1,467) 968 973 1,084 (740)
-------- --------- -------- -------- --------
Net cash used in operating
activities.......................... (67,602) (102,712) (55,370) (36,792) (28,654)
-------- --------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment..... (8,838) (13,574) (10,300) (5,903) (4,673)
Increase in acquired intangibles, purchased
software and other assets.................. (478) (11,318) (1,771) (1,433) (584)
Cash effect of business acquisitions.......... (2,370) (43,717) (38,800) -- (4,794)
-------- --------- -------- -------- --------
Net cash used in investing
activities.......................... (11,686) (68,609) (50,871) (7,336) (10,051)
-------- --------- -------- -------- --------
Cash flows from financing activities:
Net transfers from Cadence.................... 79,409 171,699 106,872 44,511 40,485
Principal payments on capital leases.......... (121) (378) (631) (383) (1,780)
-------- --------- -------- -------- --------
Net cash provided by financing
activities.......................... 79,288 171,321 106,241 44,128 38,705
-------- --------- -------- -------- --------
Decrease in cash and cash equivalents........... -- -- -- -- --
-------- --------- -------- -------- --------
Cash and cash equivalents at end of period...... $ -- $ -- $ -- $ -- $ --
======== ========= ======== ======== ========
Non-cash financing and investing activities:
Capital lease obligations incurred for
equipment..................................... $ 123 $ 1,397 $ 3,275 $ 766 $ 616
======== ========= ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 108

TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

1. BACKGROUND AND BASIS OF PRESENTATION

Tality, LP (a Delaware limited partnership) was formed on July 21, 2000,
and provides innovative engineering services for the design of complex systems
and integrated circuits, with expertise encompassing all aspects of product
design, including full product, sub-system, and advanced integrated circuit
design. Tality, LP operates principally from design sites located in the United
States, Canada and the United Kingdom. The General Partner is Tality
Corporation, an entity in which the majority equity interest is controlled by a
wholly-owned subsidiary of Cadence Design Systems, Inc. ("Cadence").

On July 14, 2000, Cadence and Tality Corporation entered into a Master
Separation Agreement. In exchange for a limited partnership interest, Cadence
will transfer certain Cadence-owned intellectual property and assets and
liabilities that relate to the operations of Tality, LP prior to the date of
separation from Cadence (the "Separation Date"). Cadence will continue to fund
the operations of Tality, LP through the Separation Date. For periods prior to
the Separation Date, "Tality, LP" refers to Cadence's design services business,
which was operated as a part of Cadence. Cadence has the right to terminate the
Master Separation Agreement at any time prior to the closing of the public
offering discussed below.

Pursuant to the terms of the Master Separation Agreement, Tality
Corporation has filed a registration statement for the sale of shares of its
Class A Common Stock. Upon completion of its planned public offering, Tality
Corporation will own a 1% general partnership interest and an approximately
16.7% limited partnership interest in Tality, LP.

The consolidated financial statements of Tality, LP reflect the financial
position, historical results of operations and cash flows of the design services
business of Cadence during each respective period. The consolidated financial
statements have been prepared using Cadence's historical basis in the assets and
liabilities and the historical results of operations of Tality, LP. Changes in
partners' net investment represents the net loss of Tality, LP and other
transfers to and from Cadence. The financial information included herein may not
reflect the consolidated financial statements, operating results, changes in
partner's net investment and cash flows of Tality, LP in the future, or what
they would have been had Tality, LP been a separate stand-alone entity during
the periods presented.

In connection with the separation, Cadence and Tality Corporation will
enter into a Master Corporate Services Agreement and other related agreements.
These agreements are expected to provide that:

- All eligible Tality, LP employees will continue to participate in the
Cadence benefit plans on terms and conditions comparable to those
applicable to Cadence employees until the date Cadence's voting interest
in Tality Corporation falls below 80% or until Tality, LP establishes
benefit plans for its employees.

- Cadence will provide Tality, LP and Tality Corporation, and Tality, LP
will provide Cadence with specified corporate services. The services
include data processing and telecommunications services, information
technology support, as well as functions including accounting, financial
management, tax, payroll, legal, procurement and other administrative
functions. Such services will be billed to Tality, LP or Cadence, as
appropriate, under the terms of the Master Corporate Service Agreement
based on an allocation of actual costs. The billings for the services
will be based on head count, revenue, amounts of actual usage, square
footage or other methodologies.
F-13
<PAGE> 109
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

- Tality, LP has agreed to indemnify Cadence for liabilities arising from
Tality, LP's business prior to and after the Separation Date. Cadence has
also agreed to indemnify Tality, LP and Tality Corporation for
liabilities arising from Cadence's business.

- Cadence and Tality, LP have agreed to continue to jointly market to each
company's respective clients. This agreement allows Cadence's sales force
to "cross-sell" Tality, LP's services and for Tality, LP's sales force to
identify joint sales opportunities.

The consolidated financial statements include charges for services provided
by Cadence, including legal, accounting, finance, facilities, information
technology, sales, human resources and other corporate and infrastructure
services. The charges for the services provided by Cadence were determined using
either head count, revenue, square footage or amounts of actual usage as agreed
by Tality and Cadence. Management believes that these charges are representative
of the operating expenses Tality, LP would have incurred had Tality, LP been
operated on a stand-alone basis and are considered to be reasonable reflections
of the utilization of services provided.

Tality, LP will be dissolved on December 31, 2099 or earlier upon the
written consent of both Tality Corporation and Cadence.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Tality, LP
and its subsidiaries after elimination of significant intercompany accounts and
transactions.

Tality, LP uses a 52/53 week year, ending on the Saturday closest to
December 31. The year ended January 3, 1998 contains 53 weeks, and the years
ended January 2, 1999 and January 1, 2000 each contain 52 weeks.

USE OF ESTIMATES

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

INTERIM FINANCIAL INFORMATION

The financial information as of July 1, 2000, and for the six months ended
July 3, 1999 and July 1, 2000 is unaudited and includes all adjustments,
consisting only of normal and recurring accruals, that management considers
necessary for a fair presentation of its consolidated financial position,
operating results and cash flows. Results for the six months ended July 1, 2000
are not necessarily indicative of results to be expected for the full fiscal
year 2000 or for any future period.

INCOME TAXES

Tality, LP is not a taxable entity for federal income tax purposes and most
state income tax purposes; as a partnership, its income or loss is allocated to
its partners. Through the Separation Date, Tality, LP's operations were included
in the Cadence U.S. income tax returns. Accordingly, any

F-14
<PAGE> 110
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

income tax benefit from losses was utilized by Cadence. In certain foreign
jurisdictions, Tality, LP will be taxed as a corporation and accordingly Tality,
LP has provided for current and deferred taxes in those jurisdictions.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of foreign subsidiaries, where the functional
currency is the local currency, are translated using exchange rates in effect at
the end of the period and revenue and costs are translated using average
exchange rates for the period. Gains and losses on the translation into U.S.
dollars of amounts denominated in foreign currencies are included in net loss
for those operations whose functional currency is the U.S. dollar, and as a
component of other comprehensive income (loss) for those operations whose
functional currency is the local currency.

STOCK-BASED COMPENSATION

Tality, LP accounts for stock options granted to its employees under the
intrinsic value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees and follows the disclosure
provisions of Statement of Financial Accounts Standards No. 123.

DERIVATIVE FINANCIAL INSTRUMENTS

Tality, LP, enters into foreign currency forward exchange contracts and
purchases foreign currency put options with approved 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 and put options are not accounted for as hedges
and, therefore, the unrealized gains and losses are recognized in other income
(expense) net, in advance of the actual foreign currency cash flows with the
fair value of these forward contracts and put options being recorded in accrued
liabilities.

As of January 2, 1999, January 1, 2000 and July 1, 2000, Tality, LP had no
specific contracts for foreign exchange exposures. A portion of the gains and
losses related to foreign exchange contracts has been allocated to Tality, LP
based on the proportion of its foreign currency exposures to Cadence's total
foreign currency exposures. The gains and losses, which have not been material,
are included in the accompanying financial statements.

Tality, LP does not use forward contracts and put options for trading
purposes in accordance with its policy on financial risk management. Tality,
LP's ultimate realized gain or loss with respect to currency fluctuations will
depend on the currency exchange rates and other factors in effect as the forward
contracts and put options mature.

REVENUE RECOGNITION

Tality, LP provides services through three billing arrangements: fixed
price contracts, scoped time and materials projects and defined level of effort
arrangements, which generally extend up to one year, but in some cases may be
longer. Under time and materials and level of effort contracts, revenue is
recognized as services are performed. For fixed price contracts, revenue is
recognized using the percentage-of-completion method of accounting, based on the
percentage that incurred contract costs to date bear to total estimated contract
costs after giving effect to the most recent

F-15
<PAGE> 111
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

estimates of total cost. The effect of changes to total estimated contract costs
is recognized in the period that such changes are determined. Provisions for
estimated losses are made in the period in which the loss first becomes
estimable and probable. Due to uncertainties inherent in the estimation process,
it is reasonably possible that management's cost estimates could be revised in
the near-term.

Deferred revenues of $4.7 million and $5.7 million at January 2, 1999 and
January 1, 2000, respectively, represent billings in excess of costs and related
profits on certain contracts. Unbilled receivables represent costs and related
profits in excess of billings on certain fixed price contracts. Unbilled
receivables were not billable at the balance sheet date but are recoverable over
the remaining life of the contract through future billings as provided in the
contractual agreements.

UNAUDITED PRO FORMA BALANCE SHEET

The unaudited pro forma balance sheet at July 1, 2000 gives pro forma
effect to retention by Cadence of all of Tality, LP's working capital as
provided in the Amended and Restated Master Separation Agreement, except the
current portion of capital lease obligations and deferred revenue, as though
such retention had occurred as of July 1, 2000.

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes accumulated foreign currency
translation gains and losses. Tality, LP has reported the components of
comprehensive income (loss) on its consolidated statements of partner's net
investment.

CASH AND CASH EQUIVALENTS

Tality, LP currently has no cash or cash equivalents. To date, Tality, LP
has been funded entirely by Cadence. Net transfers from Cadence to Tality, LP
were $79.4 million, $171.7 million and $106.9 million for the years ended
January 3, 1998, January 2, 1999 and January 1, 2000, respectively, and $40.5
million for the six months ended July 1, 2000. Net transfers are included as a
component of Cadence's net investment in Tality, LP in the accompanying
consolidated balance sheets. Cadence has committed to fund Tality, LP until it
receives the capital contribution from Tality Corporation, as discussed above.
For purposes of the statement of cash flows, Tality, LP considers all
instruments with a maturity of 90 days or less to be cash equivalents.

F-16
<PAGE> 112
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are stated at cost and consist of the
following:

<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1,
1999 2000
---------- ----------
<S> <C> <C>
Computer equipment and related software................... $ 33,404 $ 43,882
Leasehold improvements.................................... 153 153
Furniture and fixtures.................................... 1,597 2,384
Equipment................................................. 1,736 2,436
-------- --------
Total cost.............................................. 36,890 48,855
Less: accumulated depreciation.......................... (19,383) (28,520)
-------- --------
Property, plant and equipment, net........................ $ 17,507 $ 20,335
======== ========
</TABLE>

Depreciation and amortization are provided over the estimated useful lives,
using the straight-line method, as follows:

<TABLE>
<S> <C>
Computer equipment and related software.................. 3 - 5 years
Leasehold improvements................................... Shorter of the lease term
or the estimated useful life
Furniture and fixtures................................... 3 - 5 years
Equipment................................................ 3 - 5 years
</TABLE>

Depreciation expense for the years ended January 3, 1998, January 2, 1999,
and January 1, 2000 was $6.0 million, $10.6 million, and $11.4 million,
respectively.

GOODWILL AND ACQUIRED INTANGIBLES

Goodwill and acquired intangibles represent purchase price in excess of
allocated amounts to net tangible assets and in-process research and development
in connection with business combinations accounted for as purchases. Included in
goodwill and other intangibles at January 2, 1999 and January 1, 2000 is $11.5
million in assembled workforce intangibles relating to the Symbionics
acquisition. All remaining amounts represent goodwill. Such goodwill and
acquired intangibles are amortized on a straight-line basis over the remaining
estimated economic life of the underlying products and technologies (original
lives assigned are two to five years).

It is reasonably possible that the estimates of anticipated future gross
revenue, the remaining estimated economic life of the products and technologies,
or both, could differ from those used to assess the recoverability of these
costs and result in a write-down of the carrying amount or a shortened life of
both the software development costs and goodwill and acquired intangibles in the
near term.

LONG-LIVED ASSETS

Tality, LP periodically reviews long-lived assets, certain identifiable
intangibles, and goodwill related to these assets for impairment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and For
Long-lived Assets to be Disposed Of."

F-17
<PAGE> 113
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

For assets to be held and used, including acquired intangibles, Tality, LP
initiates its review whenever events or changes in circumstances indicate that
the carrying amount of a long-lived asset may not be recoverable. Recoverability
of an asset is measured by comparison of its carrying amount to the future
undiscounted cash flows that the asset is expected to generate. Any impairment
to be recognized is measured by the amount by which the carrying amount of the
asset exceeds its fair market value.

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

CONCENTRATIONS OF CREDIT RISK

Financial instruments, including derivative financial instruments, that may
potentially subject Tality, LP to concentrations of credit risk, consist
principally of receivables. Concentration of credit risk related to receivables
is limited, due to the varied customers comprising Tality, LP's customer base
and their dispersion across geographies. Credit exposure relates to the forward
contracts and is limited to the realized and unrealized gains on these
contracts. All financial instruments are only executed with approved financial
institutions with strong credit ratings, which minimizes risk of loss due to
nonpayment Tality, LP has not experienced any significant losses due to credit
impairment related to its financial instruments.

NEW ACCOUNTING STANDARDS

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

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, No. 101, "Revenue Recognition" ("SAB 101"), which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. SAB 101 was adopted retroactively for all periods
presented. The adoption of this statement did not have a material impact on
Tality, LP's financial results.

In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation (an interpretation of APB
Opinion No. 25). This Interpretation provides guidance regarding the application
of APB Opinion No. 25 to stock compensation involving employees. This
interpretation became effective July 1, 2000 and did not have a material effect
on Tality, LP's consolidated financial statements.

F-18
<PAGE> 114
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

3. ACQUISITIONS

WESTPORT TECHNOLOGY, INC.

In March 2000, Cadence acquired all of the outstanding stock of Westport
Technology, Inc. ("Westport") for cash. Westport was a design services and
intellectual property development company with expertise in telecommunications
product development encompassing hardware design, integrated circuit design, and
software design. The total purchase price was $4.8 million and the acquisition
was accounted for as a purchase. In connection with the acquisition, Cadence
acquired goodwill of $4.3 million. The results of operations of Westport and the
estimated fair value of the assets acquired and liabilities assumed are included
in the accompanying consolidated financial statements from the date of the
acquisition. Goodwill arising from the Westport acquisition is being amortized
on a straight-line basis over five years.

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

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Goodwill.................................................... $4,306
Property, plant and equipment, net.......................... 168
Cash, receivables, and other current assets................. 321
Current liabilities assumed................................. (1)
------
Net assets acquired......................................... $4,794
======
</TABLE>

Comparative pro forma financial information has not been presented because
the results of operations of Westport were not material to Tality, LP's
consolidated financial statements.

DIABLO RESEARCH COMPANY LLC

In December 1999, Cadence acquired all of the outstanding stock of Diablo
Research Company LLC ("Diablo") for cash and assumed all outstanding stock
options. Assumed stock options, which were included as a component of the
purchase price, were valued using the Black-Scholes options pricing model and
were exchanged for stock options in Cadence. Diablo was an engineering services
firm with expertise in wireless communication, global positioning satellite
solutions, and data transfer and home automation markets. The total purchase
price was $39.9 million and the acquisition was accounted for as a purchase. In
connection with the acquisition, Cadence acquired goodwill of $40.9 million.
Approximately $1.1 million of the property, plant and equipment obtained in the
purchase was retained by Cadence and therefore, is not included in the
accompanying financial statements. The results of operations of Diablo and the
estimated fair value of the assets acquired and liabilities assumed are included
in the accompanying consolidated financial statements from the date of
acquisition. Goodwill arising from the Diablo acquisition is being amortized on
a straight-line basis over five years.

F-19
<PAGE> 115
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

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

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Goodwill.................................................... $40,900
Property, plant and equipment, net and other non-current
assets.................................................... 3,073
Cash, receivables, and other current assets................. 2,989
Current liabilities assumed................................. (6,789)
Long term liabilities assumed............................... (246)
-------
Net assets acquired......................................... $39,927
=======
</TABLE>

Unaudited comparative pro forma financial information as if Tality, LP and
Diablo had been combined as of the beginning of the periods is as follows:

<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
JANUARY 2, 1999 JANUARY 1, 2000
--------------- ---------------
<S> <C> <C>
Revenue....................................... $ 125,848 $141,934
Net loss...................................... $(165,481) $(72,324)
</TABLE>

DETENTE TECHNOLOGY, INC.

In August 1998, Cadence acquired all of the outstanding stock of Detente
Technology, Inc. ("Detente") for cash. Detente was an embedded software
engineering company with expertise in complex system design and coding, Java,
and digital TV software. The total purchase price was $3.6 million and the
acquisition was accounted for as a purchase. In connection with the acquisition,
Cadence acquired goodwill of $3.6 million. The results of operations of Detente
and the estimated fair value of the assets acquired and liabilities assumed are
included in the accompanying consolidated financial statements from the date of
the acquisition. Goodwill arising from the Detente acquisition is being
amortized on a straight-line basis over two years.

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

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Goodwill.................................................... $3,639
Property, plant and equipment, net.......................... 21
Cash, receivables, and other current assets................. 269
Current liabilities assumed................................. (287)
------
Net assets acquired......................................... $3,642
======
</TABLE>

Comparative pro forma financial information has not been presented because
the results of operations of Detente were not material to Tality, LP's
consolidated financial statements.

SYMBIONICS GROUP LIMITED

In February 1998, Cadence acquired all of the outstanding stock of
Symbionics Group Limited ("Symbionics") for approximately one million shares of
Cadence common stock and $21.3 million of cash. The total purchase price was
$46.1 million and the acquisition was accounted for as a purchase. The fair
value of Cadence's common stock was determined based upon the average price

F-20
<PAGE> 116
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

of the stock five days before and five days after the acquisition was announced.
The excess of the purchase price over net assets acquired was $45.9 million, of
which $11.5 million represents assembled workforce intangibles, $5.9 million of
goodwill and $28.5 million related to the write-off of in-process research and
development that had not reached technological feasibility and, in management's
opinion, had no probable alternative future use. The results of operations of
Symbionics and the estimated fair value of the assets acquired and liabilities
assumed are included in the accompanying consolidated financial statements from
the date of acquisition. Goodwill and intangibles arising from the acquisition
are amortized on a straight-line basis over five years.

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

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Acquired intangibles, including in-process research and
development............................................... $45,856
Property, plant and equipment, net and other non-current
assets.................................................... 1,258
Receivables, and other current assets....................... 4,602
Current liabilities assumed................................. (5,616)
-------
Net assets acquired......................................... $46,100
=======
</TABLE>

The following table represents unaudited pro forma financial information as
if Tality, LP and Symbionics had been combined as of the beginning of the
periods presented. The pro forma data are presented for illustrative purposes
only and are not necessarily indicative of the combined financial position or
results of operations of future periods or the results that actually would have
resulted had Tality, LP and Symbionics been a combined company during the
specified periods. The pro forma results include the effects of the amortization
of acquired intangible assets and adjustments to the income tax provision.

<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 3, 1998
---------------
(IN THOUSANDS)
<S> <C>
Revenue..................................................... $108,890
Net loss.................................................... $(58,502)
</TABLE>

The pro forma results of operations for the year ended January 2, 1999 were
not materially different from Tality, LP's historical results.

ADVANCED MICROELECTRONICS

In October 1997, Cadence acquired certain assets and related business from
the Advanced Microelectronics division of the Institute for Technology
Development ("Advanced Microelectronics"), a non-profit corporation organized to
conduct and transfer scientific research into usable high technology for
commercial application for cash. This division provided contract engineering
services on a time-and-materials basis for the design and development of
integrated circuits. The total purchase price was $2.4 million and the
acquisition was accounted for as a purchase. Accordingly, the results of
operations of Advanced Microelectronics and the estimated fair value of the
assets acquired and liabilities assumed are included in the accompanying
consolidated financial statements from the date of acquisition. The excess of
purchase price over net assets acquired was $2.1 million, of which $0.4 million
was goodwill and $1.7 million related to the write-off of in-process research
and development that had not reached technological feasibility and, in
management's opinion, had no

F-21
<PAGE> 117
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

probable alternative future use. Comparative pro forma financial information has
not been presented, as the results of operations of Advanced Microelectronics
were not material to the Cadence's consolidated financial statements.

4. COMMITMENTS

Equipment is leased under various capital leases expiring through 2002.
Certain of these leases contain renewal options. Tality, LP's facilities are
leased by Cadence from third parties under operating leases. Operating leases
expire at various dates from 2001 through 2015. At the Separation Date, Tality,
LP intends to lease, sublease or assume leases for certain facilities from
Cadence for up to 180 months. Rent expense was $2.3 million, $4.0 million, and
$6.1 million for 1997, 1998, and 1999, respectively.

At January 1, 2000, future minimum lease payments under capital and
operating leases and the present value of the capital lease payments were as
follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
For the years:
2000..................................................... $ 2,188 $ 12,519
2001..................................................... 1,152 12,730
2002..................................................... 707 12,171
2003..................................................... -- 10,050
2004..................................................... -- 8,233
Thereafter............................................... -- 47,072
------- --------
Total lease payments.................................. 4,047 $102,775
========
Less: amount representing interest (average interest rate
of 6.50%)................................................ (140)
-------
Present value of lease payments.......................... 3,907
Less: current portion...................................... (2,056)
-------
Long-term portion........................................ $ 1,851
=======
</TABLE>

The cost of equipment under capital leases included in the consolidated
balance sheets as property, plant, and equipment at January 2, 1999 and January
1, 2000 was approximately $1.7 million and $7.0 million, respectively.
Amortization expense for capital leases is included in depreciation expense.
Accumulated amortization of the leased equipment at January 2, 1999 and January
1, 2000 was approximately $0.4 million and $3.1 million, respectively.

5. CONTINGENCIES

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

In connection with Tality's separation from Cadence, Tality, LP has agreed
to indemnify Cadence for damages arising Tality's business prior to the
separation, including that described below.

F-22
<PAGE> 118
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

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 commenced. The case is set for trial in January
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.

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 are 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 has filed a
motion to dismiss the defendant's counterclaims and a hearing on this motion is
scheduled for October 2, 2000. Cadence believes that it has defenses to, and
disputes the allegations made by, IMI Telecommunications, Inc. and intends to
defend the action vigorously.

While Tality, LP cannot predict the results or estimate the possible loss,
or range of loss, if any associated with the litigation matters described above,
Tality, LP does not expect the outcome of any of these matters to have a
material adverse effect on its business.

6. PARTNER'S EQUITY

EMPLOYEE STOCK PURCHASE PLAN

Under the Cadence employee stock purchase plan ("ESPP"), eligible Tality,
LP employees have generally been able to contribute up to 15% of their
compensation, as defined, to the purchase of shares of Cadence's common stock at
a price of 85% of the lower of the fair market value as of the beginning or the
end of the offering period.

EMPLOYEE STOCK OPTION PLANS

Cadence has stock option plans under which Tality, LP's employees and
directors were granted options to purchase Cadence common stock. Options are
generally granted at not less than the fair market value at grant date, vest
over a two to five-year period and expire five to ten years after the grant
date.

F-23
<PAGE> 119
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

A summary of options held by Tality, LP employees under the Cadence plans
follows:

<TABLE>
<CAPTION>
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year... 1,579,780 $11.01 3,602,882 $15.32 3,199,576 $16.96
Assumption of
acquired
companies
options.......... -- $ -- -- $ -- 242,699 $ 3.66
Granted............. 2,220,228 $17.80 570,031 $21.94 3,449,087 $13.04
Exercised........... (175,622) $ 8.38 (560,425) $11.87 (301,815) $12.50
Forfeited........... (21,504) $11.26 (412,912) $16.41 (617,042) $16.12
---------- ---------- ----------
Outstanding at end of
year................ 3,602,882 $15.32 3,199,576 $16.96 5,972,505 $14.47
========== ========== ==========
Options exercisable at
year end............ 708,925 1,242,994 1,836,466
Weighted average fair
value of options
granted during the
year................ $ 9.22 $ 19.00 $ 7.61
</TABLE>

A summary of the status of all of Cadence stock option plans applicable to
Tality, LP employees at January 1, 2000 follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------------
RANGE OF NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
PRICES AT 1/1/00 CONTRACTUAL LIFE EXERCISE PRICE AT 1/1/00 EXERCISE PRICE
-------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.14 - $ 5.00.. 244,672 8.4 $ 3.66 244,672 $ 3.66
$ 5.01 - $10.00.. 351,081 5.8 $ 8.24 280,975 $ 7.82
$10.01 - $15.00.. 3,531,376 8.4 $12.59 724,438 $13.49
$15.01 - $20.00.. 863,399 8.4 $17.93 272,505 $16.98
$20.01 - $25.00.. 897,717 7.8 $22.70 271,943 $22.74
$25.01 - $30.00.. 71,900 8.1 $26.75 40,785 $26.64
$30.01 - $35.00.. 12,360 7.7 $31.66 1,148 $30.41
--------- ---------
Total......... 5,972,505 1,836,466
========= =========
</TABLE>

PRO FORMA INFORMATION

This information is required to illustrate the financial results of
operations as if Tality, LP had accounted for the Cadence grants of employee
stock options under the fair value method of SFAS

F-24
<PAGE> 120
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

No. 123. The fair value of Cadence's options granted and shares purchased under
the ESPP program for years ended January 3, 1998, January 2, 1999, and January
1, 2000 reported below were estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions assuming a
dividend yield of zero for all periods:

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate..................................... 6.20% 5.22% 5.90%
Volatility factors of the expected market price of Cadence
common stock.............................................. 44% 59% 62%
Weighted average expected life of an option................. 4 Years 4 Years 5 Years
</TABLE>

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

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Tality, LP applies
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its plans. Had Tality, LP accounted for Cadence's fixed stock
option and employee stock purchase plans under SFAS No. 123, net loss would have
been adjusted to the following pro forma amounts:

<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss:
As reported.......................................... $(61,234) $(151,260) $(62,253)
======== ========= ========
Pro forma............................................ $(66,309) $(160,715) $(72,454)
======== ========= ========
</TABLE>

The effects of applying SFAS No. 123 on pro forma disclosures of net loss
for 1997, 1998, and 1999 are not likely to be representative of the pro forma
effects on net loss and net loss per share in future years.

TALITY CORPORATION PLANS

On July 13, 2000, Tality Corporation adopted the 2000 Equity Incentive Plan
and the 2000 Broad Based Equity Incentive Plan. The Equity Incentive Plan allows
for grants of, or options to purchase, up to 7,500,000 shares of Class A common
stock of Tality Corporation to employees, directors and consultants of Tality,
LP, plus an additional 2,000,000 shares per year for each year beginning on July
2, 2001 until July 2, 2004. The Broad Based Equity Incentive Plan allows for
grants of, or options to purchase, up to 10,000,000 shares of Class A common
stock of Tality Corporation to employees and consultants of Tality, LP, plus an
additional 2,500,000 shares per year for each year beginning on July 2, 2001
until July 2, 2004. Awards for 6,350,000 and 6,744,840 shares are currently
outstanding under the Equity Incentive and Broad Based Equity Incentive Plans,
respectively. The exercise price for all shares outstanding is $6.25.

F-25
<PAGE> 121
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

In September 2000, Tality Corporation adopted the Directors Stock Option
Plan, which provides for awards of options to purchase up to 675,000 shares of
Class A common stock to non-employee directors. The plan provides for automatic
grants of options to purchase 50,000 shares of Class A common stock upon
election to the board and an additional 50,000 shares if elected as chairman of
the board. Beginning July 1, 2001, each non-employee director other than the
chairman of the board will automatically receive an option to purchase an
additional 12,500 shares of Class A common stock every July 1 of each calendar
year other than the year in which the director was appointed. A non-employee
director serving as chairman of the board will automatically receive an option
to purchase 25,000 shares of Class A common stock every July 1 of each calendar
year other than the year in which the director was elected chairman of the
board. Awards for 250,000 shares of Class A common stock are currently
outstanding under the plan.

Tality, LP expects to record an aggregate deferred compensation charge of
approximately $64 million, representing the difference between the deemed fair
market value of the Class A common stock for accounting purposes and the option
exercise price or restricted share purchase price upon the date of grant. This
amount will be recorded as a reduction of equity and will be amortized over the
four-year vesting periods of the applicable options. The aggregate deferred
stock compensation expense is expected to be amortized in the amount of
approximately $8 million for the remainder of 2000, approximately $16 million
for each of 2001, 2002, and 2003, and approximately $8 million in 2004.

Initial grants of options to employees of Cadence transferring to Tality,
LP will vest 100% on the seventh anniversary of the grant, provided that if the
optionee surrenders any unvested options to purchase Cadence common stock held
by the optionee, the vesting schedule for the Tality Corporation options will
accelerate so that the option grant will vest over four years as follows: 25%
will vest one month after the first anniversary of the completion of the
offering and the remainder of the options will vest over the next three years.

7. INCOME TAXES

The tax provisions in the accompanying consolidated financial statements
are due to income taxes related to Tality, LP's foreign subsidiaries in certain
jurisdictions where its operations are taxed as a corporation. The provision for
income taxes consisted of the following components:

<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Foreign................................................... $585 $2,209 $2,728
Deferred (prepaid):
Foreign................................................... -- (569) (759)
---- ------ ------
Total provision for income taxes....................... $585 $1,640 $1,969
==== ====== ======
</TABLE>

Additional tax basis over reported amounts of Tality, LP's assets and
liabilities was approximately $26.1 million and $29.0 million at January 2, 1999
and January 1, 2000, respectively. Tality, LP recorded a long-term deferred tax
liability for acquired intangibles, primarily comprised of assembled workforce
and purchased technology related to the acquisition of Symbionics Group Limited,
of $3.2 million and $2.5 million as of January 2, 1999 and January 1, 2000,
respectively.

F-26
<PAGE> 122
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

8. EMPLOYEE BENEFIT PLAN

Eligible U.S. Tality, LP employees may participate in the Cadence 401(k)
savings plans to provide retirement benefits through tax deferred salary
deductions for all its domestic employees. Cadence may make discretionary
contributions, as determined by Cadence's Board of Directors, which cannot
exceed a percentage of the annual aggregate salaries of those employees eligible
to participate. Cadence made total contributions to the plans relating to
Tality, LP of $0.2 million, $0.4 million, and $0.3 million for 1997, 1998, and
1999, respectively.

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

9. UNUSUAL ITEMS

Described below are unusual items in 1997 and 1998:

<TABLE>
<CAPTION>
1997 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Write-off of acquired in-process research and development... $1,711 $28,500
Restructuring charges....................................... -- 17,817
------ -------
Total unusual items....................................... $1,711 $46,317
====== =======
</TABLE>

There were no unusual items recorded in 1999.

IN-PROCESS RESEARCH AND DEVELOPMENT

Write-offs of acquired in-process research and development charges in 1997
and 1998 of $1.7 million and $28.5 million, respectively, related to the
Advanced Microelectronics and Symbionics acquisitions, respectively. These
acquired in-process research and development charges represent in-process
research and development that had not reached technological feasibility and had
no probable alternative future use.

The value was determined by estimating the costs to develop the acquired
in-process research and development into commercially viable products,
estimating the resulting net cash flows from those 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 research and development. The in-process projects were
commercially viable by the end of 1999. Expenditures to complete these projects
did not exceed $6 million.

F-27
<PAGE> 123
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

The net cash flows resulting from the projects that were underway at
Symbionics were used to value the acquired in-process research and development
at the time of acquisition and were based on management's estimates of revenue,
cost of revenue, research and development costs, selling, general and
administrative costs, and income taxes from those projects. The revenue
projections were based on the potential market size that the projects addressed,
the Company's ability to gain market acceptance in these segments and the life
cycle of the in-process research and development.

Estimated total revenue at the time of acquisition from the acquired
in-process research and development was expected to peak in 2001 and 2002 and
decline rapidly thereafter as other new products entered the market. In
addition, a portion of the anticipated revenue has been attributed to
enhancements of the base technology under development and has been excluded from
net cash flow calculations. Existing technology was valued at $6 million. There
can be no assurance that these assumptions will prove accurate or that Tality,
LP will realize the anticipated benefit of the acquired in-process research and
development. The net cash flows generated from the acquired in-process research
and development were expected to reflect earnings before interest and taxes and
were estimated to be approximately 39% of the sales generated from Symbionics'
in-process research and development.

RESTRUCTURING

In 1998, Cadence recorded $17.8 million of restructuring charges relating
to Tality, LP. These charges were primarily associated with a worldwide
restructuring plan in the fourth quarter of 1998. Tality, LP's restructuring
plans and associated costs consisted of $12.2 million to terminate 184
employees, and $5.6 million to downsize and close excess facilities. The
restructuring plan was primarily aimed at reducing the cost of excess personnel
and capacity and refocusing the business on communications-related target
markets. Management estimates that the restructuring resulted in annualized cost
reductions of approximately $15.8 million in salary and benefit costs and $3.4
million in facility costs.

Severance costs in the restructuring included severance benefits, notice
pay, and outplacement services. Terminated employees included support staff,
design engineers and management personnel. Approximately $4.5 million of these
costs resulted from the acceleration of stock options vesting under employment
agreements for prior management. All terminations and termination benefits were
communicated to the affected employees prior to year-end 1998 and all severance
benefits were paid prior to the end of 1999.

Facilities consolidation charges of $5.6 million were incurred in
connection with the downsizing and closing of 13 design sites. Closure and exit
costs included payments required under lease contracts, less any applicable
sublease income after the properties were abandoned, lease buyout costs,
restoration costs associated with certain lease arrangements, and costs to
maintain facilities
F-28
<PAGE> 124
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

during the period after abandonment. Asset related costs written-off consist of
leasehold improvements of facilities that were abandoned and whose estimated
fair market value is zero. As of January 1, 2000, substantially all of the 13
sites had been vacated.

Liabilities for severance and benefits-related restructuring charges are in
payroll and payroll-related accounts, while all other liabilities for
restructuring charges are included in other accrued liabilities until settled,
at which time they become a component of partner's investment. The following
table summarizes Cadence's restructuring activity during fiscal years 1997, 1998
and 1999:

<TABLE>
<CAPTION>
SEVERANCE
AND EXCESS
BENEFITS FACILITIES ASSETS TOTAL
--------- ---------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, January 3, 1998................... $ -- $ -- $ -- $ --
1998 restructuring charges............... 12,190 1,996 3,631 17,817
Non-cash charges......................... (4,502) -- -- (4,502)
Cash charges............................. (6,305) (1,996) (3,631) (11,932)
------- ------- ------- --------
Balance, January 2, 1999................... 1,383 -- -- 1,383
------- ------- ------- --------
Non-cash charges......................... -- -- -- --
Cash charges............................. (1,383) -- -- (1,383)
------- ------- ------- --------
Balance, January 1, 2000................... $ -- $ -- $ -- $ --
======= ======= ======= ========
</TABLE>

10. SEGMENT INFORMATION

Tality, LP categorizes its offerings as either systems design services or
integrated circuit design services. Due to the identical nature of the services'
design and delivery processes, similarities in their margins, and the similar
class of customers that these design services are provided. Tality, LP
classifies its business under one reportable operating segment, electronics
design services.

Services are provided worldwide. Revenues are attributed to geographic
areas based on the country in which the contracting entity is domiciled. In
fiscal 1997, 1998 and 1999, no one client accounted for more than 10% of total
revenues. Long-lived assets are attributed to geographic areas based on the
country where the assets are located.

F-29
<PAGE> 125
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

The following tables represent a summary of revenues and long-lived assets
by geographic region for the years ended January 3, 1998, January 2, 1999,
January 1, 2000, and the six months ended July 3, 1999 and July 1, 2000.

<TABLE>
<CAPTION>
REVENUES
------------------------------------------------------------
YEARS ENDED SIX MONTHS ENDED
-------------------------------------- ------------------
JANUARY 3, JANUARY 2, JANUARY 1, JULY 3, JULY 1,
1998 1999 2000 1999 2000
---------- ---------- ---------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
North America:
United States.............. $61,503 $ 49,411 $ 58,765 $22,796 $51,842
Canada..................... 3,072 5,045 3,259 1,519 2,825
------- -------- -------- ------- -------
Total North America..... 64,575 54,456 62,024 24,315 54,667
------- -------- -------- ------- -------
Europe:
United Kingdom............. 10,093 34,201 46,916 24,362 24,928
Other...................... 4,944 397 2,691 1,535 1,135
------- -------- -------- ------- -------
Total Europe............... 15,037 34,598 49,607 25,897 26,063
------- -------- -------- ------- -------
Japan and Asia............... 11,078 16,208 17,242 7,308 9,554
------- -------- -------- ------- -------
Total........................ $90,690 $105,262 $128,873 $57,520 $90,284
======= ======== ======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
LONG-LIVED ASSETS
--------------------------------------------------------------
YEARS ENDED SIX MONTHS ENDED
-------------------------------------- --------------------
JANUARY 3, JANUARY 2, JANUARY 1, JULY 3, JULY 1,
1998 1999 2000 1999 2000
---------- ---------- ---------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
North America:
United States.............. $ 9,961 $12,996 $11,774 $11,041 $11,589
Canada..................... 1,435 1,512 1,733 1,404 1,350
------- ------- ------- ------- -------
Total North America..... 11,396 14,508 13,507 12,445 12,939
------- ------- ------- ------- -------
Europe:
United Kingdom............. 58 2,943 6,790 5,609 7,626
Other...................... 176 16 17 13 13
------- ------- ------- ------- -------
Total Europe............... 234 2,959 6,807 5,622 7,639
------- ------- ------- ------- -------
Japan and Asia............... 220 40 21 40 --
------- ------- ------- ------- -------
Total........................ $11,850 $17,507 $20,335 $18,107 $20,578
======= ======= ======= ======= =======
</TABLE>

11. RELATED PARTIES

Tality, LP's costs and expenses include allocations from Cadence for
corporate services and support in the areas of information technology systems,
human resources, administration, buildings

F-30
<PAGE> 126
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED JULY 1, 2000 ARE UNAUDITED)

and facilities, treasury, legal, finance and accounting. These allocations have
been determined on bases that Cadence and Tality, LP considered to be reasonable
reflections of the utilization of services provided or the benefit received by
Tality, LP. The allocation methods include relative revenues, headcount or
square footage. Allocated costs included in the accompanying consolidated
statements of operations are as follows:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------------------- --------------------
JANUARY 3, JANUARY 2, JANUARY 1, JULY 3, JULY 1,
1998 1999 2000 1999 2000
---------- ---------- ---------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cost of services............. $ 8,818 $14,009 $11,520 $ 5,471 $ 7,365
Sales and marketing.......... 25,215 32,417 6,280 2,918 3,176
Research and development..... 265 665 922 514 543
General and administrative... 19,289 18,088 14,571 7,774 7,604
------- ------- ------- ------- -------
$53,587 $65,179 $33,293 $16,677 $18,688
======= ======= ======= ======= =======
</TABLE>

Included in costs of services are charges totaling $4.2 million, $5.3
million, $4.5 million, $2.3 million and $2.5 million for fiscal 1997, 1998, 1999
and the six months ended July 3, 1999 and July 1, 2000, respectively, from
Cadence for Tality, LP's use of Cadence proprietary software. Such amounts
charged are based on the price of a seat license to an equivalent third-party.

In connection with the separation discussed in note 1, Cadence and Tality
Corporation will enter into a Master Corporate Services Agreement and other
related agreements. These agreements are expected to provide that:

- Cadence will provide Tality, LP and Tality Corporation, and Tality, LP
will provide Cadence with specified corporate services. The services
include data processing and telecommunications services, information
technology support, as well as accounting, financial management, tax,
payroll, legal, procurement and other administrative functions. Such
services will be billed to Tality, LP or Cadence, as appropriate
quarterly based on actual costs. The billings for the services will be
based on head count, revenue, amounts of actual usage, square footage or
other methodologies.

F-31
<PAGE> 127

TALITY, LP
A LIMITED PARTNERSHIP

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

The following unaudited pro forma condensed combined statement of
operations assumes a business combination between Tality, LP and Diablo Research
Company LLC ("Diablo") accounted for as a purchase. The pro forma condensed
combined financial statement is based on the companies' historical financial
statements and the notes thereto, which are included elsewhere in this
Prospectus. The pro forma condensed combined statements of operations combine
Tality, LP's historical consolidated statements of operations for the year ended
January 1, 2000 with Diablo's historical statements of operations for the 340
days ended December 6, 1999, as if the purchase was consummated on January 1,
1999. Tality, LP's historical balance sheet as of January 1, 2000 reflects the
acquisition of Diablo; accordingly, a pro forma balance sheet has not been
presented.

The pro forma information is presented for illustrative purposes only, and
is not necessarily indicative of the operating results that would have occurred
if the combinations had been consummated at the beginning of the periods
presented, nor is it necessarily indicative of future operating results.

These pro forma combined condensed statements of operations should be read
in conjunction with the historical financial statements and the related notes
thereto of Tality, LP and Diablo included elsewhere herein.

F-32
<PAGE> 128

TALITY, LP
A LIMITED PARTNERSHIP

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
DIABLO
RESEARCH
TALITY 340 DAYS PRO FORMA
YEAR ENDED ENDED COMBINED
JANUARY 1, DECEMBER 6, PRO FORMA JANUARY 1,
2000 1999 ADJUSTMENT 2000
---------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue.................................................. $128,873 $12,771 $141,644
Related party revenue.................................... -- 3,795 3,795
-------- ------- --------
Total revenue........................................ 128,873 16,566 145,439
Costs and expenses:
Cost of revenue........................................ 113,141 15,428 128,569
Sales and marketing.................................... 32,799 -- 32,799
Research and development............................... 9,588 -- 9,588
General and administrative............................. 28,546 4,891 33,437
Amortization of acquired intangibles................... 5,116 -- $7,498(a) 12,614
-------- ------- --------
Total operating expenses................................. 189,190 20,319 217,007
-------- ------- --------
Loss from operations..................................... (60,317) (3,753) (71,568)
Interest expense....................................... -- 397 397
Other income (expenses), net........................... 33 311 344
Write off of note receivable from Whisper................ -- (318) (318)
-------- ------- --------
Loss before provision for income taxes................... (60,284) (4,157) (71,939)
Provision for income taxes............................. 1,969 -- 1,969
-------- ------- --------
Net loss................................................. $(62,253) $(4,157) $(73,908)
======== ======= ========
</TABLE>

EXPLANATION OF PRO FORMA ADJUSTMENT

(a) The amortization of acquired intangibles represents amortization of net
intangibles related to the Diablo acquisition for the eleven months prior to
its acquisition.

The accompanying notes are an integral part of the pro forma condensed combined
statements.
F-33
<PAGE> 129

TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

NOTE 1. BASIS OF PRESENTATION

The unaudited pro forma condensed combined statement of operations included
herein has been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading.

NOTE 2. PURCHASE PRICE ALLOCATION

In accordance with Accounting Principles Board Opinion No. 16, the
acquisition was accounted for as a purchase business combination. The total
purchase price was $39.9 million in cash. In connection with the acquisition,
Cadence acquired goodwill of $40.9 million. Approximately $1.1 million of the
property, plant and equipment obtained in the purchase was retained by Cadence.
Goodwill arising from the Diablo acquisition is being amortized on a
straight-line basis over five years.

In connection with the acquisition, net assets acquired were as follows (in
thousands):

<TABLE>
<S> <C>
Goodwill.................................................... $40,900
Property, plant and equipment, net and other non-current
assets.................................................... 3,073
Cash, receivables, and other current assets................. 2,989
Current liabilities assumed................................. (6,789)
Long term liabilities assumed............................... (246)
-------
Net assets acquired......................................... $39,927
=======
</TABLE>

F-34
<PAGE> 130

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1998 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 627 $ 100
Accounts receivable:...................................
Trade, net of allowances of $188 and $123 in 1998 and
1999, respectively.................................. 1,307 2,402
Related party........................................ 625 171
Other................................................ 92 118
Prepaid expenses and other assets.................... 137 202
-------- --------
Total current assets.............................. 2,788 2,993
Property and equipment -- net............................... 5,329 3,436
Notes receivable -- related party........................... 276 --
Investment in affiliates.................................... 1,982 --
Other assets................................................ 385 190
-------- --------
Total assets........................................... $ 10,760 $ 6,619
======== ========

LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 469 $ 580
Accrued liabilities.................................... 2,490 1,714
Customer deposits and deferred revenue................. 2,020 1,049
Notes payable and capital lease obligations -- current
portion............................................... 1,092 5,686
-------- --------
Total current liabilities......................... 6,071 9,029
-------- --------
Long-term liabilities:
Notes payable and capital lease obligations............ 1,259 188
Deferred rent.......................................... 156 162
-------- --------
Total long-term liabilities....................... 1,415 350
-------- --------
Members' equity (deficit):
Class A units -- no par value; 1,915,558 units
authorized and outstanding............................ 13,222 13,222
Class B units -- no par value; 6,293,644 units
authorized;
6,142,002 and 6,157,426 units outstanding............ 844 847
Additional paid-in capital............................. 1,410 1,410
Deferred compensation.................................. (23) --
Accumulated deficit.................................... (12,179) (18,239)
-------- --------
Total members' equity (deficit)................... 3,274 (2,760)
-------- --------
Total liabilities and members' equity (deficit)... $ 10,760 $ 6,619
======== ========
</TABLE>

See notes to consolidated financial statements.
F-35
<PAGE> 131

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1999
------- -------
(UNAUDITED)
<S> <C> <C>
Revenues:
Contract revenues...................................... $ 6,170 $ 9,451
Related party contract revenues........................ 10,400 3,610
------- -------
Total revenues............................................ 16,570 13,061
------- -------
Cost and Expenses:
Cost of revenues....................................... 15,026 12,474
Selling, marketing, general and administrative......... 5,036 4,172
Research and development............................... 473 --
------- -------
Total costs and expenses.................................. 20,535 16,646
------- -------
Operating loss.............................................. (3,965) (3,585)
Interest income............................................. 99 --
Interest expense............................................ (204) (297)
Other income................................................ 154 264
Write off of note receivable from Whisper................... -- (318)
------- -------
Net loss.................................................... $(3,916) $(3,936)
======= =======
</TABLE>

See notes to consolidated financial statements.
F-36
<PAGE> 132

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1999
------- -------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(3,916) $(3,936)
Reconciliation to net cash used in operating activities:
Depreciation and amortization............................. 1,381 1,555
Loss on investment in Whisper............................. 1,638 318
Write off of note receivable from Whisper................. -- 276
Changes in assets and liabilities:
Accounts receivable -- trade........................... 169 (1,418)
Accounts receivable -- related party................... (131) 670
Accounts receivable -- other........................... 133 (54)
Prepaid and other current assets....................... (68) (48)
Accounts payable....................................... (1,310) 185
Accrued liabilities.................................... 1,175 (12)
Customer deposits and deferred revenue................. (316) (885)
Deferred rent.......................................... 12 34
------- -------
Net cash used in operating activities................ (1,233) (3,315)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................... (927) (146)
Investment in affiliate..................................... (25) (19)
Other assets................................................ (110) 43
------- -------
Net cash used in investing activities................ (1,062) (122)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under notes payable............................... 772 1,404
Principal payment of notes payable and capital lease
obligations............................................... (960) (1,618)
Borrowing under notes payable-safeguard..................... -- 3,300
Repurchase of Class B units................................. (33) (1)
------- -------
Net cash provided by (used in) financing
activities.......................................... (221) 3,085
------- -------
Net decrease in cash and cash equivalents................... (2,516) (352)
Cash and equivalents, beginning of period................... 3,143 452
------- -------
Cash and equivalents, end of period......................... $ 627 $ 100
======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES --
Property and equipment acquired under capital leases........ $ 357 $ --
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --
Cash paid during the period for interest.................... $ 204 $ 296
======= =======
</TABLE>

See notes to consolidated financial statements.
F-37
<PAGE> 133

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the Company and Diablo Lighting, Inc., an inactive entity with no assets
and liabilities, which is a 79% owned subsidiary. All significant intercompany
accounts and transactions are eliminated in consolidation.

CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with original maturities of three months or less to be
cash equivalents.

PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
estimated useful lives of five years or the lease term, as appropriate.

REVENUES -- Revenues under time and material contracts are recognized as
services are performed and costs are incurred. Revenues under fixed price
contracts are recognized using the percentage of completion method. Estimates
are reviewed and revised periodically throughout the lives of the contracts and
adjustments resulting from such revisions are recorded in the accounting period
in which the revisions are made. The Company defers recognition of customer
advances and deposits until the related services are performed.

INCOME TAXES -- DRC is taxed as a limited liability company for federal and
California income tax purposes. Accordingly, DRC's taxable income is allocated
to the members, who are responsible for the payment of federal and state taxes
in their personal income tax returns. DRC is responsible for the minimum
California corporation tax. Furthermore, income taxes for Diablo Lighting, a C
corporation, were insignificant.

COMPREHENSIVE LOSS -- The Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
requires an enterprise to report, by major components and as a single total the
change in its net assets during the period from nonowner sources. For the nine
months ended September 30, 1998 and 1999, there were no differences between net
loss and comprehensive loss.

CONCENTRATION OF CREDIT RISK -- Financial instruments which potentially
subject the Company to a concentration risk principally consist of cash and cash
equivalents and accounts receivable. The Company maintains its cash and cash
equivalents in high quality financial institutions. The Company sells services
primarily to customers in the United States. To reduce credit risk, the Company
periodically evaluates its customers' financial condition. The Company maintains
reserves for potential credit losses.

MAJOR CUSTOMERS -- Three customers accounted for the following percentages
of Diablo's revenues and accounts receivable as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
---------------------
ACCOUNTS
REVENUE RECEIVABLE
------- ----------
<S> <C> <C>
Customer A......................................... 12% 2%
Customer B......................................... 16% 47%
Customer C......................................... 28% 7%
</TABLE>

F-38
<PAGE> 134
DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999

UNIT COMPENSATION -- The Company accounts for awards of options and units
to employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."

BASIS OF PRESENTATION

The condensed consolidated financial statements included herein have been
prepared by Diablo Research Company LLC, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in condensed consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. However, Diablo
believes that the disclosures are adequate to make the information presented not
misleading.

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 presentation 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 disclosures of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
for those estimates.

The financial information as of September 30, 1998 and 1999, and for the
nine months then ended includes all adjustments, consisting only of normal and
recurring accruals, that management considers necessary for a fair presentation
of its consolidated financial position, operating results and cash flows.
Results for the nine months ended September 30, 1999 are not necessarily
indicative of results to be expected for the full fiscal year 1999 or for any
future period.

COMPANY ACQUIRED

In December 1999, Cadence Design Systems, Inc. acquired all of the
outstanding stock of Diablo Research Company LLC for cash and assumed all
outstanding stock options. The total purchase price was $39.9 million and the
acquisition was accounted for as a purchase.

SEGMENTS

The Company had $90,000 and $290,000 of foreign revenue in 1998 and 1999,
respectively.

F-39
<PAGE> 135

INDEPENDENT AUDITORS' REPORT

To the Board of Members of Diablo Research Company LLC:

We have audited the accompanying consolidated balance sheets of Diablo
Research Company LLC and its subsidiary ("the Company") as of December 31, 1997
and 1998, and the related consolidated statements of operations, members' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Diablo Research Company LLC and
its subsidiary at December 31, 1997 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

Deloitte & Touche LLP
San Jose, California
January 15, 1999
(August 3, 1999 as to Note 11)

F-40
<PAGE> 136

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 3,143 $ 452
Accounts receivable:
Trade, net of allowances of $215 in 1997 and $188 in
1998.................................................. 1,477 983
Related party (Note 2)................................. 494 842
Other.................................................. 225 64
Prepaid expenses and other current assets................. 68 154
------- --------
Total current assets................................. 5,407 2,495
Property and equipment -- net............................... 5,783 4,844
Note receivable -- related party (Note 2)................... 276 276
Related party receivable (Note 2)........................... 3,595 --
Investment in Whisper (Note 3).............................. -- 299
Other assets................................................ 274 234
------- --------
Total................................................ $15,335 $ 8,148
======= ========
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 1,778 395
Accrued liabilities....................................... 1,315 1,727
Customer deposits and deferred revenue.................... 2,337 1,934
Notes payable and capital lease obligations -- current
portion................................................ 919 1,935
------- --------
Total current liabilities............................ 6,349 5,991
------- --------
Notes Payable and Capital Lease Obligations................. 1,619 852
Deferred rent............................................... 144 128
Commitments and Contingencies (Notes 5 and 6)
Members' Equity:
Class A units -- no par value: 1,915,558 units authorized
and outstanding; (liquidation preference, $15,037)..... 13,222 13,222
Class B units -- no par value: 6,293,644 units authorized;
6,166,064 and 6,146,377 units outstanding (liquidation
preference -- see Note 8).............................. 876 848
Additional paid-in capital................................ 1,410 1,410
Deferred compensation..................................... (23) --
Accumulated deficit....................................... (8,262) (14,303)
------- --------
Total members' equity................................ 7,223 1,177
------- --------
Total................................................ $15,335 $ 8,148
======= ========
</TABLE>

See notes to consolidated financial statements.
F-41
<PAGE> 137

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Revenues:
Contract revenues......................................... $11,294 $ 8,475
Related party contract revenues........................... 12,610 12,111
------- -------
Total revenues......................................... 23,904 20,586
------- -------
Costs and Expenses:
Cost of revenues.......................................... 18,968 18,225
Selling, marketing, general and administrative............ 5,922 6,311
Research and development.................................. 1,514 473
------- -------
Total costs and expenses............................... 26,404 25,009
------- -------
Operating loss.............................................. (2,500) (4,423)
Interest income............................................. 268 109
Interest expense............................................ (108) (261)
Other income................................................ 347 198
Loss on investment in Whisper (Note 3)...................... -- (1,664)
------- -------
Net Loss.................................................... $(1,993) $(6,041)
======= =======
</TABLE>

See notes to consolidated financial statements.
F-42
<PAGE> 138

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS A UNITS CLASS B UNITS SHAREHOLDER ADDITIONAL
------------------- ------------------ NOTE PAID-IN DEFERRED ACCUMULATED
UNITS AMOUNT UNITS AMOUNT RECEIVABLE CAPITAL COMPENSATION DEFICIT
--------- ------- --------- ------ ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1997... 1,915,558 $13,222 5,377,644 $540 $(35) $1,410 $ -- $ (6,269)
Repayment of shareholder
note receivable........... -- -- -- -- 35 -- -- --
Issuance of Class B units... -- -- 825,210 310 -- -- -- --
Issuance of options to
purchase Class B units at
less than fair value...... -- -- -- 38 -- -- (38) --
Repurchase of Class B
units..................... -- -- (36,790) (12) -- -- -- --
Amortization of deferred
compensation expense...... -- -- -- -- -- -- 15 --
Net loss.................... -- -- -- -- -- -- -- (1,993)
--------- ------- --------- ---- ---- ------ ---- --------
BALANCES, December 31,
1997...................... 1,915,558 13,222 6,166,064 876 -- 1,410 (23) (8,262)
Issuance of Class B units... -- -- 3,333 2 -- -- -- --
Exercise of options to
purchase Class B units.... -- -- 10,500 4 -- -- -- --
Repurchase of Class B
units..................... -- -- (33,520) (34) -- -- -- --
Amortization of deferred
compensation expense...... -- -- -- -- -- -- 23 --
Net loss.................... -- -- -- -- -- -- -- (6,041)
--------- ------- --------- ---- ---- ------ ---- --------
BALANCES, December 31,
1998...................... 1,915,558 $13,222 6,146,377 $848 $ -- $1,410 $ -- $(14,303)
========= ======= ========= ==== ==== ====== ==== ========

TOTAL
-------
<S> <C>
BALANCES, January 1, 1997... $ 8,868
Repayment of shareholder
note receivable........... 35
Issuance of Class B units... 310
Issuance of options to
purchase Class B units at
less than fair value...... --
Repurchase of Class B
units..................... (12)
Amortization of deferred
compensation expense...... 15
Net loss.................... (1,993)
-------
BALANCES, December 31,
1997...................... 7,223
Issuance of Class B units... 2
Exercise of options to
purchase Class B units.... 4
Repurchase of Class B
units..................... (34)
Amortization of deferred
compensation expense...... 23
Net loss.................... (6,041)
-------
BALANCES, December 31,
1998...................... $ 1,177
=======
</TABLE>

See notes to consolidated financial statements.
F-43
<PAGE> 139

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,993) $(6,041)
Reconciliation to net cash used in operating activities:
Depreciation and amortization.......................... 690 1,905
Loss on investment in Whisper.......................... -- 1,664
Noncash employee severance expense..................... -- 219
Amortization of deferred compensation.................. 15 23
Changes in assets and liabilities:
Accounts receivable -- trade......................... (353) 494
Accounts receivable -- related party................. (3,158) 1,290
Accounts receivable -- other......................... (43) 161
Prepaid expenses and other current assets............ (11) (86)
Accounts payable..................................... 1,137 (1,383)
Accrued and other current liabilities................ -- 411
Customer deposits and deferred revenue............... 1,373 (402)
Deferred rent........................................ 107 (16)
------- -------
Net cash used in operating activities............. (2,236) (1,761)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (2,675) (609)
Other assets.............................................. (175) 35
------- -------
Net cash used in investing activities............. (2,850) (574)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes payable............................ -- 1,023
Principal payments of notes payable and capital lease
obligations............................................ (565) (1,350)
Issuance of Class B units................................. -- 6
Repurchase of Class B units............................... -- (35)
Proceeds from sale of Class A and B units................. 298 --
Repayment of shareholder note receivable.................. 35 --
------- -------
Net cash used in financing activities............. (232) (356)
------- -------
Net decrease in cash and cash equivalents................... (5,318) (2,691)
Cash and cash equivalents, beginning of year................ 8,461 3,143
------- -------
Cash and cash equivalents, end of year...................... $ 3,143 $ 452
======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES --
Property and equipment acquired under capital leases...... $ 2,536 $ 357
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --
Cash paid during the year for interest.................... $ 98 $ 256
======= =======
</TABLE>

See notes to consolidated financial statements.
F-44
<PAGE> 140

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

1. SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION -- Diablo Research Company LLC (DRC or the Company) was
organized in California on November 8, 1996 in order to purchase certain assets
and liabilities from Diablo Research Corporation (DR Corp.), which was
incorporated in 1982 and which changed its name to Whisper Communications, Inc.
(Whisper) on November 8, 1996. DR Corp. had historically performed research and
development of high technology products under fixed price and time and materials
contracts. During 1995 and 1996, through the use of internal resources, DR Corp.
began to develop gas, water and electric remote meter reading devices (Whisper
Technology). To further develop the Whisper Technology, which required a
manufacturing environment, different personnel requirements and additional
funding, DR Corp. spun off the assets, liabilities and operations related to the
Whisper Technology in 1996. To effect the spin-off transaction, DRC was created
on November 8, 1996 and all non-Whisper related assets and liabilities were
transferred to it (i.e., the primary operations of DR Corp. were transferred to
DRC to continue its on-going activities). This transaction was accounted for as
a reverse spin out. The ownership of DRC was identical to the ownership of
Whisper as of the spin-off date. In connection with this transaction,
third-party investors acquired a 36% equity interest in both DRC and Whisper
(see Note 8).

BUSINESS -- The Company is engaged in contract engineering and development
for emerging products in the communications, control, data transfer and home
automation markets.

CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- The Company operates in a
dynamic industry, and accordingly, can be affected by a variety of factors. For
example, management of the Company believes that changes in any of the following
areas could have a significant negative effect on the Company in terms of its
future financial position, results of operations and cash flows: ability to
obtain additional financing; regulatory changes; fundamental changes in the
technology underlying the Company's products or services; market acceptance of
the Company's products under development; litigation or other claims against the
Company; the hiring, training and retention of key employees; successful and
timely completion of product development efforts; and new product introductions
by competitors.

CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with original maturities of three months or less to be
cash equivalents.

REVENUES -- Revenue under time and material contracts is recognized as
services are performed and costs are incurred. Revenue under fixed price
contracts is recognized using the percentage of completion method. Estimates are
reviewed and revised periodically throughout the lives of the contracts and
adjustments resulting from such revisions are recorded in the accounting period
in which the revisions are made. There were $41 of such revenues earned but not
yet billed at December 31, 1998 (none at December 31, 1997). The Company defers
recognition of customer advances and deposits until the related services are
performed.

F-45
<PAGE> 141
DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

COMPREHENSIVE LOSS -- The Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
requires an enterprise to report, by major components and as a single total the
change in its net assets during the period from nonowner sources. For the years
ended December 31, 1997 and 1998, there were no differences between net loss and
comprehensive loss.

SIGNIFICANT ESTIMATES -- The preparation of financial statements in
accordance 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 liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.

CONCENTRATION OF CREDIT RISK -- Financial instruments which potentially
subject the Company to a concentration risk principally consist of cash and cash
equivalents and accounts receivable. The Company maintains its cash and cash
equivalents in high quality financial institutions. The Company sells services
and products primarily to customers in the United States. To reduce credit risk,
the Company periodically evaluates its customers' financial condition. The
Company maintains reserves for potential credit losses.

UNIT COMPENSATION -- The Company accounts for awards of options and units
to employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."

FISCAL YEAR -- The Company's fiscal years for 1997 and 1998 ended on the
Sunday closest to December 31 (December 29 and December 28), respectively. For
practical purposes, the fiscal years then ended are referred to as December 31
herein.

RECENTLY ISSUED ACCOUNTING STANDARD -- In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's
fiscal year ending December 31, 2001. Management believes that this statement
will not have a significant impact on the Company's financial position, results
of operations or cash flows.

RECLASSIFICATIONS -- Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 presentation. Such reclassifications
had no effect on net loss or members' equity.

2. TRANSFER OF WHISPER-RELATED ASSETS AND LIABILITIES

On November 8, 1996, through the reverse spin-out transaction described in
Note 1, DR Corp. spun-off the Whisper-related assets and liabilities, comprising
assets of $221 and liabilities of $1,355. In connection with this transaction,
the Company received a note receivable from Whisper of $276,

F-46
<PAGE> 142
DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

bearing interest at 7% per annum and due in total in November 2006. The net
liabilities transferred to Whisper of $1,410 as a result of this spin-off were
recorded as additional paid-in capital in 1996 (rather than a gain) due to the
related party nature of the transaction.

The Company also provided certain contract services and administrative and
research functions for Whisper for which it has recorded revenues of $12,610 in
1997 and $12,111 in 1998. The Company's total receivables from Whisper of $4,089
and $831 (included in accounts receivable -- related party) at December 31, 1997
and 1998, respectively, include billings for such services, as well as certain
other advances made on behalf of Whisper.

3. INVESTMENT IN WHISPER

In March 1998, the Company agreed to accept 1,198,339 shares of Whisper
common stock valued at $3.00 per share as payment for $3,595,017 of accounts
receivable due from Whisper. The $3.00 per share value was the fair value of
Whisper common stock as determined by Whisper's Board of Directors and agreed to
by the Company's management. In October 1998, the Company and Whisper settled
and concluded an existing development agreement under which the Company was
providing contract services to Whisper. At this point in time, Whisper had not
yet issued the 1,198,339 shares mentioned above. As part of the finalization of
the contract, the number of shares to be issued by Whisper to Diablo was reduced
by 345,883 as repayment for certain advance deposits made by Whisper of
approximately $1.0 million (in other words, the Company's liabilities were
reduced by reducing the number of shares to be received from Whisper at a value
of $3.00 per share). In addition, the number of shares to be issued by Whisper
to Diablo was reduced by an additional 200,000 shares. This reduction
represented an adjustment to the amounts related to contract services previously
provided. Accordingly, contract revenue was reduced by $600,000 as a result of
this agreement.

In December 1998, Whisper revalued its common stock from $3.00 to $0.45 as
a result of an expected significantly dilutive round of preferred stock
financing, its product market conditions and other factors. Management has
evaluated its investment in Whisper common stock and, based on their analysis,
believes that this decline in value is other than temporary. Accordingly, the
Company has recognized a loss of $1,664 in 1998 as a result of this decline. At
December 31, 1998, the Company has 665,120 shares of Whisper common stock valued
at $0.45 (representing a less than 10% ownership in Whisper), which includes
12,664 shares repurchased from Company employees originally issued under the
Phantom Stock Plan (see Note 7).

4. PROPERTY AND EQUIPMENT

Property and equipment at December 31 consist of:

<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Equipment................................................... $ 6,012 $ 6,810
Furniture and fixtures...................................... 755 812
Leasehold improvements...................................... 697 808
------- -------
7,464 8,430
Accumulated depreciation and amortization................... (1,681) (3,586)
------- -------
Property and equipment, net................................. $ 5,783 $ 4,844
======= =======
</TABLE>

F-47
<PAGE> 143
DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

At December 31, 1997 and 1998, property and equipment with a cost of $2,357
and $1,193, respectively (net of accumulated amortization of $455 and $1,925,
respectively), was leased under capital lease agreements.

5. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

Notes payable and capital lease obligations at December 31 consist of:

<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Short-term loan, interest at 8.0%, collateralized by
substantially all Company assets.......................... $ -- $ 500
Promissory note, interest at prime (8.0% at December 31,
1998) plus 1%, collateralized by substantially all Company
assets.................................................... -- 311
Subordinated promissory note, interest at 12.0%............. 219
Bank term loan, interest at prime (8.0% at December 31,
1998) plus 1.5%, repaid in 1998........................... 192 --
Unsecured note payable to former employee, interest at
5.68%, repaid in 1998..................................... 15 --
Capital lease obligations (Note 6).......................... 2,331 1,757
------ -------
2,538 2,787
Current portion............................................. (919) (1,935)
------ -------
Noncurrent portion.......................................... $1,619 $ 852
====== =======
</TABLE>

The short-term loan (the Loan), bearing interest at 8.0%, was obtained from
a significant unitholder of the Company. The Loan is due on demand, or any
unpaid amounts, including interest, may be converted, at the option of the Loan
holder, into Class A units of the Company at a price of $0.80 per unit. The Loan
is collateralized by substantially all of the assets of the Company.

Borrowings under the promissory note (the Note) with a bank are due in
monthly installments through 2001. The Note agreement requires the Company to
maintain certain financial (including a minimum current ratio of 2.0:1.0,
tangible net worth of at least $7,500, total debt to tangible net worth ratio of
less than 1.0:1.0 and a debt service ratio of at least 1.25:1.0) and
nonfinancial covenants and is collateralized by substantially all of the assets
of the Company. At December 31, 1998, the Company was not in compliance with the
covenants, and, as such, the debt is due on demand and has been classified as
current.

The subordinated promissory note (the Subordinated Note), which bears
interest at 12.0%, is payable to a former officer and director of the Company
under the terms of his severance agreement. The Subordinated Note was
subsequently repaid in 1999.

6. COMMITMENTS AND CONTINGENCIES

The Company leases its facilities under various operating leases expiring
through September 2006, which include rent escalation terms. The Company's
primary facility is leased from a related

F-48
<PAGE> 144
DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

party. In addition, the Company leases certain equipment under capital leases.
Minimum future lease payments are as follows:

<TABLE>
<CAPTION>
OPERATING LEASES
---------------------------
YEARS ENDING RELATED CAPITAL
DECEMBER 31, PARTY OTHER TOTAL LEASES
------------ ------- ------ ------ -------
<S> <C> <C> <C> <C>
1999............................................... $ 689 $ 490 $1,179 $ 1,113
2000............................................... 689 509 1,198 836
2001............................................... 689 526 1,215 28
2002............................................... 689 375 1,064 --
2003............................................... 689 -- 689 --
Thereafter......................................... 1,893 -- 1,893 --
------ ------ ------ -------
Total minimum lease payments....................... $5,338 $1,900 $7,238 1,977
====== ====== ======
Less amount representing interest.................. (220)
-------
Present value of minimum lease payments............ 1,757
Current portion.................................... (1,112)
-------
Long-term capital lease obligation................. $ 645
=======
</TABLE>

Rent expense, which is calculated on a straight-line basis, was $756 for
1997 ($650 to a related party) and $1,136 for 1998 ($668 to a related party).

7. MEMBERS' EQUITY

CLASS A AND B UNIT SPLIT

In October 1997, the Board of Members approved a 2 for 1 split of all
outstanding Class B units. As such, all Class B unit and per unit amounts were
retroactively restated to reflect this split.

CLASS A AND B UNITS

Upon organization and to effect the reverse spin-out described in Note 1,
the Company issued 5,377,644 Class B units to the common shareholders of DR
Corp. in exchange for their common stock on a share-for-unit basis, plus cash of
$.0005 per share. Also, in 1996, the Company received net proceeds of $13,222
from the sale of 1,915,558 Class A units to new investors. The significant terms
of the Class A and B units are as follows:

- Each Class A and B unit will automatically convert to common stock upon
an underwritten public offering in which the Company receives proceeds
greater than or equal to $10,000 (and in which the Company will become a
"C" corporation).

- Each Class A and B unit has voting rights.

- Class A unitholders shall have the right to elect two members to the
Board of the Company.

- In the event of liquidation, dissolution or winding up of the Company,
subsequent to the liquidation preference described in Note 8, the holders
of Class B units shall receive $3.85 per unit, plus all accrued but
unpaid dividends. Any remaining assets shall be distributed pro rata to
the Class A and B unitholders.

- The Class A and B unitholders have no special dividend rights.

- The Class A and B unitholders have certain registration rights.

F-49
<PAGE> 145
DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

PHANTOM STOCK PLAN

In connection with the reverse spin out described in Note 1, DR Corp.'s
phantom stock plan was canceled. At that time, there were 509,000 rights
outstanding, of which 225,601 were vested. In exchange for their phantom stock
rights, the phantom shareholders were to receive from the Company one Class B
unit and one common share of Whisper for each right outstanding and $1.00 for
each vested right as of November 8, 1996, subject to adjustment for the stock
split. In 1997, all outstanding rights (net of employee terminations prior to
issuance) under the Plan were exchanged for 807,210 Class B units valued at
$0.325 per share and a cash payment of $226 ($1.00 for each vested right) was
made to the phantom shareholders. The Class B units continue to vest in
accordance with the phantom stock plan vesting schedule. Upon an employee's
termination, the Company has the right to repurchase any unvested units at the
lower of original cost or fair market value, and has the right to repurchase
vested units at fair market value. In 1997 and 1998, 36,790 and 33,520 units,
respectively, were repurchased at prices ranging from $0.325 to $0.65 per unit.
At December 31, 1998, there were 45,188 units subject to repurchase by the
Company at the lower of original cost or fair market value.

1997 OPTION PLAN

Under the 1997 Option Plan, the Company has reserved 3,063,476 Class B
units for issuance, at the discretion of the Board of Members, to officers,
members of the Board, employees and consultants. Options must be granted at not
less than fair market value at the date of grant as determined by the Board of
Members. Options granted under the 1997 Option Plan generally vest over four
years and expire ten years from the date of grant.

The Company's 1997 Option Plan allows employees to exercise their options
immediately. All unvested units are placed in escrow and continue to vest
according to the employee's normal option vesting schedule. Upon termination of
an employee, the employee's vested units are subject to repurchase at fair
market value and the unvested units are subject to repurchase by the Company at
the lower of fair market value or original purchase price.

Additional information with respect to options under the 1997 Option Plan
is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE
OPTIONS PER UNIT
--------- ------------
<S> <C> <C>
Outstanding, January 1, 1997................................ -- $ --
Granted (weighted average fair value of $0.21 per unit)..... 1,644,580 $0.37
Canceled.................................................... (49,918) $0.33
---------
Outstanding, December 31, 1997.............................. 1,594,662 $0.37
Granted (weighted average fair value of $0.14 per unit)..... 1,112,215 $0.65
Exercised................................................... (10,500) $0.42
Canceled.................................................... (459,102) $0.38
---------
Outstanding, December 31, 1998.............................. 2,237,275 $0.51
=========
</TABLE>

At December 31, 1998, 826,201 units were available for future grant under
the 1997 Option Plan.

F-50
<PAGE> 146
DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Additional information regarding options outstanding as of December 31,
1998 is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------- OPTIONS VESTED
WEIGHTED ------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE VESTED PRICE
------------- ----------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.05 140,000 7.0 $0.05 138,750 $0.05
0.33 728,063 8.7 0.33 344,283 0.33
0.65 1,369,212 9.5 0.65 234,155 0.65
--------- --- ----- ------- -----
$0.05 - $0.65 2,237,275 9.0 $0.51 717,188 $0.38
========= =======
</TABLE>

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), requires the disclosure of pro forma net
loss had the Company adopted the fair value method. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's option awards. These
models also require subjective assumptions, including expected time to exercise,
which greatly affect the calculated values. The Company's calculations were made
using the minimum value option pricing model with the following weighted average
assumptions: expected life, five years; risk free interest rates ranging from
4.5% to 6.0% in 1998 and 5.7% to 7.1% in 1997; and no dividends during the
expected term (since the Company is not public, stock volatility was assumed nil
for purposes of this calculation). The Company's calculations are based on a
single option valuation approach and forfeitures are recognized as they occur.
If the computed fair market values of the awards had been amortized to expense
over the vesting period of the awards, pro forma net loss would have been
approximately $2,063 in 1997 and $6,143 in 1998.

8. RELATED PARTY TRANSACTIONS

During November 1996, third party investors (the Investors) acquired a 36%
voting interest in both the Company and Whisper through the purchase of
1,915,558 Class A units of the Company and 1,915,558 shares of Series A
preferred stock of Whisper, respectively. Under the terms of a preference
sharing agreement among the Class B unitholders and Whisper's Series B preferred
shareholders (collectively, the Individual Shareholders) and the Investors, upon
liquidation, dissolution or winding up of the Company or Whisper or upon a
merger or sale of the Company or Whisper, the Investors are first entitled to an
amount of $15,037 less (1) any cash or property distributed to the Investors,
(2) the value of the Company's or Whisper's marketable securities owned by the
Investors, and (3) any proceeds received by the Investors in an initial public
offering. After such amount is distributed to the Investors, the Individual
Shareholders are entitled to $26,000 multiplied by a fraction, the numerator of
which, depending on which company is being sold, is the number of Class B units
or Series B preferred stock then owned by the Individual Shareholders and the
denominator of which is, depending on which company is being sold, the total
number of Class B units or Series B preferred stock outstanding on such date,
less (1) any cash or property distributed to the Individual Shareholders, (2)
the value of the Company's marketable securities owned by the

F-51
<PAGE> 147
DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Individual Shareholders and (3) any proceeds received by the Individual
Shareholders in an initial public offering.

Prepaid expenses and other assets at December 31, 1998 include a $50 note
receivable due from an officer of the Company. The note receivable bears
interest at 8.0% and is due upon termination of employment or will be
automatically forgiven upon the officers' first anniversary of employment with
the Company.

The Company paid a management fee of $100 to a significant unitholder in
1997 and 1998, respectively, for certain managerial, legal, financial and other
administration services, which has been included in operating expenses.

In 1998, Whisper granted options to purchase up to 120,400 shares of
Whisper common stock at $3.00 per share to the Company's employees dedicated to
providing contract services to Whisper. Such options vest based on certain
performance criteria and expire in five years. The Company will record
compensation expense for these options over the vesting period based upon the
fair value of the options as ultimately determined on the vesting dates. At
December 31, 1998, the Company had not recorded any amounts related to these
options as their fair value at year end is insignificant since the exercise
price of $3.00 per share is significantly greater than the fair value of
Whisper's common stock of $0.45 per share (see Note 3).

9. MAJOR CUSTOMERS

Two customers accounted for 53% (Whisper -- see Note 2) and 23% of total
revenues in 1997, respectively. Two customers accounted for a total of 62%
(Whisper -- see Note 2) and 17% of total revenues in 1998, respectively.

Two customers accounted for 39% (Whisper) and 19% of total accounts
receivable at December 31, 1997, respectively. Two customers accounted for 44%
(Whisper -- see Note 2) and 21% of total accounts receivable at December 31,
1998, respectively.

10. EMPLOYEE BENEFIT PLAN

Under the Company's 401(k) Savings Plan (the Plan), employees may
contribute up to 15% of their salary into the Plan, subject to IRS limitations.
The Company matches 75% of the employee's contribution up to 10% of their
salary. Company contributions were approximately $373 and $645 in 1997 and 1998,
respectively, and vest over a period of 36 months.

11. SUBSEQUENT EVENT

In February 1999, the Company obtained a $1 million revolving line of
credit facility with a bank and subsequently repaid its promissory note with the
same bank (see Note 5). Borrowings under the line of credit facility bear
interest at prime plus 0.25%, are due in February 2000, and are collateralized
by substantially all of the Company's assets. The line of credit facility also
requires that the Company meet certain financial covenants. The line of credit
is guaranteed by certain existing unitholders of the Company. In exchange for
this guarantee, the Company issued warrants to purchase 230,770 Class B units at
an exercise price of $0.65. Such warrants expire in ten years. At August 3,
1999, $975 was outstanding under the line of credit and the Company was not in
compliance with the financial covenants; hence amounts borrowed under the line
of credit are due on demand.

F-52
<PAGE> 148
DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

In March, June and August 1999, the Company received $1,500, $500 and $500,
respectively, pursuant to convertible note agreements (the Notes) with certain
existing unitholders. The Notes bear interest at 8.0% and are due upon demand.
The Notes are convertible, along with all accrued but unpaid interest, at the
option of the Noteholders, into newly designated units of the Company at a
conversion price to be determined pursuant to future negotiations between the
Company and the Noteholders. The Notes are collateralized by a second lien and
security interest in all of the Company's accounts receivable, general
intangibles, documents, instruments and chattel paper.

F-53
<PAGE> 149

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

No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................... 1
Risk Factors............................. 9
Cautionary Note Regarding Forward Looking
Statements............................. 22
Our Separation from Cadence.............. 23
Use of Proceeds.......................... 25
Dividend and Distribution Policy......... 25
Capitalization........................... 26
Dilution................................. 27
Selected Financial Data.................. 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 31
Business................................. 45
Management............................... 59
Arrangements between Tality and
Cadence................................ 71
Principal Stockholders................... 79
Description of Capital Stock and
Partnership Units...................... 81
Shares Eligible for Future Sale.......... 87
Underwriting............................. 89
Validity of Class A Common Stock......... 92
Experts.................................. 92
Additional Information................... 92
Index to Consolidated Financial
Statements............................. F-1
</TABLE>

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

Through and including , 2000 (the 25th day after the date
of this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as underwriter and with respect to an unsold allotments or
subscription.
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------

12,750,000 Shares

TALITY CORPORATION

Class A

Common Stock

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

[Tality Logo]

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

GOLDMAN, SACHS & CO.

LEHMAN BROTHERS

UBS WARBURG LLC

SG COWEN
----------------------------------------------------------
----------------------------------------------------------
<PAGE> 150

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with this offering. All amounts are estimates except the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 46,500
NASD fee.................................................... 18,000
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving costs................................ 300,000
Legal fees and expenses..................................... 2,485,500
Accounting fees and expenses................................ 650,000
Blue Sky qualification fees and expenses.................... 25,000
Transfer agent and registrar fees and expenses.............. 5,000
----------
Total....................................................... $3,625,000
==========
</TABLE>

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

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Registrant is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware provides for
the indemnification of officers and directors under certain circumstances
against expenses incurred in successfully defending against a claim and
authorizes Delaware corporations to indemnify their officers and directors under
certain circumstances against expenses and liabilities incurred in legal
proceedings involving such persons because of their being or having been an
officer or director. Article VII of the Bylaws provide that all persons whom the
Registrant is empowered to indemnify pursuant to Delaware General Corporation
Law shall be indemnified by the Registrant to the full extent permitted thereby.
The foregoing right of indemnification shall not be deemed to be exclusive of
any other rights to which those seeking indemnification may be entitled under
any statute, the Registrant's Amended and Restated Certificate of Incorporation,
Bylaws, agreement, vote of stockholders or disinterested directors or otherwise.

Section 102(b) of the Delaware General Corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may affect
a director's liability with respect to any of the following: (i) breaches of the
director's duty of loyalty to the corporation or its stockholders; (ii) acts or
omissions not made in good faith or which involve intentional misconduct of
knowing violations of law; (iii) liability for dividends paid or stock
repurchased or redeemed in violation of Section 174 of the Delaware General
Corporation law or (iv) any transaction from which the director derived an
improper personal benefit.

All of Tality's directors and officers will be covered by insurance
policies maintained by Tality against certain liabilities for actions taken in
their capacities as such, including liabilities under the Securities Act of
1933, as amended. In addition, the Registrant has entered into indemnity
agreements with its directors and executive officers (a form of which is filed
as Exhibit 10.5 to this Registration Statement) that obligate the Registrant to
indemnify such directors and executive officers to the fullest extent permitted
by the Delaware General Corporation Law.

Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the underwriters agree to indemnify
the directors and certain officers of the Registrant and certain other persons
in certain circumstances.
II-1
<PAGE> 151

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In connection with its incorporation and organization, on July 13, 2000,
Tality Corporation issued 2,150,000 shares of Class A common stock and one share
of Class B common stock to Cadence for an aggregate of $13,437,500. Tality
Corporation believes that this issuance was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving any public
offering.

During July, August and September 2000, Tality Corporation granted options
to Cadence to purchase up to 13,124,840 shares under Tality Corporation's stock
option plans at a weighted average exercise price of $6.25 per share and sold
220,000 restricted shares of Tality Corporation's Class A common stock to Tality
directors at a price of $6.25 per share. Cadence subsequently transferred the
options to its employees involved primarily in the electronics design services
business. These grants were exempt from registration under Section 4(2) of the
Securities Act as (i) a transaction not involving a public offering and (ii)
issuances to Cadence employees or Tality non-employee directors pursuant to Rule
701 under the Securities Act.

During July 2000, Tality Corporation granted options to two employees of
Cadence involved primarily in the electronics design services business. These
grants were exempt from registration under Section 4(2) of the Securities Act as
a transaction not involving a public offering.

ITEM 16. EXHIBITS

(a) Exhibits

II-2
<PAGE> 152

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.13* Form of Indemnification and Insurance Matters Agreement by
and among the Registrant, Cadence, Cadence Holdings, Inc.
and Tality, LP.
10.14** Form of Fixed Term License Agreement between Cadence and
Tality, LP.
10.15* Form of Joint Technology Development and Support Agreement
by and among the Registrant, Cadence, Cadence Holdings, Inc.
and Tality, LP.
10.16* Form of Joint Sales Agreement by and among the Registrant,
Cadence, Cadence Holdings, Inc. and Tality, LP.
10.17* Form of Asset Purchase Agreement by and among Cadence,
Cadence Design Systems (Canada) Limited and Tality Canada
Corporation.
10.18** Form of Amended and Restated Master Separation Agreement by
and among the Registrant, Cadence, Cadence Holdings, Inc.
and Tality, LP.
10.19** Form of Asset Purchase Agreement by and among Symbionics
Limited, Cadence and Cadence Design Systems Limited.
10.20* Tality Corporation Directors Stock Option Plan.
10.21* Form of Amended and Restated Agreement of Limited
Partnership of Tality, LP between the Registrant and Cadence
Holdings, Inc.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit
5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (included on the signature page to this
Registration Statement, see page II-5).
27.1 Financial Data Schedule.
</TABLE>

---------------
* Previously filed.

** Confidential treatment request as to certain portions of exhibit.
Unredacted versions of this exhibit have been filed separately with the
Securities and Exchange Commission.

(b) Financial Statement Schedule

Other financial statement schedules have been omitted because the
information called for is not required or is shown either in our consolidated
financial statements or the notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes the following:

(i) The Registrant hereby undertakes to provide to the underwriters at
the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters
to permit prompt delivery to each purchaser.

(ii) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted
to directors, officers and controlling persons of the Registrant pursuant
to the Delaware General Corporation Law, the Registrant's Amended and
Restated Certificate of Incorporation, the Registrant's Bylaws, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such

II-3
<PAGE> 153

indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.

(iii) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act is part of this Registration
Statement as of the time it was declared effective.

(iv) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 154

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Jose, State of California, on the 27th day of September, 2000.

TALITY CORPORATION

By: /s/ ROBERT P. WIEDERHOLD
------------------------------------
Robert P. Wiederhold
President and Chief Executive
Officer

KNOWN ALL PERSON BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints H. Raymond Bingham, Robert P. Wiederhold
and R.L. Smith McKeithen, each of whom may act without joinder of the other, as
their true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and any and all Registration
Statements filed pursuant to Section 462 of the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
thereof.

Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the registration statement has been signed below by the
following persons in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ H. RAYMOND BINGHAM Chairman of the Board of September 27, 2000
------------------------------------------------ Directors
H. Raymond Bingham

/s/ ROBERT P. WIEDERHOLD President and Chief Executive September 27, 2000
------------------------------------------------ Officer; Director (Principal
Robert P. Wiederhold Executive Officer)

/s/ DUANE W. BELL Senior Vice President, Chief September 27, 2000
------------------------------------------------ Financial Officer and Secretary
Duane W. Bell (Principal Financial Officer
and Principal Accounting
Officer)

/s/ RONALD R. BARRIS Director September 27, 2000
------------------------------------------------
Ronald R. Barris

/s/ MICHAEL G. KEITH Director September 27, 2000
------------------------------------------------
Michael G. Keith

/s/ KENNETH LEVY Director September 27, 2000
------------------------------------------------
Kenneth Levy

/s/ JOHN M. SCANLON Director September 27, 2000
------------------------------------------------
John M. Scanlon
</TABLE>

II-5
<PAGE> 155

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Form of Restated Certificate of Incorporation of the
Registrant to be in effect prior to completion of the
offering.
3.3* Bylaws of the Registrant.
4.1* Specimen form of Registrant's common stock certificate.
5.1* Opinion of Gibson, Dunn & Crutcher LLP.
10.1* Form of Agreement of Limited Partnership of Tality, LP,
between the Registrant and Cadence Holdings, Inc.
10.2* Master Separation Agreement dated as of July 14, 2000,
between the Registrant, Cadence Design Systems, Inc.
("Cadence") and Cadence Holdings, Inc.
10.3* Tality Corporation 2000 Equity Incentive Plan, as amended.
10.4* Tality Corporation 2000 Broad Based Equity Incentive Plan,
as amended.
10.5* Form of Indemnity Agreement between the Registrant and its
directors and executive officers.
10.6* Employment Agreement between the Registrant and Robert P.
Wiederhold dated as of July 14, 2000.
10.7* Form of General Assignment and Assumption Agreement by and
among the Registrant, Cadence, Cadence Holdings, Inc. and
Tality, LP.
10.8* Form of Master Intellectual Property Ownership and License
Agreement by and among the Registrant, Cadence, Cadence
Holdings, Inc. and Tality, LP.
10.9* Form of Employee Matters Agreement by and among the
Registrant, Cadence, Cadence Holdings, Inc. and Tality, LP.
10.10* Form of Master Corporate Services Agreement by and among the
Registrant, Cadence, Cadence Holdings, Inc. and Tality, LP.
10.11* Form of Real Estate Matters Agreement by and among the
Registrant, Cadence, Cadence Holdings, Inc. and Tality, LP.
10.12* Form of Master Confidentiality Agreement by and among the
Registrant, Cadence, Cadence Holdings, Inc. and Tality, LP.
10.13* Form of Indemnification and Insurance Matters Agreement by
and among the Registrant, Cadence, Cadence Holdings, Inc.
and Tality, LP.
10.14** Form of Fixed Term License Agreement between Cadence and
Tality, LP.
10.15* Form of Joint Technology Development and Support Agreement
by and among the Registrant, Cadence, Cadence Holdings, Inc.
and Tality, LP.
10.16* Form of Joint Sales Agreement by and among the Registrant,
Cadence, Cadence Holdings, Inc. and Tality, LP.
10.17* Form of Asset Purchase Agreement by and among Cadence,
Cadence Design Systems (Canada) Limited and Tality Canada
Corporation.
10.18** Form of Amended and Restated Master Separation Agreement by
and among the Registrant, Cadence, Cadence Holdings, Inc.
and Tality, LP.
10.19** Form of Asset Purchase Agreement by and among Symbionics
Limited, Cadence and Cadence Design Systems Limited.
10.20* Tality Corporation Directors Stock Option Plan.
10.21* Form of Amended and Restated Agreement of Limited
Partnership of Tality, LP between the Registrant and Cadence
Holdings, Inc.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit
5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (included on the signature page to this
Registration Statement, see page II-5).
27.1 Financial Data Schedule.
</TABLE>

II-6
<PAGE> 156

---------------
* Previously filed.

** Confidential treatment request as to certain portions of exhibit.
Unredacted versions of this exhibit have been filed separately with the
Securities and Exchange Commission.

(b) Financial Statement Schedule

Other financial statement schedules have been omitted because the
information called for is not required or is shown either in our consolidated
financial statements or the notes thereto.

II-7