TALITY CORP, S-1, 2000-07-17

TALITY CORP
S-1, 2000-07-17

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 2000.

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

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

2655 SEELY AVENUE, BUILDING 9
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
2655 SEELY AVENUE, BUILDING 9
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 1888 CENTURY PARK EAST, SUITE 2100
TELESIS TOWER LOS ANGELES, CALIFORNIA 90067
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>
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(1)
---------------------------------------------------------------------------------------------------------------------
Class A Common Stock, par value $.001 per share.... $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.

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.

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--------------------------------------------------------------------------------
<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 July 17, 2000.
[TALITY LOGO]
Shares
TALITY CORPORATION
Class A Common Stock
------------------------
This is an initial public offering of shares of Class A common stock of
Tality Corporation. All of the 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 approximately 1% general partnership
interest and % limited partnership interest in Tality, LP. At that time,
Cadence Design Systems, Inc. will own an approximately % 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 % 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 $ and $ . 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 8 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 shares of
Class A common stock, the underwriters have the option to purchase up to an
additional 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 gatefold cover graphics to depict the stages of the electronics design
process generally, and identifying the participation by Tality in the steps of
the design process. The steps of the design process represented will include:

- idea

- architecture design

- logic design

- physical design

- prototype

- volume manufacturing

At the end of the process, graphics will depict representative
communications-related products employing the electronics design process. The
representative products will show the flow of data to end users, from
origination at the communications service provider across cable, public switched
telephone and wireless networks to the client's premises.
<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 and the United Kingdom. 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, electronics product 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 our 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 our 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 electronics product 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 selected 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 our 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

These businesses will be conducted by Tality, LP. Tality Corporation is a
holding company whose principal assets after completion of this offering will be
an approximately 1% general partnership interest and % limited partnership
interest in Tality, LP.

Immediately after completion of this offering, Cadence will own the only
outstanding share of Class B common stock of Tality Corporation and an
approximately % 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 total voting power in
Tality Corporation will be approximately %. 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 the Class A common stock.

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. 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 this 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 the 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 have begun the process of acquiring from Cadence certain assets used in
our foreign operations and we expect that the separation of our business from
Cadence, including the transfer of related assets, liabilities and intellectual
property rights, will be substantially completed prior to the

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<PAGE> 6

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 2655 Seely Avenue, Building
9, San Jose, California 95134, and our telephone number at that address is (408)
943-1234.

TRADEMARKS

We have applied for federal trademark registration 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, a Delaware 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 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 and the formation of Tality, LP;

- 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.

3
<PAGE> 7

THE OFFERING

CLASS A COMMON STOCK
OFFERED.................. shares

COMMON STOCK TO BE
OUTSTANDING AFTER THIS
OFFERING:

CLASS A COMMON STOCK..... 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............ units

Each limited partnership unit 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. If Cadence 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 approximately
% of our outstanding Class A common stock, or
% if the underwriters' option to purchase
additional shares of our Class A common stock is
exercised in full.

If all limited partnership units were exchanged
for, and the share of Class B common stock was
converted into, Class A common stock, there would
be shares of Class A common stock
outstanding immediately after this offering.

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

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.

4
<PAGE> 8

The information set forth above:

- includes approximately 1,640,000 shares of Class A common stock owned by
Cadence executives as of July 17, 2000;

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

- excludes 12,225,682 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 shares of Class A common stock available for
future issuance under our 2000 Equity Incentive Plan and our 2000 Broad
Based Equity Incentive Plan.

5
<PAGE> 9

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
three months ended April 3, 1999 and April 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 three months
ended April 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 reflect the
following:

- the structure of Tality Corporation and Tality, LP as of the date of the
completion of this offering, the receipt by Tality Corporation of net
proceeds of approximately $ from this offering and the purchase
by Tality Corporation of approximately % of the partnership
interests of Tality, LP;

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

- the net losses attributable to Tality Corporation.

<TABLE>
<CAPTION>
TALITY, LP TALITY CORPORATION
--------------------------------------------------------------------------- -------------------------------
THREE
YEAR ENDED THREE MONTHS ENDED MONTHS
----------------------------------------------------- ------------------- YEAR ENDED ENDED
DEC. 30, DEC. 28, JAN. 3, JAN. 2, JAN. 1, APRIL 3, APRIL 1, JANUARY 1, 2000 APRIL 1, 2000
1995 1996 1998 1999 2000 1999 2000 PRO FORMA PRO FORMA
-------- -------- -------- --------- -------- -------- -------- --------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<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 $ 26,825 $ 43,027 $128,873 $ 43,027
Cost of revenue.. 66,507 119,480 151,367 255,097 189,190 45,688 55,532 189,190 55,532
Loss from
operations..... (19,258) (31,080) (60,677) (149,835) (60,317) (18,863) (12,505) (60,317) (12,505)
Loss before
minority
interest....... (19,457) (31,609) (61,234) (151,260) (62,253) (19,506) (12,957) (62,253) (12,957)
Minority
interest....... -- -- -- -- -- -- --
Net loss......... $(19,457) $(31,609) $(61,234) $(151,260) $(62,253) $(19,506) $(12,957) $ $
Pro forma net
loss per
share.......... $ $
Weighted average
shares used in
computing pro
forma net loss
per share......
</TABLE>

6
<PAGE> 10

The pro forma consolidated balance sheet data for Tality Corporation sets
forth the consolidated financial position of Tality Corporation and Tality, LP
on a pro forma basis, reflecting the following:

- the retention by Cadence of all of Tality, LP's working capital except
the current portion of capital lease obligations and deferred revenue;
and

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

The pro forma as adjusted balance sheet data also reflects the receipt of
the estimated net proceeds of this offering based on an assumed initial public
offering price of $ per share and after deducting an assumed
underwriting discount and estimated offering expenses payable by us.

<TABLE>
<CAPTION>
AT APRIL 1, 2000
--------------------------------------------------------
TALITY
TALITY CORPORATION
CORPORATION TALITY, LP TALITY, LP PRO FORMA
ACTUAL ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- ----------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ -- $ -- $ -- $
Working capital........................ -- 34,961 (7,464)
Total assets........................... -- 153,911 87,272
Long-term obligations, net of current
portion.............................. -- 3,911 3,911
Minority interest...................... -- -- --
Cadence's net investment............... -- 118,322 75,897
Total stockholders' equity............. -- -- --
</TABLE>

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

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<PAGE> 11

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 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. 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> 12

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 margin 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 (23)% 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 had an adverse impact on 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

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Operations -- Factors Affecting Operating Results" for a discussion of factors
that may cause our quarterly operating results to fluctuate.

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 value of our stock
will 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.

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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. 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 non-competitive, 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 undergoing 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 electronics
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 electronics 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 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, which 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> 15

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 companies, services
and technologies in the future will 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, our ability to expand our services offerings and increase our
revenue may increase more slowly than we expect. Even if we are able to identify
and acquire acquisition candidates, 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 may
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

- risks associated with entering 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 800 employees at
June 30, 1999 to over 1,200 employees as of June 30, 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 our officers to

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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 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 or delay in revenue and loss of
market share;

- failure to attract new clients or achieve market acceptance;

- 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 our 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 our 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 also enter
into confidentiality, invention assignment and license agreements with our
employees, consultants and third parties with whom we have strategic
relationships, and 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 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 as 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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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 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 42% for the first quarter 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 revenue. The success of these
operations may be affected by:

- currency conversion risks;

- 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;

- conversion to the euro, making our pricing and marketing strategies
non-competitive;

- 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 and 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 financial condition. For example,
if there is an increase in the rate at which a foreign currency exchanges into
U.S. dollars, it will take more of the foreign currency to equal a specified
amount of U.S. dollars than before the rate increase. If 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. 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.

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 will own our only outstanding
share of Class B common stock, which will represent approximately % of the
combined voting power of our outstanding common stock, or % 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.

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 Cadence;

- our fundamental accounting policies;
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- 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 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 were 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. 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;

- 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.

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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 enter into arrangements with Cadence to lease facilities at its San
Jose, California campus under a lease that is terminable by either party with
six months' notice and expires in 2005 and at its Livingston, United Kingdom
location under a lease that is not terminable and expires 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 agree to amend these
agreements in ways that may be less favorable to us than the current terms of
the agreements. 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 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.

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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, 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 directors, is currently the president
and chief executive officer of Cadence, and Ronald R. Barris, another one of our
directors, is an officer of Cadence. Ownership of Cadence common stock by our
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directors and officers and Messrs. Bingham's and Barris' employment by Cadence
could create, or appear to create, potential 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, WE ARE DEPENDENT ON TALITY, LP TO PROVIDE US WITH
SUFFICIENT FUNDS TO MEET OUR OPERATING NEEDS. ANY FAILURE BY TALITY, LP TO
PROVIDE US WITH NECESSARY FUNDING WOULD HARM OUR LIQUIDITY.

Tality Corporation is a holding company and its only material assets
consist of partnership interests in Tality, LP. We have no independent means of
generating revenue. As a partner of Tality, LP, we will incur income taxes on
our share of any net taxable income of Tality, LP. We intend 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 us for expenses we incur relating to the ownership of
partnership interests in and operation of Tality, LP. To the extent we need
funds to pay taxes or for any other purpose and Tality, LP is unable to provide
us with sufficient funds, our liquidity may suffer and we may be unable to meet
our 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 not declared or paid any dividends on its common
stock and Tality, LP has not made any distributions to its partners since their
respective dates of inception. 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
shares of Class A common stock outstanding or issuable upon exercise of options,
or approximately 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, approximately 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 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,

19
<PAGE> 23

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 indirect
interests in Tality, LP units 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 deviations from financial results
expected by, securities analysts;

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

- any shortfall in revenue or net income or any increase in losses from
levels expected by securities analysts or investors; 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 $ per share in net tangible book value per
share. We also have issued options to acquire 12,225,682 shares of Class A
common stock at prices below the initial public offering price. As these
outstanding options are exercised, there will be further dilution.

20
<PAGE> 24

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.

21
<PAGE> 25

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 electronics product 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 completed prior to the
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 are entering into a master separation agreement and, prior
to completing this offering, will enter into other 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.

STOCK OWNERSHIP BY CADENCE

Upon completion of this offering, Cadence's share of Class B common stock
and its limited partnership units in Tality, LP will be convertible into or
exchangeable for approximately % of the outstanding shares of our Class A
common stock. While Cadence does not currently plan to distribute

22
<PAGE> 26

its equity interests in Tality Corporation and Tality, LP, it 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.

23
<PAGE> 27

USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be
approximately $ million, or $ 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 $ 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
approximately % of the partnership interests in Tality, LP, or % of the
partnership interests if the underwriters exercise their option to purchase
additional shares in full. The price of the partnership units to be acquired by
Tality Corporation will equal the net proceeds to it from this offering.

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

- 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 not paid and do not anticipate paying any cash dividends on our
common stock in the foreseeable future. In addition, Tality, LP has not declared
any distributions to its partners since formation 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.

24
<PAGE> 28

CAPITALIZATION

Our capitalization as of April 1, 2000 is presented:

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

- on a pro forma consolidated basis for Tality Corporation to give effect
to 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 though this retention had occurred
as of April 1, 2000; and

- on a pro forma as adjusted basis for the consolidated position of Tality
Corporation and Tality, LP, to reflect the receipt of the estimated net
proceeds from the sale of shares of Class A common stock
in this offering and the purchase by Tality Corporation of an approximate
% partnership interest in Tality, LP.

The number of shares of Class A common stock in the table below excludes
2,774,318 shares currently available for future issuance under our 2000 Equity
Incentive Plan and our 2000 Broad Based Equity Incentive 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>
APRIL 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................................... $ -- $ 3,911 $ $
Minority interest........................... -- --
Cadence's net investment.................... -- 118,322
-------- -------- ------- --------
Stockholders' equity:
Class A common stock, $.001 par value;
300,000,000 shares authorized; none
issued and outstanding actual;
shares outstanding pro
forma and pro forma as adjusted......... -- --
Class B common stock, $.001 par value;
1,000 shares authorized; one issued and
outstanding actual; one share issued and
outstanding pro forma and pro forma as
adjusted................................ -- --
Class C common stock, $.001 par value;
160,000,000 shares authorized; none
issued and outstanding actual and pro
forma and pro forma as adjusted......... -- --
Additional paid-in capital.................. -- --
-------- -------- ------- --------
Total stockholders' equity.............. -- --
-------- -------- ------- --------
Total capitalization.................... $ -- $122,233 $ $
======== ======== ======= ========
</TABLE>

25
<PAGE> 29

DILUTION

As of April 1, 2000, our pro forma net tangible book value was
approximately $11.8 million, or $ 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
executives and 510,000 shares of Class A common stock held by Cadence, assuming
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 dilution. Without taking into account any changes in net tangible book
value after April 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 $ 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 April 1, 2000 would have been $ million, or
$ per share of common stock. This amount represents an immediate
increase in pro forma net tangible book value of $ per share to the
existing stockholders and an immediate dilution in pro forma net tangible book
value of $ 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............. $
Pro forma net tangible book value per share at April 1,
2000................................................... $
Increase per share attributable to new investors..........
------
Pro forma net tangible book value per share after this
offering..................................................
------
Dilution per share to new investors......................... $
======
</TABLE>

The following table summarizes, as of April 1, 2000, on the pro forma basis
described above, the relative investment in Tality Corporation by Cadence and
Cadence executives, 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 for, and the conversion of its share of
Class B common stock into, 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... % $ % $
New investors...........
----------- --- ------------ ---
Total......... 100% $ 100%
=========== === ============ ===
</TABLE>

The total consideration from Cadence consists of Cadence's historical
investment in the electronics design services business from 1995 through April
1, 2000, including the fair value of stock issued in acquisitions, less the
estimated working capital to be retained by Cadence at the time of separation.

The discussion and tables above assume no exercise of any stock options
outstanding. At April 1, 2000, there were no options outstanding for shares of
Class A common stock. On July 17, 2000, there were options issued to purchase
12,225,682 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.

26
<PAGE> 30

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 three months
ended April 3, 1999 and April 1, 2000 and the consolidated balance sheet data as
of April 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 consolidated statements of
operations data for Tality, LP and Tality Corporation for the year ended January
1, 2000 and the three months ended April 1, 2000.

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

- the structure of Tality Corporation and Tality, LP as of the date of the
completion of this offering, the receipt of estimated net proceeds of
$ from this offering and the purchase by Tality Corporation of
approximately % of the partnership units of Tality, LP;

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

- the net losses of Tality, LP allocable to Tality Corporation.

27
<PAGE> 31
<TABLE>
<CAPTION>
TALITY, LP
-----------------------------------------------------

YEAR ENDED
-----------------------------------------------------
DEC. 30, DEC. 28, JAN. 3, JAN. 2, JAN. 1,
1995 1996 1998 1999 2000
-------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenue....................... $ 47,249 $ 88,400 $ 90,690 $ 105,262 $128,873
Costs and expenses
Cost of revenue.............. 38,950 69,686 91,632 129,257 113,141
Sales and marketing.......... 16,043 27,169 29,327 35,862 32,799
Research and
development................ 2,174 4,282 5,029 7,176 9,588
General and
administrative............. 9,340 18,343 23,632 33,208 28,546
Amortization of acquired
intangibles................ -- -- 36 3,277 5,116
Unusual items................ -- -- 1,711 46,317 --
-------- -------- -------- --------- --------
Total costs and expenses... 66,507 119,480 151,367 255,097 189,190
-------- -------- -------- --------- --------
Loss from operations.......... (19,258) (31,080) (60,677) (149,835) (60,317)
Other income (expense), net... -- (42) 28 215 33
-------- -------- -------- --------- --------
Loss before provision for
income taxes and minority
interest..................... (19,258) (31,122) (60,649) (149,620) (60,284)
Provision for income taxes.... 199 487 585 1,640 1,969
-------- -------- -------- --------- --------
Loss before minority
interest..................... (19,457) (31,609) (61,234) (151,260) (62,253)
Minority interest............. -- -- -- -- --
-------- -------- -------- --------- --------
Net loss...................... $(19,457) $(31,609) $(61,234) $(151,260) $(62,253)
======== ======== ======== ========= ========
Pro forma net loss per
share........................
Weighted average shares used
in computing pro forma net
loss per share...............

<CAPTION>
TALITY, LP
------------------- TALITY CORPORATION
THREE MONTHS -------------------------
ENDED YEAR THREE MONTHS
------------------- ENDED ENDED
APRIL 3, APRIL 1, JANUARY 1, APRIL 1,
1999 2000 2000 2000
-------- -------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenue....................... $ 26,825 $ 43,027 $128,873 $ 43,027
Costs and expenses
Cost of revenue.............. 27,736 33,438 113,141 33,438
Sales and marketing.......... 7,505 7,943 32,799 7,943
Research and
development................ 2,663 2,772 9,588 2,772
General and
administrative............. 6,563 8,337 28,546 8,337
Amortization of acquired
intangibles................ 1,221 3,042 5,116 3,042
Unusual items................ -- -- -- --
-------- -------- -------- --------
Total costs and expenses... 45,688 55,532 189,190 55,532
-------- -------- -------- --------
Loss from operations.......... (18,863) (12,505) (60,317) (12,505)
Other income (expense), net... (189) 62 33 62
-------- -------- -------- --------
Loss before provision for
income taxes and minority
interest..................... (19,052) (12,443) (60,284) (12,443)
Provision for income taxes.... 454 514 1,969 514
-------- -------- -------- --------
Loss before minority
interest..................... (19,506) (12,957) (62,253) (12,957)
Minority interest............. -- --
-------- -------- -------- --------
Net loss...................... $(19,506) $(12,957) $ $
======== ======== ======== ========
Pro forma net loss per
share........................ $ $
======== ========
Weighted average shares used
in computing pro forma net
loss per share...............
======== ========
</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,
and restructuring charges totaling $17.8 million in 1998.

The pro forma consolidated balance sheet data sets forth the consolidated
financial position of Tality Corporation and Tality, LP on a pro forma basis
reflecting the following:

- the retention by Cadence of all of Tality, LP's working capital except
the current portion of capital lease obligations and deferred revenue;
and

- the reclassification of Cadence's equity interest to minority interest.

<TABLE>
<CAPTION>
TALITY, LP
--------------------------------------------------------------------------------------------
YEAR ENDED
------------------------------------------------------------ AS OF
DEC. 30, DEC. 28, JAN. 3, JAN. 2, JAN. 1, APRIL 1, APRIL 1, 2000
1995 1996 1998 1999 2000 2000 PRO FORMA
----------- ----------- ------- ------- -------- ----------- -------------
(IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents.......... $ -- $ -- $ -- $ -- $ -- $ -- $
Working capital.................... 596 10,692 25,094 16,135 23,844 34,961
Total assets....................... 17,632 35,643 54,920 90,868 142,531 153,911
Long-term obligations.............. 66 126 104 3,956 4,318 3,911
Minority interest.................. -- -- -- -- -- --
Partners' net investment........... 6,019 19,534 37,691 58,178 102,545 118,322
Stockholders' equity............... -- -- -- -- -- --
</TABLE>

28
<PAGE> 32

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 product 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. Tality Corporation is a holding company whose
principal assets are an approximate 1% general partnership interest and %
limited partnership interest in Tality, LP.

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 allocations to us of Cadence corporate expenses, including expenses
associated with centralized tax, legal, accounting, treasury and real estate
functions, information technology, sales, corporate marketing, cost of Cadence
software and other Cadence corporate services and infrastructure costs. The
expense allocations have been 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. Expenses were allocated 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 relationship with Cadence. Cadence has agreed to
provide to us corporate services and support in the areas of information
technology systems, human resources, administration, buildings and facilities,
treasury, legal and finance and accounting. Although the fees provided for in
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 provides 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
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

29
<PAGE> 33

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 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 defined level of
effort contracts, revenue is recognized as services are provided to the client
in accordance with contractual billing schedules. For fixed price contracts,
revenue is recognized using contract accounting, which is generally 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 materially adversely
affected. 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.

RESEARCH AND DEVELOPMENT. Research and development expense represents our
investment in developing intellectual property, comprised of know-how, trade
secrets, hardware 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. General and
administrative expenses also include allocations to us of a portion of Cadence's
corporate overhead expenses for services provided to us by Cadence.

PROVISION FOR INCOME TAXES. Until the separation, we will have no
operations 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, we will own approximately % 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 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 net intangibles of $40.9 million, which are 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
30
<PAGE> 34

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 acquired intangibles of $17.3 million 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 approximately 184 employees and $5.6
million to downsize and close excess facilities. 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. 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 to employees in July 2000, we
expect to record an aggregate deferred stock compensation expense of
approximately $60 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. This amount will be recorded as a
reduction of stockholders' equity and will be amortized over the vesting period
of the applicable options.

SEPARATION COSTS

Separation costs are those associated with the process of becoming a
stand-alone, publicly held company, including consulting and professional fees.
Separation costs began in the second quarter of 2000 and are expected to
continue being incurred for at least the next several quarters. As of April 1,
2000, no separation costs had been incurred.

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.

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<PAGE> 35

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
------------------------------------ -------------------
JANUARY 3, JANUARY 2, JANUARY 1, APRIL 3, APRIL 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 88 103 78
Sales and marketing................. 32 34 25 28 19
Research and development............ 6 7 7 10 6
General and administrative.......... 26 31 22 24 19
Amortization of acquired
intangibles...................... -- 3 4 5 7
Unusual items....................... 2 44 -- -- --
--- ---- --- --- ---
Total costs and expenses......... 167 242 146 170 129
--- ---- --- --- ---
Loss from operations.................. (67) (142) (46) (70) (29)
Other income (expense), net........... -- -- -- (1) --
--- ---- --- --- ---
Loss before provision for income
taxes............................... (67) (142) (46) (71) (29)
Provision for income taxes............ 1 2 2 2 1
--- ---- --- --- ---
Net loss.............................. (68)% (144)% (48)% (73)% (30)%
=== ==== === === ===
</TABLE>

THREE MONTHS ENDED APRIL 3, 1999 AND APRIL 1, 2000

REVENUE. Revenue increased $16.2 million, or 60%, from $26.8 million in the
first quarter of 1999 to $43.0 million in the first quarter of 2000. The
increase in revenue resulted from a larger base of clients and an increase in
total client service hours billed, of which $4.6 million was attributable to the
Diablo acquisition.

COST OF REVENUE. Cost of revenue increased $5.7 million, or 21%, from $27.7
million, or 103% of revenue, in the first quarter of 1999 to $33.4 million, or
78% of revenue, in the first quarter of 2000. The increase in cost of revenue
resulted from the hiring of additional design engineers, including those
acquired as part of the Diablo acquisition. The decrease in cost of revenue as a
percentage of revenue in the first quarter of 1999 was a result of better
engineering staff utilization and more effective use of reusable intellectual
property.

SALES AND MARKETING. Sales and marketing expense increased $0.4 million, or
6%, from $7.5 million, or 28% of revenue, in the first quarter of 1999 to $7.9
million, or 19% of revenue, in the first quarter of 2000. Substantially all of
the increase in sales and marketing expense was attributable to a $0.2 million
increase in our allocable portion of Cadence's centralized sales and marketing
expense and a $0.2 million increase in direct selling expense. The 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 $0.1
million, or 4%, from $2.7 million, or 10% of revenue, in the first quarter of
1999 to $2.8 million, or 6% of revenue, in the first quarter of 2000. The
decrease in research and development expense as a percentage of revenue resulted
from the absolute dollar amount of research and development expense remaining
constant in the first quarter of each 1999 and 2000, while revenue increased 60%
to $43.0 million during the same period. We expect that research and development
expense will increase in future periods.

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<PAGE> 36

GENERAL AND ADMINISTRATIVE. General and administrative expense increased
$1.7 million, or 27%, from $6.6 million, or 24% of revenue, in the first quarter
of 1999 to $8.3 million, or 19% of revenue, in the first quarter of 2000.
Substantially all of the increase in general and administrative expense was
attributable to a $1.0 million increase in our allocable portion of Cadence's
centralized general and administrative expense, a $0.6 million increase in our
allocable portion of Cadence's centralized information technology costs, a $0.4
million increase in administrative and related costs associated with the Diablo
acquisition, and a $0.4 million increase in compensation costs associated with
additions to our administrative support staff, offset in part by a $0.6 million
decrease in provision for bad debts.

AMORTIZATION OF ACQUIRED INTANGIBLES. Amortization expense increased $1.8
million, or 149%, from $1.2 million, or 5% of revenue, in the first quarter of
1999 to $3.0 million, or 7% of revenue, in the first quarter of 2000. The
increase in amortization expense was attributable to the amortization of
intangibles associated with the Diablo acquisition.

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 a larger base of
clients 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.

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 resulted in a reduction of
personnel and a cost savings of $5.7 million. The savings were partially offset
by an increase in our allocable portion of Cadence's centralized sales and
marketing expense 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 the ongoing development of products and design
methodologies and processes.

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

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<PAGE> 37

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 our allocable portion of Cadence's centralized information
technology costs.

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 our allocable portion of Cadence's centralized information technology costs.
The increase in general and administrative expense was partially offset by a
$0.7 million decrease in our allocable portion of Cadence's centralized human
resource staffing costs.

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 technology 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.

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

34
<PAGE> 38

based on the potential market size that the projects addressed, our ability to
gain market acceptance in these segments and the life cycle of this 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 acquisition. 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. Severance costs
included severance benefits, notice pay and outplacement services. 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.

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>

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<PAGE> 39

Benefits that resulted from the restructuring included a decrease in cost
of revenue in 1999 related to lower salary costs and site closures and a
decrease in general and administrative expenses related to lower salary costs.

QUARTERLY RESULTS OF OPERATIONS

The following table presents selected unaudited consolidated financial
information for each of the five quarters ending April 1, 2000. 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,
1999 1999 1999 2000 2000
-------- -------- ---------- ---------- --------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue $ 26,825 $ 30,695 $ 33,794 $ 37,559 $ 43,027
Costs and expenses
Cost of revenue.................... 27,736 27,290 28,546 29,569 33,438
Sales and marketing................ 7,505 8,834 7,836 8,624 7,943
Research and development........... 2,663 2,566 2,129 2,230 2,772
General and administrative......... 6,563 6,844 7,194 7,945 8,337
Amortization of acquired
intangibles..................... 1,221 1,162 1,022 1,711 3,042
Unusual items...................... -- -- -- -- --
-------- -------- -------- -------- --------
Total costs and expenses........ 45,688 46,696 46,727 50,079 55,532
-------- -------- -------- -------- --------
Loss from operations................. (18,863) (16,001) (12,933) (12,520) (12,505)
Other income (expense), net.......... (189) 435 (305) 92 62
-------- -------- -------- -------- --------
Loss before provision for income
taxes.............................. (19,052) (15,566) (13,238) (12,428) (12,443)
Provision for income taxes........... 454 669 641 205 514
-------- -------- -------- -------- --------
Net loss............................. $(19,506) $(16,235) $(13,879) $(12,633) $(12,957)
======== ======== ======== ======== ========
</TABLE>

36
<PAGE> 40

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,
1999 1999 1999 2000 2000
-------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenue................................... 100% 100% 100% 100% 100%
Costs and expenses
Cost of revenue......................... 103 89 85 79 78
Sales and marketing..................... 28 29 23 23 19
Research and development................ 10 8 6 6 6
General and administrative.............. 24 22 21 20 19
Amortization of acquired intangibles.... 5 4 3 5 7
Unusual items........................... -- -- -- -- --
--- --- --- --- ---
Total costs and expenses............. 170 152 138 133 129
--- --- --- --- ---
Loss from operations...................... (70) (52) (38) (33) (29)
Other income (expense), net............... (1) 1 (1) -- --
--- --- --- --- ---
Loss before provision for income taxes.... (71) (51) (39) (33) (29)
Provision for income taxes................ 2 2 2 1 1
--- --- --- --- ---
Net loss.................................. (73)% (53)% (41)% (34)% (30)%
=== === === === ===
</TABLE>

FACTORS AFFECTING OPERATING RESULTS

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;

- 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 master separation agreement, Cadence will transfer
to Tality, LP the assets and liabilities that relate to our business as of the
separation date. However, current assets and current liabilities, excluding the
current portion of capital lease obligations and deferred revenue which will be
transferred to us, will be retained by Cadence.

Net cash used in operating activities was $22.5 million in the first
quarter of 1999 compared to net cash used in operating activities of $18.0
million in the first quarter of 2000. Net cash used in

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<PAGE> 41

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 loss, 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 $5.6 million in the first quarter
of 1999 compared to $10.5 million in the first quarter 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 $4.0 million for the first quarter of 1999,
$4.7 million for the first quarter 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 $1.6 million for the first quarter
of 1999, $1.0 million for the first quarter 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 in acquiring Advanced Microelectronics in 1997, $43.7 million was
used in acquiring Symbionics and Detente in 1998, $39.9 million was used in
acquiring Diablo in 1999 and $4.8 million was used in acquiring Westport
Technology in the first quarter of 2000.

Cash provided by financing activities was $28.1 million for the first
quarter of 1999 and $28.5 million for the first quarter 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'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.

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. 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 April 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.

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<PAGE> 42

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 July 17, 2000, Cadence 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 quarter of 2000.

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 is effective July 1, 2000 and is not expected to have a material
effect on our financial statements.

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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 pressures, communications-related companies are
increasingly relying on relationships with external service providers to provide
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 and adoption 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 electronics product 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, electronics
product 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 electronics product 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

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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.

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 system 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,

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resulting in an increasing number of participants being involved in the process
of bringing a product to market.

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 and the United Kingdom, including the U.S. sites of Silicon
Valley, San Diego, California and Research Triangle Park; 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 pressures, 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 through 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:

- 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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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, which
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.

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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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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<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 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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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:

[graphics depicting communications-related markets and representative
products developed within these markets using Tality's electronics design
services]

CLIENTS

Our clients consist primarily of communications-related companies and
integrated circuits manufacturers of all sizes, ranging from start-up companies
to large, multinational organizations. During 1999 and the first quarter 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.

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

<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 our Voice-over-Internet-Protocol and system-on-a-chip
design expertise, we integrated the required functionality onto a single chip
and implemented into software much of the functionality originally embodied in
hardware. The resulting system-on-a-chip contains an ARM7TDMI(TM) embedded
microcontroller and two OakDSPCores(TM) digital signal co-processors. Aplio is
currently

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marketing the Aplio/Trio System-on-a-Chip to manufacturers of Internet phones,
e-mail phones and screen phones.

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. With Matsushita,
we developed a GSM cellular phone radio frequency subsystem, 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. The module is designed to operate with a number of the digital
baseband controllers commonly utilized in GSM phones.

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

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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 through 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 June 30, 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 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 22 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

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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.

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 a U.S. trademark application for
the name "Tality". 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".

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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 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 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 June 30, 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 90 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 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. The case is set for trial in August
2000, although it is likely to be continued until January 2001. Cadence 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.
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<PAGE> 54

Cadence has been sued by a former 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 is pending. No trial date is currently set for this matter.
Cadence believes it has meritorious defenses to these claims and intends to
defend this action vigorously.

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 and 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 AND DIRECTORS

Our executive officers and directors, and their ages and positions as of
July 17, 2000, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Robert P. Wiederhold....... 40 President and Chief Executive Officer; Director
Duane W. Bell.............. 48 Senior Vice President, Chief Financial Officer, Secretary
H. Raymond Bingham......... 54 Director
Ronald R. Barris........... 57 Director
</TABLE>

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 electronic 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 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.

H. RAYMOND BINGHAM has been a director of Tality since its incorporation in
July 2000. 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.

RONALD R. BARRIS has been a director of Tality since its incorporation in
July 2000. Mr. Barris has served as Senior Vice President for Strategy and
Electronic Infusion of Cadence since December 1999. 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.

BOARD STRUCTURE

Our board of directors is divided into three classes serving staggered
three-year terms. Mr. Wiederhold's initial term will expire in 2001. Mr. Barris'
initial term will expire in 2002. Mr. Bingham's initial term 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

Prior to completion of this offering, our board of directors will establish
an audit committee and a compensation committee all of whose members will be
independent directors.

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.

The compensation committee reviews and approves the compensation and
benefits for our executive officers, administers our employee benefit plans and
makes recommendations to the board of directors regarding employee compensation
and benefit matters. Upon completion of the offering, the compensation committee
will be comprised of Messrs. Barris and Bingham.

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

BOARD COMPENSATION

We anticipate that non-employee directors will generally receive an initial
option grant of shares of Class A common stock upon becoming a director of
Tality and an annual option grant under our 2000 Equity Incentive Plan to
purchase shares of Class A common stock. See "Management -- Stock Options". We
also intend to pay the expenses of our non-employee directors in attending Board
and committee meetings. Directors who are not employees of Tality or Tality, LP
may also receive compensation in amounts to be determined.

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 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
business relations with Cadence after the separation. See "Arrangements Between
Tality and Cadence".

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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 $151,875 350,000 $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.

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

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<PAGE> 58

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 initial public offering price
of the Cadence common stock of $22.81 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>

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 shares of restricted 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 currently allows for grants of,
or options to purchase, an aggregate of 7,000,000 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

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<PAGE> 59

on July 2, 2004. Awards for 5,705,000 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 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.
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<PAGE> 60

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;

- 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.

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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 currently allows for grants of,
or options to purchase, an aggregate of 8,000,000 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 6,520,682 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.

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 twelve 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.

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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 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 2000, Tality granted options to Cadence to purchase up to
6,520,682 shares of Class A common stock under 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 to
Cadence employees who we expect to become our employees of Tality after the
separation.

During July 2000, Tality issued to Cadence an aggregate of 2,150,000 shares
of Class A common stock for a price of $6.25 per share, 1,640,000 of which were
resold to Cadence executives at the same price.

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ARRANGEMENTS BETWEEN TALITY AND CADENCE

Below is a summary description of the 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.

MASTER SEPARATION AGREEMENT

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

The 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 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 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 SEC;

- 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 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 or when the shares can be sold 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 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

- 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.

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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;

- 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 the costs and expenses associated with this offering.

TERMINATION. Cadence, in its sole discretion, may terminate the master
separation agreement at any time before the closing of this offering. After this
offering, we and Cadence must agree for the 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. The 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.

Specified Liabilities. Tality, LP will assume liabilities from Cadence that
relate to the past, present and future conduct of our business.

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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
which will be assumed by Tality LP;

- 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.

DELAYED TRANSFERS. If it is not practicable to transfer any assets or
liabilities on the separation date, those assets and liabilities will be
transferred as promptly as practicable after the separation date.

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.

FOREIGN ASSET PURCHASE AGREEMENT

We expect Tality, LP to acquire some of the assets it will use in its
foreign operations prior to the separation. These assets will be acquired under
agreements between certain affiliates of Cadence that are similar to the
agreements that will govern the transfer to Tality, LP of its other assets.

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

LIMITED PARTNERSHIP AGREEMENT

Immediately following this offering, approximately % of the limited
partnership units of Tality, LP will be owned by us and % of the 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 units in Tality, LP. Cadence, on behalf of its
wholly-owned subsidiary, will contribute cash and certain assets used in our
foreign operations and will contribute the balance of the assets to be
transferred under the 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.

Under the terms of the limited partnership agreement, in the event we issue
shares of our common stock or other equity securities or securities convertible
into equity securities, we must transfer the proceeds from the sale of those
securities to the partnership, for which we will receive an equivalent amount of
additional limited partnership units in return. If we acquire our own shares of
common stock, those shares must be canceled, the partnership must reimburse us
for any amount paid for the acquisitions of those shares and we must surrender
an equivalent amount of limited partnership units. If we issue shares of our
Class A common stock to Tality, LP employees, we will contribute the amount that
we receive from the employees for the purchase of those shares to the
partnership, and we will receive a number of limited partnership units equal to
the number of shares of Class A common stock that we issue 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.

In our role as general partner, we will manage Tality, LP. We will not be
compensated for managing the partnership, but we will be reimbursed on a
quarterly basis by Tality, LP for expenses we incur on behalf of the
partnership. The partnership may admit additional partners only if, in the case
of an additional limited partner, we have 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 we
contribute 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.

Distributions of available cash of Tality, LP to its partners can be made
upon 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 losses are first allocated to each partner to reverse any
previous profits allocated to the partner, then ratably to each partner

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based on its units until that partner's capital account reaches a zero balance,
and thereafter to each partner in a manner so as to reflect the partner's
economic risk of loss in the partnership. Partnership profits are allocated to
each partner first to reverse any previous losses, then ratably according to the
partner's units.

The partnership will be dissolved on December 31, 2099 or earlier upon the
written consent of Tality Corporation and a wholly-owned subsidiary of 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 benefit
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. The 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 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 quarterly for these services at prices based upon
Cadence's 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 vary. We can terminate the master
corporate services agreement or specific services with six months notice.

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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 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 the
property.

MASTER CONFIDENTIALITY AGREEMENT

Under the master confidentiality agreement, each party will agree not to
disclose confidential information of the other party except in specific
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 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 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 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. For a discussion of litigation matters,
see "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.

INSURANCE MATTERS. The agreement also contains provisions which obligate
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
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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 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 its 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 and
incentive arrangements for joint sales activities. Cadence also will support our
sales activities globally and act as a source of referral of new opportunities
for us to sell our design services and electronic design intellectual property.
This agreement will provide for allocation of responsibility for post-sales
support and client service.

EDA TOOLS AGREEMENT

Following the separation, we will license the Cadence 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
gives us rights to upgrade or use new EDA tools. While we anticipate we will use
Cadence's EDA tools primarily, we are not obligated by this or any other
agreement to use them exclusively.

JOINT TECHNOLOGY DEVELOPMENT AND SUPPORT AGREEMENT

Consistent with our master IP agreement and joint sales agreement, the
joint technology development and support agreement will provide for us to supply
our expertise, technology and resources to Cadence for its development of
methodology services as well as for calibration, validation, enhancement and
development of its EDA tools. We will agree with Cadence to jointly design and
manage projects to develop new methodology intellectual property. This agreement
will require for Cadence to commit to certain minimum annual funding amounts.
Cadence will own the methodology IP developed through joint projects but can use
that intellectual property to sell design services only with our consent.
Cadence will license this methodology IP to us for internal use and derivative
use.

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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
%, or about % 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 July 17, 2000, and as adjusted to
reflect the sale of 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, 2655 Seely Avenue, Building 9,
San Jose, California 95134.

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING
BENEFICIALLY SHARES BENEFICIALLY PERCENTAGE OF
OWNED(1) OWNED(1) TOTAL VOTING 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)..... 98.1% 98.1% %
Robert P. Wiederhold(3)............. -- -- -- -- -- --
H. Raymond Bingham(4)............... 300,000 300,000 * * * *
Ronald R. Barris(5)................. 100,000 100,000 * * * *
All directors and executive officers
as a group (4 persons)(6)......... 400,000 400,000 * * * *
</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 July 17, 2000, an aggregate of shares of common
stock were outstanding.

(2) Represents one share of Class B common stock and limited
partnership units of Tality, LP, each of which may be converted or exchanged
for one share of Class A common stock at any time at the holder's election.

(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 of the date of
this prospectus.

(4) Represents 300,000 shares of Class A common stock subject to a one year
right of repurchase by Cadence.

(5) Represents 100,000 shares of Class A common stock subject to a one year
right of repurchase by Cadence.

(6) Does not include 4,335,000 shares of Class A common stock issuable upon
exercise of stock options that have been granted to all directors and
executive officers, consisting of four 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 approximately shares
of Class A common stock issued and outstanding, 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 of Cadence's equity
interests in Tality Corporation and Tality, LP to Cadence stockholders.

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:

- 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 such
holder, plus

- the aggregate number of limited partnership units owned by such
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 the 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. 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, at the option of the holder, one
share of Class A common stock. Any shares of Class B common stock transferred to
a person other than the original holder thereof and, in certain cases, their
affiliates, 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.

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 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, are 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.

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, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series of preferred stock. However, no
shares of non-voting preferred stock may be issued without the prior approval of
the 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.

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<PAGE> 74

OPTIONS

As of July 17, 2000, options to purchase a total of 12,225,682 shares of
Class A common stock were outstanding, all of which are subject to lock-up
agreements entered into with the underwriters. An aggregate of 2,774,318 shares
of Class A common stock are currently available for the granting of additional
options under the 2000 Equity Incentive Plan and our 2000 Broad Based Equity
Incentive Plan. See "Management -- 2000 Equity Incentive Plan",
"Management -- 2000 Broad Based Equity Incentive Plan" and "Shares Eligible for
Future Sale".

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

After the offering, Cadence will hold approximately % 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.

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.

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<PAGE> 75

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 80% of
the issued and outstanding common stock, voting as one class, to amend or repeal
any provision of our bylaws or the provisions 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 certain
investors would be willing to pay for shares of the Class A common stock and
could delay, prevent or allow Tality's board of directors to resist an
acquisition of Tality, even if the proposed transaction was favored by a
majority of Tality'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
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 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 ours).

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

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<PAGE> 76

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 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
than those made available by Cadence to unaffiliated third parties.

The limited partnership agreement extends similar protections against
liability to Cadence.

PARTNERSHIP UNITS.

Immediately following this offering, under the limited partnership
agreement more fully summarized in "Arrangements Between Tality and Cadence",
approximately % of the limited partnership units of Tality, LP will be owned
by Tality and % of the 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 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 the offering. These shares will only be issuable to Cadence or its
affiliates upon the acquisition by Tality of Cadence's share of Class B common
stock and its limited partnership units in connection with a tax-free
distribution of Cadence's ownership interest in Tality to Cadence's
stockholders. See "Description of Capital Stock and Partnership Units".

REGISTRATION RIGHTS. We have granted Cadence registration rights related to
our Class A common stock. We have granted Cadence three demand registrations
that permit it to require us to register some of its shares of Class A common
stock issuable upon conversion of its share of Class B common stock and exchange
of its limited partnership units for sale under the 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 holdings in our Class A 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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<PAGE> 77

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 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
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 -- 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 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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<PAGE> 78

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 its executives 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. 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,
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 12,225,682 shares of Class A
common stock under our 2000 Equity Incentive Plan and our 2000 Broad Based
Equity Incentive Plan. Concurrently with the sale of the shares offered hereby,
we will grant options to purchase an additional shares of Class A
common stock pursuant to the two plans. An additional 2,774,318 shares currently
are reserved for issuance under the 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 and 2000 Broad Based Equity Incentive 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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<PAGE> 79

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. Goldman, Sachs & Co., Lehman
Brothers Inc., UBS Warburg LLC and SG Cowen Securities Corporation are the
representatives of the underwriters.

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

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<PAGE> 80

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".

At the request of Tality Corporation, the underwriters are reserving up to
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. "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 representatives 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.

Tality estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $2,775,000.

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

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<PAGE> 81

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, Los Angeles,
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.

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<PAGE> 82

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-7
Consolidated Balance Sheets................................. F-8
Consolidated Statements of Operations....................... F-9
Consolidated Statements of Partner's Net Investment......... F-10
Consolidated Statements of Cash Flows....................... F-11
Notes to Consolidated Financial Statements.................. F-12
Pro Forma Condensed Combined Statements of Operations....... F-29

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY
Unaudited Interim Financial Statements:
Condensed Consolidated Balance Sheets..................... F-32
Condensed Consolidated Income Statements.................. F-33
Condensed Consolidated Statements of Cash Flows........... F-34
Notes to Condensed Consolidated Financial Statements...... F-35
Annual Financial Statements:
Independent Auditors' Report.............................. F-37
Consolidated Balance Sheets............................... F-38
Consolidated Statements of Operations..................... F-39
Consolidated Statements of Members' Equity................ F-40
Consolidated Statements of Cash Flows..................... F-41
Notes to Consolidated Financial Statements................ F-42
</TABLE>

F-1
<PAGE> 83

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> 84

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> 85

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 to Cadence for $6.25 per share....... 2 -- (13,438) 13,436 --
--- --- -------- ------- ---
Balances, July 17, 2000...................... $ 2 $-- $(13,438) $13,436 $--
=== === ======== ======= ===
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 86

TALITY CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO BALANCE SHEET
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").

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 based on Cadence's actual costs.

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.

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 a number
of votes per share equal to the total number

F-5
<PAGE> 87
TALITY CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO BALANCE SHEET (CONTINUED)
JULY 17, 2000

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 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.

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 Cadence executives 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.

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 5,705,000 and 6,520,682 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.

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 represented as a
reduction of equity and will be amortized over the vesting periods of the
applicable options.

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-6
<PAGE> 88

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-7
<PAGE> 89

TALITY, LP
A LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
PRO FORMA
JANUARY 2, JANUARY 1, APRIL 1, APRIL 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 $3,341................... $20,428 $ 29,340 $ 29,115 $ --
Unbilled receivables................... 21,732 26,372 31,306 --
Prepaid expenses and other............. 2,709 3,800 6,218 --
------- -------- -------- -------
Total current assets................ 44,869 59,512 66,639 --
------- -------- -------- -------
Property, plant and equipment, net....... 17,507 20,335 23,168 23,168
------- -------- -------- -------
Goodwill and other intangibles, net of
accumulated amortization of $3,149,
$8,218 and $11,191..................... 18,167 53,541 54,670 54,670
Purchased software and other, net of
accumulated amortization of $1,599,
$4,194 and $5,065...................... 10,325 9,143 9,434 9,434
------- -------- -------- -------
Total assets........................ $90,868 $142,531 $153,911 $87,272
======= ======== ======== =======
LIABILITIES AND PARTNER'S NET INVESTMENT
Current liabilities:
Current portion of capital lease
obligations......................... $ 534 $ 2,056 $ 2,417 $ 2,417
Accounts payable....................... 3,523 5,062 6,445 --
Payroll and payroll related accruals... 13,568 15,433 12,974 --
Other accrued liabilities.............. 6,426 7,461 4,795 --
Deferred revenue....................... 4,683 5,656 5,047 5,047
------- -------- -------- -------
Total current liabilities........... 28,734 35,668 31,678 7,464
------- -------- -------- -------
Long-term liabilities:
Capital lease obligations, net of
current portion..................... 730 1,851 1,617 1,617
Deferred taxes......................... 3,226 2,467 2,294 2,294
------- -------- -------- -------
Total long-term liabilities......... 3,956 4,318 3,911 3,911
------- -------- -------- -------
Commitments and contingencies (notes 4
and 5)
Partner's net investment:
Cadence investment..................... 58,022 102,641 118,694 76,269
Accumulated other comprehensive income
(loss).............................. 156 (96) (372) (372)
------- -------- -------- -------
Total partner's net investment...... 58,178 102,545 118,322 75,897
------- -------- -------- -------
Total liabilities and partner's net
investment........................ $90,868 $142,531 $153,911 $87,272
======= ======== ======== =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 90

TALITY, LP
A LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 91

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......................................... (12,957) -- (12,957)
Accumulated translation adjustments.............. -- (276) (276)
Net transfers from Cadence......................... 29,010 -- 29,010
--------- ----- ---------
Balances, April 1, 2000............................ $ 118,694 $(372) $ 118,322
========= ===== =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 92

TALITY, LP
A LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
------------------------------------ -------------------
JANUARY 3, JANUARY 2, JANUARY 1, APRIL 3, APRIL 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) (19,506) (12,957)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization.............. 6,077 15,296 19,868 4,809 6,291
Write-off of acquired in-process research
and development.......................... 1,711 28,500 -- -- --
Provision for losses on trade accounts
receivables.............................. 200 4,152 2,710 740 145
Non-cash restructuring charges............. -- 4,502 -- -- --
Deferred income taxes...................... -- (569) (759) (143) (173)
Changes in operating assets and
liabilities, net of effect of acquired
companies:
Receivables.............................. (15,111) (2,931) (13,535) (4,336) (4,535)
Prepaid expenses and other............... (363) (1,212) (829) (1,110) (2,417)
Accounts payable and accrued
liabilities........................... 2,585 (158) (1,545) (6,664) (3,743)
Deferred revenue......................... (1,467) 968 973 3,747 (609)
-------- --------- -------- -------- --------
Net cash used in operating
activities.......................... (67,602) (102,712) (55,370) (22,463) (17,998)
-------- --------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment..... (8,838) (13,574) (10,299) (4,023) (4,702)
Increase in acquired intangibles, purchased
software and other assets.................. (478) (11,318) (1,771) (1,613) (1,027)
Cash effect of business acquisitions.......... (2,370) (43,717) (38,800) -- (4,794)
-------- --------- -------- -------- --------
Net cash used in investing
activities.......................... (11,686) (68,609) (50,870) (5,636) (10,523)
-------- --------- -------- -------- --------
Cash flows from financing activities:
Net transfers from Cadence.................... 79,409 171,699 106,872 28,257 29,010
Principal payments on capital leases.......... (121) (378) (631) (158) (489)
-------- --------- -------- -------- --------
Net cash provided by financing
activities.......................... 79,288 171,321 106,241 28,099 28,521
-------- --------- -------- -------- --------
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 $ 7 $ 616
======== ========= ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 93

TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

1. BACKGROUND AND BASIS OF PRESENTATION

Tality, LP (a Delaware limited partnership) was formed on July , 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 will be 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 which 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 an approximate 1% general partnership interest and a
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.

The consolidated financial statements include allocations of certain
Cadence expenses, including centralized legal, accounting, finance, facilities,
information technology, sales, human resources and other Cadence corporate
services and infrastructure costs. Management believes that the expenses
allocated to Tality, LP are representative of the operating expenses it 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.

F-12
<PAGE> 94
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

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 April 1, 2000, and for the three months
ended April 3, 1999 and April 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 three months ended April 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 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

F-13
<PAGE> 95
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

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 April 3, 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 provided to the client in accordance with contractual
billing schedules. For fixed price contracts, revenue is recognized using
contract accounting, which is generally 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 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 April 1, 2000 gives pro forma
effect to retention by Cadence of all of Tality, LP's working capital, except
the current portion of capital lease obligations and deferred revenue, as though
such retention had occurred as of April 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.

F-14
<PAGE> 96
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

CASH AND CASH EQUIVALENTS

Tality, LP currently has no cash or cash equivalents. To date, Tality, LP
has been funded entirely by Cadence. 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.

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.

ACQUIRED INTANGIBLES

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. Such
intangibles are amortized on a straight-line basis over the remaining estimated
economic life of the underlying products and technologies (original lives
assigned are three 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 acquired intangibles in the near term.

F-15
<PAGE> 97
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

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."

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
F-16
<PAGE> 98
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

guidance regarding the application of APB Opinion No. 25 to stock compensation
involving employees. This interpretation is effective July 1, 2000 and is not
expected to have a material effect on Tality, LP's consolidated financial
statements.

3. ACQUISITIONS

WESTPORT TECHNOLOGY, INC.

In March 2000, Cadence acquired all of the outstanding stock of Westport
Technology, Inc. ("Westport") and assumed all outstanding stock options. Assumed
stock options were exchanged for stock options in Cadence. 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 net intangibles 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. Intangibles arising from the
Westport 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 net intangibles.................................... $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") and assumed all outstanding stock options.
Assumed stock options 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 in cash, and the acquisition was
accounted for as a purchase. In connection with the acquisition, Cadence
acquired net intangibles of $40.9 million. Approximately $1.1 million of the
property, plant and equipment obtained in the purchase was retained by Cadence.
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. Intangibles arising from the
Diablo acquisition are amortized on a straight-line basis over five years.

F-17
<PAGE> 99
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

In connection with the acquisition, net assets acquired were as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Acquired net intangibles.................................... $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"). 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 net intangibles 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. Intangibles arising from the Detente 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 net intangibles.................................... $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 excess of
the purchase price over net assets acquired was $45.9 million, of which

F-18
<PAGE> 100
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

$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. 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. 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 $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 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.

F-19
<PAGE> 101
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

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 include disputes
and lawsuits related to intellectual property, licensing, contract law,
distribution arrangements, and employee relations matters.

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 12% of their
compensation, as defined, to the purchase of

F-20
<PAGE> 102
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

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.

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>

F-21
<PAGE> 103
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

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 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.

F-22
<PAGE> 104
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

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 7,000,000 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 5,705,000 and 6,520,682 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.

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.

F-23
<PAGE> 105
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

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 in foreign subsidiaries of $3.2 million and
$2.5 million as of January 2, 1999 and January 1, 2000, respectively.

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

F-24
<PAGE> 106
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

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.

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. Severance costs included severance benefits, notice pay, and
outplacement services. 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 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 system design services or
integrated circuit design services. Due to the identical nature of the services'
design and delivery processes, similarities in their

F-25
<PAGE> 107
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

margins, and the similar class of customers that these design services are
provided. Tality, LP classifies its business under one reportable operating
segment, electronic 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.

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 three months ended April 3, 1999 and April 1, 2000.

<TABLE>
<CAPTION>
REVENUES
--------------------------------------------------------------
THREE MONTHS
YEARS ENDED ENDED
-------------------------------------- --------------------
JANUARY 3, JANUARY 2, JANUARY 1, APRIL 3, APRIL 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 $11,559 $24,770
Canada..................... 3,072 5,045 3,259 669 1,162
------- -------- -------- ------- -------
Total North America..... 64,575 54,456 62,024 12,228 25,932
------- -------- -------- ------- -------
Europe:
United Kingdom............. 10,093 34,201 46,916 11,463 11,624
Other...................... 4,944 397 2,691 430 547
------- -------- -------- ------- -------
Total Europe............... 15,037 34,598 49,607 11,893 12,171
------- -------- -------- ------- -------
Japan and Asia............... 11,078 16,208 17,242 2,704 4,924
------- -------- -------- ------- -------
Total........................ $90,690 $105,262 $128,873 $26,825 $43,027
======= ======== ======== ======= =======
</TABLE>

F-26
<PAGE> 108
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

<TABLE>
<CAPTION>
LONG-LIVED ASSETS
--------------------------------------------------------------
THREE MONTHS
YEARS ENDED ENDED
-------------------------------------- --------------------
JANUARY 3, JANUARY 2, JANUARY 1, APRIL 3, APRIL 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 $11,981 $15,100
Canada..................... 1,435 1,512 1,733 1,387 1,545
------- ------- ------- ------- -------
Total North America..... 11,396 14,508 13,507 13,368 16,645
------- ------- ------- ------- -------
Europe:
United Kingdom............. 58 2,943 6,790 4,984 6,488
Other...................... 176 16 17 14 17
------- ------- ------- ------- -------
Total Europe............... 234 2,959 6,807 4,998 6,505
------- ------- ------- ------- -------
Japan and Asia............... 220 40 21 47 18
------- ------- ------- ------- -------
Total........................ $11,850 $17,507 $20,335 $18,413 $23,168
======= ======= ======= ======= =======
</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 and facilities, treasury, legal and
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>
THREE MONTHS
YEAR ENDED ENDED
-------------------------------------- --------------------
JANUARY 3, JANUARY 2, JANUARY 1, APRIL 3, APRIL 1,
1998 1999 2000 1999 2000
---------- ---------- ---------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cost of services.............. $ 8,818 $14,009 $11,520 $3,143 $ 4,078
Sales and marketing........... 25,215 32,417 6,280 1,301 1,592
Research and development...... 265 665 922 265 360
General and administrative.... 19,289 18,088 14,571 3,625 4,031
------- ------- ------- ------ -------
$53,587 $65,179 $33,293 $8,334 $10,061
======= ======= ======= ====== =======
</TABLE>

Included in costs of services are charges totaling $4.2 million, $5.3
million, $4.5 million, $1.1 million and $1.3 million for fiscal 1997, 1998, 1999
and the three months ended April 3, 1999

F-27
<PAGE> 109
TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 1, 2000 (NOTES RELATED TO THE
PERIOD ENDED APRIL 1, 2000 ARE UNAUDITED)

and April 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. Significant expected provisions of the agreements are:

Cadence will provide Tality, LP with specified corporate services. The
services include data processing and telecommunications, information technology
support, as well as accounting, financial management, tax, payroll, legal,
procurement and other administrative functions. Such services will be billed
quarterly based on Cadence's actual costs.

F-28
<PAGE> 110

TALITY, LP
A LIMITED PARTNERSHIP

PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

The following unaudited pro forma condensed combined statements of
operations assume a business combination between Tality, LP and Diablo Research
Company LLC ("Diablo") accounted for as a purchase. The pro forma condensed
combined financial statements are 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 nine
months ended October 2, 1999 and the year ended January 2, 1999 with Diablo's
historical statements of operations for the nine months ended September 30, 1999
and year ended December 31, 1998, respectively, as if the transactions were
consummated at the beginning of the periods presented. 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-29
<PAGE> 111

TALITY, LP
A LIMITED PARTNERSHIP

PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
DIABLO TALITY DIABLO
RESEARCH NINE RESEARCH
TALITY YEAR PRO FORMA MONTHS NINE MONTHS PRO FORMA
YEAR ENDED ENDED COMBINED ENDED ENDED COMBINED
JANUARY 2, DECEMBER 31, PRO FORMA JANUARY 2, OCTOBER 2, SEPTEMBER 30, PRO FORMA OCTOBER 2,
1999 1998 ADJUSTMENT 1999 1999 1999 ADJUSTMENT 1999
---------- ------------ ----------- ---------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $ 105,262 $20,586 $ 125,848 $ 91,314 $13,061 $104,375
--------- ------- --------- -------- ------- --------
Costs and expenses:
Cost of revenue.... 129,257 18,225 147,482 83,572 12,474 96,046
Sales and
marketing........ 35,862 -- 35,862 24,175 -- 24,175
Research and
development...... 7,176 473 7,649 7,358 -- 7,358
General and
administrative... 33,208 6,311 39,519 20,601 4,490 25,091
Amortization of
acquired
intangibles...... 3,277 -- $ 8,180(a) 11,457 3,405 -- $ 6,135(a) 9,540
Unusual items...... 46,317 1,664 47,981 -- -- --
--------- ------- --------- -------- ------- --------
Total operating
expenses........... 255,097 26,673 289,950 139,111 16,964 162,210
--------- ------- --------- -------- ------- --------
Loss from
operations......... (149,835) (6,087) (164,102) (47,797) (3,903) (57,835)
Other income
(expenses),
net.............. 215 46 261 (59) (33) (92)
--------- ------- --------- -------- ------- --------
Loss before provision
for income taxes... (149,620) (6,041) (163,841) (47,856) (3,936) (57,927)
Provision for
income taxes..... 1,640 -- 1,640 1,764 -- 1,764
--------- ------- --------- -------- ------- --------
Net loss............. $(151,260) $(6,041) $(165,481) $(49,620) $(3,936) $(59,691)
========= ======= ========= ======== ======= ========
</TABLE>

EXPLANATION OF PRO FORMA ADJUSTMENT

(a) The amortization of acquired intangibles represents amortization of net
intangibles related to the Diablo acquisition for the year ended December
31, 1998 and the nine months ended September 30, 1999.

The accompanying notes are an integral part of the pro forma condensed combined
statements.
F-30
<PAGE> 112

TALITY, LP
A LIMITED PARTNERSHIP

NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS

NOTE 1. BASIS OF PRESENTATION

The unaudited pro forma condensed combined statements of operations
included herein have 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 net intangibles of $40.9 million. Approximately $1.1 million of
the property, plant and equipment obtained in the purchase was retained by
Cadence. Intangibles arising from the Diablo acquisition are 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>
Acquired net intangibles.................................... $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-31
<PAGE> 113

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-32
<PAGE> 114

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-33
<PAGE> 115

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-34
<PAGE> 116

DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION -- The condensed consolidated financial
statements include the Company and Diablo Lighting, Inc., a 79% owned
subsidiary. All significant intercompany accounts and transaction 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.

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
F-35
<PAGE> 117
DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999

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-36
<PAGE> 118

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
January 15, 1999
(August 3, 1999 as to Note 11)

F-37
<PAGE> 119

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-38
<PAGE> 120

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-39
<PAGE> 121

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-40
<PAGE> 122

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-41
<PAGE> 123

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.

PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the Company and Diablo Lighting, Inc., a 79% owned subsidiary. All
significant intercompany accounts and transactions are eliminated in
consolidation.

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-42
<PAGE> 124
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-43
<PAGE> 125
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 exchange 1,198,339 shares of Whisper
common stock valued at $3.00 per share as payment for $3,595 of accounts
receivable due from Whisper. In October 1998, as part of the final settlement
relating to the existing development agreement between the Company and Whisper,
the Company agreed to a reduction in the total number of shares to be issued by
Whisper from 1,198,339 to 652,456; accordingly, the Company returned the right
to 345,883 of these shares, valued at $3.00 per share, as payment for credits
and deposit amounts due to Whisper (i.e., reduction of liabilities) and returned
the right to 200,000 of these shares, for which an amount of $600 was recorded
as a reduction in contract revenues from Whisper.

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>

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.

F-44
<PAGE> 126
DIABLO RESEARCH COMPANY LLC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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-45
<PAGE> 127
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-46
<PAGE> 128
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-47
<PAGE> 129
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-48
<PAGE> 130
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 has not recorded any
amounts related to these grants in 1998 as the exercise price is significantly
above the fair value of Whisper common stock of $0.45 (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-49
<PAGE> 131
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-50
<PAGE> 132

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

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............................. 8
Cautionary Note Regarding Forward Looking
Statements............................. 21
Our Separation from Cadence.............. 22
Use of Proceeds.......................... 24
Dividend and Distribution Policy......... 24
Capitalization........................... 25
Dilution................................. 26
Selected Financial Data.................. 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 29
Business................................. 40
Management............................... 52
Arrangements between Tality and
Cadence................................ 60
Principal Stockholders................... 68
Description of Capital Stock and
Partnership Units...................... 69
Shares Eligible for Future Sale.......... 74
Underwriting............................. 76
Validity of Class A Common Stock......... 78
Experts.................................. 78
Additional Information................... 78
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.
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
Shares

TALITY CORPORATION

Class A
Common Stock

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

[TALITY Logo]

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

GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
UBS WARBURG LLC
SG COWEN
Representatives of the Underwriters
----------------------------------------------------------
----------------------------------------------------------
<PAGE> 133

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......... $ 46,451
NASD fee.................................................... 18,095
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving costs................................ 230,000
Legal fees and expenses..................................... 1,700,000
Accounting fees and expenses................................ 650,000
Blue Sky qualification fees and expenses.................... 25,000
Transfer agent and registrar fees and expenses.............. 5,000
Miscellaneous............................................... 5,454
----------
Total....................................................... $2,775,000
==========
</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.

II-1
<PAGE> 134

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.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In connection with its incorporation and organization, on July 13, 2000,
Tality Corporation issued shares of Class A common stock and one share of Class
B common stock to Cadence for an aggregate of $ and assets of Tality
Corporation's operations. 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 2000, Tality Corporation granted options to Cadence to purchase
up to shares of Tality Corporation's Class A common stock under Tality
Corporation's stock option plan at a weighted average exercise 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 a
transaction not involving a public offering and issuances to Cadence employees
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

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2+ Amended and 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 Limited Partnership Agreement between the Registrant
and Cadence Design Systems, Inc. ("Cadence").
10.2 Master Separation Agreement dated as of July 14, 2000,
between the Registrant, Cadence and Cadence Holdings, Inc.
10.3+ Tality Corporation 2000 Equity Incentive Plan.
10.4+ Tality Corporation 2000 Broad Based Equity Incentive Plan.
10.5+ Form of Indemnification Agreement between the Registrant and
its director and executive officers.
10.6 Employment Agreement between the Registrant and Robert P.
Wiederhold dated as of July 14, 2000.
10.7+ Form of Assignment and Assumption Agreement between the
Registrant and Cadence.
10.8+ Form of Master Intellectual Property Ownership and License
Agreement between the Registrant and Cadence.
10.9+ Form of Employee Matters Agreement between the Registrant
and Cadence.
10.10+ Form of Master Corporate Services Agreement between the
Registrant and Cadence.
10.11+ Form of Real Estate Matters Agreement between the Registrant
and Cadence.
10.12+ Form of Master Confidential Disclosure Agreement between the
Registrant and Cadence.
10.13+ Form of Indemnification and Insurance Matters Agreement
between the Registrant and Cadence.
10.14+ Form of EDA Tools Agreement between the Registrant and
Cadence.
10.15+ Form of Joint Technology Development and Support Agreement
between the Registrant and Cadence.
</TABLE>

II-2
<PAGE> 135

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.16+ Form of Joint Sales Agreement between the Registrant and
Cadence.
10.17+ Form of Asset Purchase Agreement between Cadence, Cadence
Technology Limited 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>

---------------
+ To be filed by amendment.

** 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 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.

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<PAGE> 136

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this 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 17th day of July, 2000.

TALITY CORPORATION

By: /s/ ROBERT P. WIEDERHOLD
--------------------------------------
Robert P. Wiederhold
President and Chief Executive Officer

KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints 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
hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-1 has been signed below by the following
persons in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ ROBERT P. WIEDERHOLD President and Chief Executive July 17, 2000
----------------------------------------------------- Officer; Director (Principal
Robert P. Wiederhold Executive Officer)

/s/ DUANE W. BELL Senior Vice President, Chief July 17, 2000
----------------------------------------------------- Financial Officer and Secretary
Duane W. Bell (Principal Financial Officer and
Principal Accounting Officer)

/s/ H. RAYMOND BINGHAM Director July 17, 2000
-----------------------------------------------------
H. Raymond Bingham

/s/ RONALD R. BARRIS Director July 17, 2000
-----------------------------------------------------
Ronald R. Barris
</TABLE>

II-4
<PAGE> 137

SCHEDULE II

TALITY, LP
A LIMITED PARTNERSHIP
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) PERIOD
----------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Provisions for losses on trade
accounts receivable:
Year ended January 1, 2000........ $6,667 $2,710 $(6,180) $3,197
Year ended January 2, 1999........ 4,125 4,152 (1,610) 6,667
Year ended January 3, 1998........ 4,500 200 (575) 4,125
</TABLE>

---------------
(1) Uncollectible accounts written-off, net of recoveries

S-1
<PAGE> 138

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Tality, LP:

We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Tality, LP included
in this registration statement and have issued our report thereon dated October
, 2000. Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the index above is the
responsibility of the company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

San Jose, California
October , 2000

S-2
<PAGE> 139

EXHIBIT INDEX

---------------
+ To be filed by amendment.

** 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.

S-3