CADENCE DESIGN SYSTEMS INC, 10-K, 1997-03-21

CADENCE DESIGN SYSTEMS INC
10-K, 1997-03-21
PREPACKAGED SOFTWARE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 28, 1996

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________

COMMISSION FILE NUMBER 1-10606

CADENCE DESIGN SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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DELAWARE 77-0148231
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or No.)
organization)
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555 RIVER OAKS PARKWAY, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices, including Zip Code)

(408) 943-1234
(Registrant's telephone number, including area code)

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

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COMMON STOCK $.01 PAR VALUE
PER SHARE NEW YORK STOCK EXCHANGE
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Name of each exchange on which
Title of each class registered
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Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

/X/ Yes / / No

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

Aggregate market value of the voting stock held on March 3, 1997 by
non-affiliates
of the registrant: $2,837,562,594

Number of shares of common stock outstanding at March 3, 1997: 88,596,639

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the Annual Meeting to be held on May 1, 1997
are incorporated by reference into Part III hereof.

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CADENCE DESIGN SYSTEMS, INC.

1996 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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PART I.

Item 1. Business..................................................................................... 3

Item 2. Properties................................................................................... 10

Item 3. Legal Proceedings............................................................................ 10

Item 4. Submission of Matters to a Vote of Security Holders.......................................... 11

PART II.

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................... 12

Item 6. Selected Financial Data...................................................................... 12

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 12

Item 8. Financial Statements and Supplementary Data.................................................. 21

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................................... 21

PART III.

Item 10. Directors and Executive Officers of the Registrant........................................... 22

Item 11. Executive Compensation....................................................................... 23

Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 23

Item 13. Certain Relationships and Related Transactions............................................... 23

PART IV.

Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................ 24

Signatures ............................................................................................. 55
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PART I

ITEM 1. BUSINESS

Cadence Design Systems, Inc. (Cadence or the Company) develops, markets and
supports electronic design automation (EDA) software tools that automate,
enhance and accelerate the design and verification of integrated circuits (ICs)
and electronic systems. The Company combines its technology with services to
help optimize its customers' product development processes. The Company's
products and services are used by companies throughout the world to design and
develop electronic circuits and systems, including semiconductors, computer
systems and peripherals, telecommunications and networking equipment, mobile and
wireless devices, automotive electronics, consumer products and other advanced
electronics.

Cadence was formed as a result of the merger of SDA Systems, Inc. (SDA) into
ECAD, Inc. (ECAD) in May 1988. In addition to certain smaller acquisitions from
1989 through 1994, in December 1991, Cadence merged with Valid Logic Systems
Incorporated (Valid), a company that developed and supported EDA software used
to design electronic systems, printed circuit boards (PCBs) and applications for
electronic product designs involving advanced packaging technology such as
hybrids and multi-chip modules (MCMs). In February 1989, Valid had acquired
Integrated Measurement Systems, Inc. (IMS), a company that manufactures and
markets verification systems used in testing prototype application specific
integrated circuits (ASICs). During 1995, Cadence and IMS sold to the public
approximately 3.0 million shares of common stock, of which approximately 2.6
million shares were sold by the Company as the sole selling stockholder of IMS.
In February 1997, Cadence and IMS sold 1.65 million shares of common stock to
the public, of which .95 million were owned by the Company. As a result, the
Company received approximately $18.6 million of proceeds and reduced its
ownership in IMS to approximately 37%. As Cadence was the majority stockholder
with an ownership percentage of approximately 55% as of December 28, 1996, the
consolidated financial statements of the Company for all periods presented
include the accounts of IMS after elimination of inter-company accounts and
transactions and minority interest adjustments. In October 1996, the Company
entered into a merger agreement with Cooper and Chyan Technology, Inc. (CCT), a
company that develops, markets and supports software tools that help designers
route the wires that interconnect the electronic devices on high performance
PCBs and ICs. The acquisition is expected to be accounted for as a
pooling-of-interests. The merger has been approved by CCT's shareholders and is
currently awaiting regulatory approval. On January 3, 1997, each of Cadence and
CCT received a request for additional information from the United States Federal
Trade Commission with respect to their proposed transaction. There can be no
assurance that regulatory approval will be obtained and that the merger will be
consummated. In November 1996, the Company consummated a secondary public
offering whereby 5.75 million shares of common stock were sold, generating
$202.1 million of net proceeds. In December 1996, the Company completed the
acquisition of High Level Design Systems, Inc., (HLDS), a company which
developed, marketed and supported EDA software for the design of high-density,
high performance ICs. As part of its overall investment strategy, the Company
has committed to participate in a venture capital partnership, Telos Venture
Partners (the Partnership), as a limited partner. The Partnership's purpose is
to make venture capital investments in start-up and growth oriented businesses,
with some emphasis on businesses in the semiconductor and software industries.
The Company's total investment of $25 million will be completed over the next
two to three years.

THE INTEGRATED CIRCUIT AND ELECTRONIC SYSTEM DESIGN PROCESS

The electrical design process involves describing the architectural,
behavioral, functional and structural attributes of an IC or electronic system.
This process involves describing the product overall system architecture and
then implementing it by creating a design description, simulating the design to
identify electrical defects and refining the description to meet predetermined
design specifications.

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ARCHITECTURAL DEFINITION

Cadence's Alta Business Unit offers a class of software for top-down design
known as electronic systems design automation (ESDA). The Company's ESDA
products are designed to allow customers to include product concepts in the EDA
environment, accelerating and enhancing the early phases of system development.
The Signal Processing Workbench (SPW-Registered Trademark-) tool set provides
customers with a higher level of design automation for a number of application
areas including wireless communications, networking and multi-media. The Signal
Processing Workbench includes a large applications library of design blocks, a
complete technology base and a visualization and analysis environment. Once the
design is conceptualized, the Signal Processing Workbench provides links to
implementation which include multiple capabilities that allow the design to be
passed downstream to ASIC and IC engineers.

ESDA is seen as a natural evolution of EDA that enables customers to include
product concept in the design environment. Alta's focus is on virtual product
design, a new approach that starts with the creation of a product prototype in
software, which is called virtual prototype. Virtual prototyping allows the
designer to focus on what is needed for the product to be successful as opposed
to how the design is implemented.

IMPLEMENTATION -- THE DESIGN DESCRIPTION

The first step in the implementation process is creation of the design
description. To handle the complexity of large designs, engineers use a variety
of techniques, including block diagrams, equations or special design description
languages referred to as hardware description languages (HDLs).

For digital designs, the most common HDLs are Verilog-Registered Trademark-
HDL, a language originally developed by Cadence that is now in the public domain
and an Institute of Electronic and Electrical Engineers (IEEE) standard, and
VHSIC HDL-TM- (VHDL), a language that is also an IEEE standard and backed by the
U.S. Department of Defense. Verilog and VHDL are both supported by Cadence as
well as many other EDA vendors. Similar standard HDLs are emerging for analog
design. Cadence introduced an analog extension to Verilog called Verilog-A-TM-
in 1994, and in June of 1996 it became an official Open Verilog International
(OVI) standard.

STRUCTURAL DESIGN & SIMULATION

Before an IC or PCB can be manufactured, high level design descriptions must
be detailed into a structural design, in which the engineer specifically defines
components, their interconnections and associated physical properties.
Structural designs may be created manually or generated using an automated
process called logic synthesis. In structural design, critical design time can
be saved by selecting components from an electronic library and including them
in the design, rather than recreating symbols and data for each design. A
database containing the design electrical characteristics, interconnections and
specific design rules is automatically created and used as the foundation for
subsequent design steps.

Electronics designers use simulation throughout the electrical design
process to identify design errors before the design is manufactured. In
addition, simulation enables electronics designers to quickly explore design
alternatives, and it can be performed at different levels of design abstraction
and with mixed levels of abstraction. This enables a designer to verify the
conceptual, structural and performance aspects of the design. A key element in
the simulation process is the use of component libraries containing software
models of commonly used parts.

PHYSICAL DESIGN AND VERIFICATION

When the design is determined to be functionally correct, the designer
generates a non-graphical description called a netlist that details the design
components and interconnections. This netlist becomes the blueprint for physical
design. Next, the physical design team determines the layout and associated

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interconnection of the components on the target substrate that will yield the
optimum combination of performance, area and cost. Once this process is
completed, physical verification tools are used to provide a final check of the
design implementation before products are released to manufacturing. Accuracy in
this process is essential to avoiding costly production runs of faulty parts.

EDA TOOLS

The Company's EDA tools are used by customers to analyze, simulate,
implement and verify electronic designs. In addition, the Company's tools let
design architects and engineers build abstract models of chips, simulate their
behavior, and analyze their physical attributes for acceptable performance. The
resulting productivity and accuracy improvements over earlier generation
approaches to IC design enable customers to develop increasingly complex,
high-quality electronic products with accelerated time to market schedules.

CAE PRODUCTS

Cadence is a leader in the computer aided engineering (CAE) market primarily
based on its strong market presence in logic simulation. Cadence's Verilog HDL
logic simulator, VerilogXL-TM-, is used by numerous ASIC vendors and supports
over 185 ASIC libraries.

Cadence also offers a broad suite of tools for logic synthesis. The
Synergy-TM- product line provides designers the ability to easily target their
design for implementation into an ASIC, field programmable gate array (FPGA) or
programmable logic device (PLD) design. Synergy enables designers to make
critical tradeoffs between area, power and performance to optimize their design
based on specific design requirements. With the advent of deep submicron
technology, successful completion of complex designs will require companies to
adopt new methodologies and utilize innovative design automation tools. Success
will be predicated on introducing physical design knowledge into the logic
design process to ensure that the resulting silicon will meet specifications.
The adoption of design planning tools will become increasingly important for
electronics designers because such tools provide the necessary bridge between
the logic and physical domains. An advanced high level design planning
environment allows engineers to accurately predict physical effects that are
used to provide guidelines for logic optimization and final implementation.

IC DESIGN PRODUCTS

The Company's custom layout portfolio is anchored by the
Virtuoso-Registered Trademark- product family. This suite consists of tools for
basic layout editing, design compaction, layout synthesis and device-level
editing. In 1995, the Company introduced Virtuoso FastChip-TM-, which provides
the ability to rapidly create cells and blocks for applications including random
logic, standard cell blocks and library elements, reducing overall design time.
In addition, FastChip allows chip designers to perform extensive "what-if"
analysis with design variables like placement and aspect ratios that have
significant bearing on performance.

The Ensemble-TM- product family provides advanced place and route (P&R)
solutions for gate, cell, block and mixed designs including: Gate Ensemble-TM-
for gate array design, Cell Ensemble-Registered Trademark- , which is finely
tuned for two layer metal designs and Cell3 Ensemble-Registered Trademark-,
which is based on advanced routing algorithms for three layer metal and above
designs. Silicon Ensemble-TM-, which is based on Cadence's proprietary area-
based architecture and was introduced in early 1996, provides a broad solution
for routing designs that consist of a mix of cell and gate-based approaches. In
addition, Silicon Ensemble includes several specialized routing engines to deal
with specific design challenges like datapath, complex clock trees, crosstalk
and power.

Cadence's product lines for automated and interactive physical verification
are anchored by the Dracula-Registered Trademark- and Diva-TM- products,
respectively. Physical verification provides the final check before products are
released to manufacturing. In 1995, Cadence introduced Vampire-TM-, which
provides advanced hierarchical design capability necessary to successfully
verify large scale chips.

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The Analog Artist-TM- series provides a broad set of simulation, layout and
verification tools for chip design. This product family features the Spectre-TM-
high-speed circuit simulation family of products. In 1994, Cadence introduced
SpectreHDL-TM-, the industry's first analog behavioral simulation system for
analog and mixed-signal applications. In 1995, the Company further expanded the
product offering with the introduction of SpectreRF-TM-, simulation technology
utilized specifically for the design of radio frequency applications.

Additionally, Cadence now offers IC design products previously marketed by
HLDS. These design planning products include Top-Down DP-TM-, which has been
released for limited customer use, for hardware description language designers
in the functional design phase; Logic DP-TM-, for application by gate level
designers in the logic implementation phase; and Physical DP-TM-, for
application by layout engineers in the physical implementation and verification
phase.

HLDS also offered an EDA infrastructure product now offered by Cadence on
which newly defined deep submicron (ICs with feature size below 0.35 micron)
design methodologies can be implemented. HLDS' infrastructure product, called
Pillar-TM-, provides computer aided design (CAD) developers who are responsible
for implementing deep submicron methodologies with a database, graphical user
interface, applications programming interfaces and a software development
environment.

HLDS also offered two other standalone EDA tools now offered by Cadence to
solve specific deep submicron design problems: HyperExtract-TM- and Fasnet-TM-
Delay Calculator. These tools complement the design planning products and may be
integrated with the Pillar infrastructure product.

SYSTEM DESIGN PRODUCTS

The Allegro-TM- product line offers broad solutions for layout of standard
PCB, hybrid (MCM) Allegro-TM- and advanced component packaging. In addition, the
Company offers thermal, signal integrity,
reliability and electromagnetic analysis tools for detecting potential
manufacturing problems. In 1995, the Company introduced BoardQuest-TM-, which is
specifically tailored for the needs of high-speed designers, offering advanced
system planning to accurately predict thermal, interconnect and electromagnetic
effects early in the design process. For analog system and board level design,
Cadence's Analog Workbench-TM- offers tools from top-down design through board
design.

SERVICES

Cadence offers services ranging from advanced tools training and methodology
assessment to joint design work with customers or even complete outsourcing of
its customer's design work where Cadence is responsible for the entire product
design from start to finish. In addition, the Company believes that customer
support is a key factor in successfully marketing EDA products and generating
repeat orders. The Company's product maintenance contracts entitle the customers
to product updates, documentation and ongoing support.

The Company is pursuing a strategy of combining a broad suite of design
tools with world-class support, design and process services to enable its
customers to accelerate their product development efforts, improve their design
productivity and successfully cope with the increasing complexity of IC and
electronic system design. The design process is becoming more complicated as
customers are seeking to create higher performance products, lower development
costs, improve time to market and migrate their design and manufacturing efforts
to utilize deep submicron technologies. As a consequence, the Company believes
that its solutions-oriented approach to providing both EDA tools and services
will enable customers to more effectively respond to demanding market
requirements.

Cadence offers a range of design development and support to its customers,
from remodeling the customer's design factory (i.e. re-engineering the product
design process) to leasing out Cadence's Design Factory(SM), which includes
everything from assistance with specific designs to a complete outsourcing of a

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particular design operation. The Company works with the customer's executive
management and engineering team to assess a customer's design goals and
objectives and translate those goals into design solutions.

Cadence's services offerings include product design, library design, design
process and software services. Cadence offers product design services to
facilitate complex IC design targeted to on-time completion with reliability.
The Company offers on-site design assistance and full service chip designs.
Library design services assist in the optimization of libraries for performance,
density, quality, reliability and testability and the targeting of existing
libraries to multiple foundry sources and product applications. Cadence also
offers design process services to assist its customers management and
engineering teams to optimize their internal design process by providing a
product development environment blueprint and implementation management.

In addition, Cadence offers application and education services that
facilitate the implementation and assimilation of Cadence tools and technology
aimed at maximizing customers productivity with Cadence's software applications.

MARKETING AND SALES

As of February 28, 1997, Cadence had 1,784 employees engaged in field sales
and sales support, representing approximately 56% of its total work force. In
North America, Cadence uses a direct sales force consisting of sales people and
applications engineers to license its products. Cadence's sales force presents
Cadence and its products for licensing to prospective customers, while
applications engineers provide technical pre-sales as well as post-sales
support. Due to the complexity of EDA products, the selling cycle is generally
long, with three to six months or longer being typical. Activities during this
sales cycle typically consist of technical presentations, product
demonstrations, and often, an on-site customer evaluation of Cadence software.

In Europe and Asia, Cadence markets and supports its products primarily
through 15 majority-owned subsidiaries. Cadence also serves its international
customers through distributors in various countries throughout Europe and
Asia/Pacific. Cadence licenses its IC products in Japan primarily though a
distributor, Innotech Corporation (Innotech). In 1996, 1995 and 1994, Innotech
accounted for 14%, 15% and 10% of total revenue, respectively. Cadence's systems
products and services are marketed in Japan through a majority-owned subsidiary.

Revenue from international sources was $350.2 million, $271.8 million and
$221.5 million, or approximately 47%, 50% and 52% of total revenue for 1996,
1995 and 1994, respectively. (See Notes to Consolidated Financial Statements for
a summary of operations by geographic area.) Prices for international customers
are quoted from a local currency international price list. The list is prepared
based on the U.S. dollar price list but reflects the higher cost of doing
business outside the United States. International customers are invoiced in the
local currency or U.S. dollars using current exchange rates.

The Company enters into foreign currency forward contracts to hedge the
impact of foreign currency fluctuations. Though the Company attempts to reduce
the impact of foreign currency fluctuations, significant exchange rate movements
may have a material adverse impact on the Company's results of operations.

Cadence is required to have United States Department of Commerce export
licenses for shipment of its products outside the United States. Although to
date Cadence has not encountered any material difficulty in obtaining these
licenses, any difficulty in obtaining necessary export licenses in the future
could have an adverse effect on revenue.

PRODUCT DEVELOPMENT AND ENGINEERING

For the years 1996, 1995 and 1994, respectively, Cadence's investment in
research and development was $128.9 million, $100.4 million and $88.2 million
prior to capitalizing $13.6 million, $11.8 million and

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$10.8 million of software development costs. See Notes to Consolidated Financial
Statements for a more complete description of Cadence's capitalization of
certain software development costs.

Cadence is currently developing technology that it will introduce to the EDA
market in 1997 and beyond. Among the primary areas that Cadence is addressing
are the design of silicon devices in the deep sub-micron range, high-speed board
design, architectural-level design, high-performance logic verification
technology and hardware/software co-design.

CUSTOMER ALLIANCES

Cadence has established close working relationships with a number of
semiconductor manufacturers and electronic system companies based on a business
alliances model. To ensure that research and development activities are properly
prioritized and also that finished products meet customers' needs, major new
product developments often times begin after collaboration with a Cadence
customer/partner.

These technology alliances allow Cadence to work with customers' designers
in defining and developing state-of-the-art solutions for current and emerging
design approaches. Through an engineer exchange program, customers will often
work on-site at Cadence facilities, giving Cadence valuable insight into
customer product planning. Product development partnerships are generally
directed at the development and refinement of specific tools.

UNIVERSITY PROGRAMS

Cadence supports EDA research by sharing its design automation technology
and expertise with universities. More than 500 universities worldwide
participate, including the University of California at Berkeley, Duke
University, the Massachusetts Institute of Technology and Stanford University.
Certain faculty members from the University of California at Berkeley,
considered to be a leading university for IC design software research, have
served as consultants to Cadence since its inception. These consultants have
helped Cadence to stay abreast of the latest developments and directions in the
rapidly changing IC design software industry.

NEXT-GENERATION TECHNOLOGICAL DEVELOPMENT

Cadence's advanced research and development group, Cadence Laboratories, is
committed to new technological development. This group, located in Berkeley,
California and in Rome, Italy, is chartered with identifying and developing
prototype technologies in emerging design areas which will offer substantially
improved alternatives to current EDA solutions.

COMPETITION

The Company operates in the highly competitive EDA industry, which continues
to be characterized by falling prices, rapid technological change, and new
market entrants. The Company's success is dependent upon its ability to develop
innovative, cost competitive EDA software products and services, and to bring
them to market in a timely manner. The Company competes with other companies,
including Avant! Corporation, Mentor Graphics Corp., Synopsys, Inc., Viewlogic
Systems, Inc. and Zuken-Redac, that sell one or more competing products and with
actual and potential customers' internal EDA software development and design
services groups as well. Some of the Company's competitors may have
substantially greater financial, marketing and technological resources than the
Company. There can be no assurance that the Company will be able to compete
successfully.

Because the EDA industry is labor intensive rather than capital intensive,
the number of the Company's actual and potential competitors is significant. A
potential competitor who possesses the necessary knowledge of electronic circuit
and systems design, production and operation could develop competitive EDA tools
using a moderately priced computer workstation and bring such tools to market

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quickly. There can be no assurance that development of competitive products will
not result in a shift of customer preferences away from the Company's products,
resulting in a significant decrease in the sales of the Company's comparable
products.

Intense competition in the EDA industry has lowered product prices. In the
past, discounts of up to 60% of the list prices of the EDA products have been
given. Although the Company is striving to reduce discounts, it recognizes that
it may be required to discount EDA product prices under similar circumstances in
the future.

Cadence cooperates with other design automation vendors to deliver
full-scope technology to its customers. Through Cadence's Connections Program,
customers can more easily integrate Cadence products and technologies with other
companies products and technologies. This provides customers with the
flexibility to mix and match third-party and proprietary tools to specifically
meet their design automation needs. Today over 100 companies have integrated
their tools with Cadence's software. In 1996 Cadence introduced platinum status
relationships with its Connections Program to jointly deliver, with its platinum
partners, integrated design flows. In addition, Cadence is a founding member of
the Virtual Socket Interface Alliance, an open membership organization that is
developing open specifications to facilitate the development of next generation
"system-on-a-chip" solutions.

The major advantages of Cadence products over its competitors products
include higher performance capabilities, enhanced features, and more efficient
design methodologies through integration of electrical and physical design
tools. Cadence's commitment to industry standard hardware platforms, operating
systems and networking protocols allows users to configure an open design
environment tailored to their specific needs. As design needs grow, a Cadence
design environment usually can be expanded to include additional Cadence tools
or third-party tools.

PROPRIETARY TECHNOLOGY

Cadence believes that its continued success lies, in part, in its employees
and the combined knowledge, ability and experience they collectively bring and
the abilities of its management team to focus that energy on achieving the
Company's goals and objectives.

Cadence relies principally on licensing, non-disclosure, proprietary rights,
and other forms of agreements to secure its rights to its proprietary
technology. Cadence's products are generally licensed to end-users on a "right
to use" basis pursuant, typically, to a non-transferable license grant which
restricts the use of its products to designated seats at designated sites for
the customer's internal design purposes only. Cadence's various agreements
prohibit a customer from disclosing the proprietary information contained in the
Company's products to any other third person or entity. Although Cadence has
taken various technical measures in the form of keys, time-driven locks, and
other software and hardware mechanisms to protect its technology, Cadence
recognizes that it may very well be technologically feasible for competitors of
Cadence to copy aspects of the Company's licensed products in violation of
agreements and Cadence's proprietary rights. In appropriate circumstances,
Cadence will seek civil and criminal penalties along with any available
equitable relief against those who would take or attempt to take or otherwise
misappropriate its proprietary technology and other confidential information.

Cadence also relies on a combination of patent, copyright, and trade secret
laws and other traditional intellectual property protection mechanisms. In 1996,
Cadence was granted 9 new patents for a total of 25 issuances and was allowed 8
additional patents. In 1996, Cadence filed in excess of 15 new trademark
applications. In addition, Cadence has also sought federal copyright protection
for certain of its products. Cadence does not believe that any of its technology
infringes that of others nor does Cadence believe that any of its trademarks
infringe the marks of others.

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MANUFACTURING

Cadence's software production operations consist of configuring the proper
version of a product, recording it on magnetic tape or CD-ROM, and producing
customer unique access keys which allow customers to use licensed products. User
manuals and other documentation are generally available on CD-ROM, but are
occasionally supplied in hard copy format. Shipments are generally made within
two weeks of receiving an order.

EMPLOYEES

As of February 28, 1997, Cadence employed 3,190 persons, including 1,942 in
sales, marketing, support and manufacturing activities, 1,000 in product
development and 248 in management, administration and finance. None of Cadence's
employees is represented by a labor union, and Cadence has experienced no work
stoppages. Cadence believes that its employee relations are good.

Competition in recruiting of personnel in the software industry is intense.
Cadence believes that its future success will depend in part on its continued
ability to recruit and retain highly skilled management, marketing and technical
personnel.

ITEM 2. PROPERTIES

The Company's headquarters are located in San Jose, California, and the
Company owns the related land and buildings. The total square footage of the
buildings comprising the Company's headquarters is approximately 510,000.

In addition to the Company's headquarters, the Company continues to lease
three buildings with approximately 209,000 square feet in San Jose, California
at an annual rate of approximately $5.6 million. The leases related to
approximately 129,000 square feet expire in March 1998, and the remaining lease
expires in June 1997. Approximately 198,000 of the square footage of these
facilities has been sublet and the balance remains available for sublet.

Cadence leases additional facilities for its sales offices in the United
States and various foreign countries, and research and development facilities in
San Diego, Santa Cruz and Berkeley, California, Lawrence, Kansas, United
Kingdom, France, Taiwan and India at an aggregate annual rental of approximately
$8.7 million. Cadence also leases approximately 100,000 square feet of
facilities in Chelmsford, Massachusetts for its east coast operations and
approximately 85,000 square feet in Sunnyvale, California for its Alta
operations at a combined annual rate of approximately $ 1.6 million.

Cadence also leases approximately 70,000 square feet in a building in
Beaverton, Oregon, at a current annual rental of approximately $.8 million,
which houses manufacturing, engineering, marketing and administrative operations
for IMS and a regional software sales office.

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

ITEM 3. LEGAL PROCEEDINGS

From time to time the Company is involved in various disputes and litigation
matters which have arisen in the ordinary course of business. These include
disputes and lawsuits related to intellectual property, licensing, contract law,
distribution arrangements, and employee relations matters.

The Company filed a complaint in the United States District Court for the
Northern District of California on December 6, 1995 against Avant! Corporation
(a company formed by a merger of companies formerly known as ArcSys, Inc. and
ISS, Inc. (Avant!)) and certain of its employees for misappropriation of trade
secrets, copyright infringement, conspiracy and other illegalities.

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On January 16, 1996, Avant! filed various counterclaims against the Company
and the Company's President and CEO, and on April 12, 1996, Avant! filed a First
Amended Counterclaim. The amended counterclaim alleges, INTER ALIA, that the
Company and its President and CEO had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anti-competitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The amended
counterclaim also alleges that certain Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its President
and CEO continue to believe that each has meritorious defenses to Avant!'s
amended counterclaims, and each intends to defend such action vigorously. By an
order dated July 13, 1996, the court bifurcated Avant!'s counterclaim from the
Company's complaint.

On April 19, 1996, the company filed a motion seeking a preliminary
injunction to prevent further use of Cadence copyrighted code and trade secrets
by Avant!. By order of March 18, 1997, the Court granted in part and denied in
part that motion. The Court has not yet set a trial date. The Company intends to
pursue its claims vigorously.

Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse effect on
the Company's financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

11
<PAGE>
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock is traded on the New York Stock Exchange under
the symbol CDN. The Company has never declared or paid any cash dividends on its
common stock in the past and none are planned to be paid in the future. As of
December 28, 1996, the Company had approximately 1,644 stockholders of record,
not including those held in street or nominee name.

The following table sets forth the high and low sales price for the Common
Stock for each calendar quarter in the two-year period ended December 28, 1996.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C> <C>
1995: First Quarter......................................................................... $ 12.39 $ 8.55
Second Quarter........................................................................ 15.50 11.28
Third Quarter......................................................................... 18.55 13.78
Fourth Quarter........................................................................ 28.25 16.05

1996: First Quarter......................................................................... $ 30.33 $ 23.00
Second Quarter........................................................................ 43.75 29.67
Third Quarter......................................................................... 37.88 23.00
Fourth Quarter........................................................................ 41.38 32.63
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA

Five fiscal years ended December 28, 1996
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenue.............................................. $ 741,459 $ 548,418 $ 429,072 $ 368,623 $ 418,724
Unusual items (1).................................... $ 100,543 $ -- $ 14,707 $ 19,650 $ (253)
Income (loss) from operations........................ $ 91,259 $ 117,860 $ 44,047 $ (8,415) $ 65,710
Net income (loss) (2)................................ $ 29,038 $ 97,270 $ 36,648 $ (12,779) $ 55,360
Net income (loss) per share.......................... $ .32 $ 1.05 $ .37 $ (.13) $ .53
Total assets......................................... $ 717,001 $ 374,035 $ 361,048 $ 339,301 $ 367,243
Long-term obligations................................ $ 20,292 $ 1,619 $ 2,098 $ 4,001 $ 5,722
</TABLE>

(1) See Notes to Consolidated Financial Statements for further discussion.

(2) Net income (loss) included a $13.6 million after tax gain on the sale of
stock of a subsidiary and a $3.1 million after tax gain on the sale of an
equity investment in the years ended December 30, 1995 and December 31,
1994, respectively.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN "FACTORS THAT MAY
AFFECT FUTURE RESULTS."

OVERVIEW

Cadence Design Systems, Inc. (the Company) develops, markets and supports
electronic design automation (EDA) software tools that automate, enhance and
accelerate the design and verification of integrated circuits (ICs) and
electronic systems. The Company combines its technology with services to

12
<PAGE>
help optimize its customers' product development processes. The Company's
products and services are used by companies throughout the world to design and
develop electronic circuits and systems, including semiconductors, computer
systems and peripherals, telecommunications and networking equipment, mobile and
wireless devices, automotive electronics, consumer products and other advanced
electronics.

In December 1996, the Company completed the acquisition of High Level Design
Systems, Inc. (HLDS), a company which developed, marketed and supported EDA
software for the design of high-density, high performance ICs. The acquisition
was accounted for as a purchase and, accordingly, the results of HLDS from the
date of the acquisition forward have been recorded in the Company's consolidated
financial statements. In connection with the acquisition, the Company recorded a
charge to operations of $95.7 million for 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.

In November 1996, the Company consummated a secondary public offering
whereby 5.75 million shares of common stock were sold generating $202.1 million
of net proceeds.

In October 1996, the Company entered into a merger agreement with Cooper and
Chyan Technology, Inc. (CCT). CCT develops, markets and supports software tools
that help designers route the wires that interconnect the electronic devices on
high performance printed circuit boards (PCBs) and ICs. The acquisition is
expected to be accounted for as a pooling of interests. The merger has been
approved by CCT's shareholders and is currently awaiting regulatory approval.
There can be no assurance that regulatory approval will be obtained and that the
merger will be consummated.

In July 1995, the Company and its wholly-owned subsidiary, Integrated
Measurement Systems, Inc. (IMS), sold to the public approximately 3.0 million
shares of common stock, of which approximately 2.6 million shares were sold by
the Company as the sole selling stockholder of IMS and .4 million shares were
sold by IMS. As a result of the offering and sale of shares by the Company, the
Company's ownership interest in IMS decreased to approximately 55%. However, as
the Company remained the majority stockholder as of December 28, 1996, the
consolidated financial statements of the Company for all periods presented
include the accounts of IMS after elimination of intercompany accounts and
transactions and minority interest adjustments. In February 1997, the Company
and IMS sold 1.7 million shares of common stock to the public of which .95
million were owned by the Company. As a result, the Company received
approximately $18.6 million and reduced its ownership in IMS to approximately
37%.

In August 1994, the Company acquired the business and certain assets of
Redwood Design Automation, Inc. (Redwood). Redwood developed, marketed and
supported advanced software tools for electronic systems design. The acquisition
was accounted for as a purchase and, accordingly, the results of Redwood from
the date of the acquisition forward have been recorded in the Company's
consolidated financial statements.

13
<PAGE>
RESULTS OF OPERATIONS

REVENUE

<TABLE>
<CAPTION>
% CHANGE
--------------------
1996 1995 1994 96/95 95/94
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(In millions)
Product............................................................. $ 414.1 $ 292.2 $ 241.5 42% 21%
Services............................................................ 114.6 65.9 28.4 74% 132%
Maintenance......................................................... 212.8 190.3 159.2 12% 20%
--------- --------- ---------
Total revenue..................................................... $ 741.5 $ 548.4 $ 429.1 35% 28%
--------- --------- ---------
--------- --------- ---------
Sources of Revenue as a Percent of Total Revenue
Product............................................................. 56% 53% 56%
Services............................................................ 15% 12% 7%
Maintenance......................................................... 29% 35% 37%
</TABLE>

In 1996, strong demand for the Company's products and services generated a
35% increase in revenues as compared to the prior year.

The increases in product revenue in 1996 when compared with 1995 and in 1995
when compared with 1994 were primarily the result of increased demand for the
Company's products which enable customers to meet complex design challenges,
including deep submicron IC design. The 1996 increase was attributed to
increased sales volume of its automatic place and route, physical layout and
verification, and timing-driven design process tools. Also, demand increased for
Electronic Systems Design Automation (ESDA) products, produced by the Company's
Alta Group, which are designed to allow customers to include product concepts in
the EDA environment by accelerating and enhancing the early phases of system
development. The increase in product revenue in 1995 was exemplified by
increased sales volume of its IC, automated test equipment (ATE) hardware
business, top-down design and Alta Group's systems design products.

The increases in services revenue in 1996 and 1995 were the result of
significant demand for the Company's Spectrum Services offerings, which provide
a range of solutions to address the product development needs of its customers.
The 1995 increase in services revenue was driven by an outsourcing agreement
with Unisys Corporation (Unisys) to assume a substantial portion of Unisys'
internal silicon design operation. This five-year agreement was signed in March
1995 for a total contract value of at least $75 million. The decreased services
revenue growth rate in 1996, as compared to 1995, was due to a small services
revenue base in 1994.

The increase in maintenance revenue was attributable to an increase in the
Company's installed base of products. The decreased maintenance revenue growth
rate in 1996, as compared to 1995, was due to customers renewing maintenance
contracts at a slower rate in 1996 as compared with 1995.

Revenue from international sources was approximately $350.2 million, $271.8
million and $221.5 million, or 47%, 50% and 52% of total revenue for 1996, 1995
and 1994, respectively. In 1996, domestic and international revenue increased
41% and 29%, respectively, following increases of 33% and 23% in 1995. The
increase in total revenue from international sources in 1996, as compared to
1995, was primarily attributable to product revenue growth and new Spectrum
Services contracts in all regions. The higher percentage increase in domestic
revenue in 1996, as compared to international revenue, was primarily
attributable to an increase in domestic services revenue in 1996 as compared to
1995. The increase in international revenue in 1996, as compared to 1995, more
than offset the negative impact of $31.4 million on revenue as the result of the
weakening of certain foreign currencies, primarily the Japanese yen, in relation
to the U.S. dollar.

14
<PAGE>
COST OF REVENUE

Cost of Revenue as a Percent of Related Revenue
Product................................................................ 12% 15% 22%
Services............................................................... 71% 83% 80%
Maintenance............................................................ 11% 9% 9%
</TABLE>

Cost of product revenue includes costs of production personnel, packaging
and documentation, amortization of capitalized software development costs and
costs of the Company's ATE hardware business. The increase in cost of product in
absolute dollars in 1996, as compared to 1995, was primarily due to the
increased cost of revenue associated with its ATE products resulting from higher
product demand, as well as increased purchased software amortization and the
write-off of $1.6 million of capitalized software development costs related to
products at the end of their life cycle. The decrease in cost of product as a
percentage of product revenue in 1996, as compared to 1995, was primarily due to
revenues growing at a faster rate than costs. The decrease in cost of product in
absolute dollars and as a percentage of product revenue in 1995, as compared to
1994, was primarily due to productivity improvements in the software release and
production process, and a reduction in printing and manufacturing costs due to
decreased demand for manuals, partly offset by increased cost of revenue
associated with its ATE products resulting from higher product demand.

Cost of services revenue includes personnel and related costs associated
with providing services to customers and the infrastructure to manage a services
organization, as well as costs to recruit, develop and retain services
professionals. Cost of services increased in total dollars in both 1996 and 1995
due to increased services revenue and the continued development of this line of
business. The increase in cost of services from 1994 to 1995 was primarily due
to additional costs associated with the transfer to the Company of former
employees of Unisys pursuant to the outsourcing agreement signed in March of
1995. As part of the Unisys outsourcing agreement, the Company retained
approximately 180 hardware and software designers and acquired fixed assets and
certain intangibles. While primarily focused on serving the needs of Unisys, the
design and services resources acquired by the Company are also being used to
support other customers' design needs. The improvement in services gross margins
to 29% in 1996, as compared to 17% in 1995, was due to increased operating
efficiencies attained within existing services offerings. Continued investment
in developing new services offerings and the cost of integrating new services
professionals performing a growing number of services offerings will continue to
put pressure on services gross margins until operating efficiencies are
obtained.

Cost of maintenance revenue includes the cost of customer services such as
hot-line and on-site support and the production cost of the maintenance renewal
process. The increase in cost of maintenance in total dollars and as a
percentage of maintenance revenue from 1995 to 1996 was principally due to
additional on-site support costs necessary to support a larger installed base.

15
<PAGE>
OPERATING EXPENSES

<TABLE>
<CAPTION>
% CHANGE
--------------------
1996 1995 1994 96/95 95/94
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(In millions)
Marketing and sales.................................................. $ 226.5 $ 185.0 $ 163.4 22% 13%
Research and development............................................. $ 115.3 $ 88.6 $ 77.4 30% 14%
General and administrative........................................... $ 54.4 $ 40.4 $ 39.7 34% 2%

Expenses as a Percent of Total Revenue
Marketing and sales.................................................. 31% 34% 38%
Research and development............................................. 16% 16% 18%
General and administrative........................................... 7% 7% 9%
</TABLE>

MARKETING AND SALES

The increase in marketing and sales for 1996, as compared to 1995, was
primarily the result of an increase of $26.6 million in employee related
expenses attributable to increased headcount including commissions, recruiting
and relocations, as well as increases in pre-sales activities and advertising.
This increase was partially offset by the weakening of certain foreign
currencies, primarily the Japanese yen, in relation to the U.S. dollar which
favorably impacted marketing and sales expenses by approximately $5.6 million in
1996, as compared to the prior year. Marketing and sales expenses grew from 1994
to 1995 due to an additional $28.2 million of employee related costs resulting
from increased headcount, a higher volume of pre-sales activities and increased
commissions and sales incentives. Of these increased expenses, $5.1 million was
attributable to the effect of the strengthening of certain foreign currencies in
relation to the U.S. dollar. These increases were offset by approximately $6.0
million of decreased facilities costs.

RESEARCH AND DEVELOPMENT

The Company's investment in research and development, prior to the reduction
for capitalization of software development costs, was $128.9 million, $100.4
million and $88.2 million for 1996, 1995 and 1994, respectively, representing
17%, 18% and 21% of total revenue. The expense increases for 1996, as compared
to 1995, were primarily attributable to higher salary-related costs due to
increased headcount of $15.6 million, higher consulting and other outside
service costs of $6.0 million, and higher recruiting, computer maintenance and
facilities costs. The increase of $12.2 million from 1994, as compared to 1995,
was primarily due to personnel costs of $11.0 million associated with increased
headcount and incentive compensation, and $1.6 million of higher consulting
costs, offset by decreased facilities costs. The Company capitalized
approximately $13.6 million, $11.8 million and $10.8 million of software
development costs in the years 1996, 1995 and 1994, respectively, which
represented approximately 11%, 12% and 12% of total research and development
expenditures made in those years. The amount of capitalized software development
costs in any given period may vary depending on the exact nature of the
development performed.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased in 1996, as compared to 1995,
primarily as a result of higher legal costs of $5.9 million, higher management
information and telecommunication costs of $2.2 million and higher outside
service costs of $1.0 million. The decrease in general and administrative costs
as a percentage of revenue from 1994 to 1995 was primarily attributable to
revenue growing at a faster rate than costs. The increase in absolute costs of
$.7 million in 1995, as compared to 1994, was the result of $1.1 million of
additional information system costs and $.7 million of additional legal
expenses. These costs were offset by reductions in employee-related costs,
facilities costs and bad debt expense.

16
<PAGE>
OTHER ITEMS

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(In millions)
Unusual items.......................................................................... $ 100.5 $ -- $ 14.7
Other income (expense)................................................................. $ (.8) $ 17.2 $ 4.8
</TABLE>

UNUSUAL ITEMS

The unusual items in 1996 and in 1994 included costs of $95.7 million and
$4.7 million related to the 1996 fourth quarter write-off and the 1994 third
quarter write-off of in-process research and development costs associated with
the HLDS acquisition and the Redwood acquisition, respectively, as the acquired
in-process research and development had not reached technological feasibility
and, in management's opinion, had no probable alternative future use. Included
in 1996 unusual items was $2.7 million of capitalized software development costs
for products developed by the Company which were replaced by HLDS products, as
well as $2.1 million of restructuring charges consisting of employee termination
costs associated with the outsourcing of the Company's management information
technology services and costs associated with excess facilities. Included in the
1994 unusual items was a $10 million provision for settlement of litigation. In
April 1994, the Company entered into agreements to settle two class action
lawsuits for a combined settlement of $16.5 million, of which approximately $7.5
million was covered by the Company's insurance carriers. Reflected in the
statement of income in 1994 was the net settlement cost of $9.0 million plus
$1.0 million for related legal costs.

OTHER INCOME AND EXPENSE

Interest income was $4.4 million, $4.9 million and $3.3 million for 1996,
1995 and 1994, respectively. The decrease in 1996, as compared to 1995, was
primarily attributable to prevailing interest rates being lower in 1996 as
compared to 1995. This decrease was partially offset by the increased interest
earned in the fourth quarter of 1996 as a result of the net proceeds received in
a secondary offering of the Company's common stock in the latter part of the
quarter. The increase in 1995 was primarily due to increased earnings on cash
investments resulting from higher interest rates during 1995 than during 1994.
Interest expense was $1.9 million, $2.2 million and $1.0 million for 1996, 1995
and 1994, respectively. The decrease in interest expense in 1996, as compared to
1995, was attributable to a larger notes payable balance being maintained during
a majority of 1995 as compared to 1996. The increase in interest expense in
1995, as compared to 1994, was due to an increase in notes payable related to
the purchase of corporate facilities in the first and fourth quarters of 1994.
The note payable related to the first facility purchase was paid in full in May
1994, and the note payable related to the second facility purchase was paid in
full in October 1995. Included in 1995 other income was an $18.9 million gain on
the sale of approximately 45% of the stock of IMS, a previously wholly-owned
subsidiary, in an initial public offering. In 1994, other income included a $4.2
million gain related to the sale of an equity investment.

INCOME TAXES

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(In millions)
Provision for income taxes............................................................... $ 61.4 $ 37.8 $ 12.2
Effective tax rate....................................................................... 68% 28% 25%
</TABLE>

As of December 28, 1996, the Company had gross deferred tax assets of
approximately $48.0 million against which the Company had recorded a valuation
allowance of $10.8 million, resulting in net deferred tax assets of $37.2
million. A significant portion of the net operating loss and credit
carryforwards which

17
<PAGE>
created the deferred tax assets was generated by acquired companies prior to
their mergers with the Company and by restructuring charges recorded as a result
of these mergers. Approximately $9.0 million of these deferred tax assets will
affect equity and intangibles and will not be available to offset future
provisions for income taxes. Realization of the net deferred tax assets of $37.2
million is dependent on generating sufficient taxable income prior to the
expiration of the loss and tax credit carryforwards. Although realization is not
assured, management believes that it is more likely than not that the net
deferred tax assets of $37.2 million will be realized. The amount of the net
deferred tax assets considered realizable, however, could be reduced or
increased in the near term if actual facts, including the estimate of future
taxable income, differ from those estimated.

The 1996 tax rate without the fourth quarter write-off of $95.7 million of
in-process research and development costs associated with the HLDS acquisition
(which is not deductible for tax purposes) was 33%. The increase in the 1996 tax
rate, as compared to the 1995 tax rate, excluding this fourth quarter write-off,
was primarily due to an increase in state income taxes and a smaller reduction
in the valuation allowance. The increase in the 1995 tax rate, as compared to
the 1994 tax rate, was attributable to an increase in foreign earnings which
were subject to a higher tax rate than the U.S. tax rate, the related cost of
repatriating these earnings and an increase in state income taxes. The Company
anticipates that its effective tax rate will remain at 33% in 1997.

LIQUIDITY AND CAPITAL RESOURCES

At December 28, 1996, the Company's principal sources of liquidity consisted
of $285.5 million of cash and short-term investments as compared with $96.6
million and $96.9 million at December 30, 1995 and December 31, 1994,
respectively, and a three-year, $120 million secured revolving line of credit
agreement. As of December 28, 1996, the Company had no borrowings under the
revolving line of credit.

Cash generated from operating activities decreased $21.8 million to $175.3
million for the year ended December 28, 1996, as compared to the year ended
December 30, 1995. The decrease was primarily due to increases in accounts
receivable, prepaid expenses and other, and lower deferred income taxes,
partially offset by an increase in net income prior to the write-off of
in-process research and development, an increase in accrued liabilities and
payables, and higher deferred revenue. Cash generated from operating activities
increased $42.7 million in the year ended December 30, 1995, as compared to the
year ended December 31, 1994, primarily due to higher net income and increases
in accrued liabilities and payables, and deferred revenue, partially offset by
increases in accounts receivable and prepaid expenses.

At December 28, 1996, the Company had net working capital of $259.6 million
compared with $6.5 million at December 30, 1995. The primary reasons for the
increase were net proceeds from the Company's secondary public offering of
$202.1 million, increases in accounts receivable of $59.9 million and in prepaid
expenses and other current assets of $35.5 million, partly offset by an increase
in deferred revenue of $14.7 million and an increase in accounts payable and
accrued liabilities of $24.2 million. The increase in accounts receivable was
attributable to increased billing activity late in the year. The increase in
deferred revenue was attributable to increased maintenance renewals and an
increase in deferred product revenue. The increase in accounts payable and
accrued liabilities was primarily attributable to payments expected to be made
in early 1997, including bonus and commissions payments, sales taxes and
issuances of stock under the Company's Employee Stock Purchase Plan (ESPP).

In addition to its short-term investments, the Company's primary investing
activities were purchases of property and equipment, purchases of software and
intangibles and the capitalization of software development costs, which combined
represented $96.4 million and $45.6 million of cash used for investing
activities in the years ended December 28, 1996 and December 30, 1995,
respectively.

Since 1994, as part of its authorized stock repurchase program, the Company
has sold put warrants and purchased call options through private placements. The
Company had a maximum potential obligation related to the put warrants at
December 28, 1996 to buy back 1.9 million shares of its common stock at an

18
<PAGE>
aggregate price of approximately $66.6 million. The put warrants will expire in
March 1997 through September 1997. The Company has both the unconditional right
and the intent to settle these put warrants with stock and, therefore, no amount
was classified out of stockholders' equity in the accompanying balance sheet.
The effect of the exercise of these put warrants and call options is reported in
stockholders' equity.

In connection with and prior to the consummation of the CCT merger, the
Company will rescind its stock repurchase program, with the exception of
continued systematic stock repurchases under its seasoned stock repurchase
program for the Company's ESPP. Such repurchases are intended to cover the
Company's expected re-issuances under the ESPP for the next 12 months.

Anticipated cash requirements for 1997 include the purchase of treasury
stock through the exercise of call options for the Company's seasoned systematic
stock repurchase program and the contemplated additions of property, plant and
equipment of approximately $60 million.

As part of its overall investment strategy, the Company has committed to
participating in a venture capital partnership as a limited partner. The
Company's total committed investment of at least $25.0 million will be made over
the next two to three years. As of December 28, 1996, the Company had
contributed approximately $6.5 million, which is reflected in other assets in
the accompanying balance sheet.

The Company anticipates that current cash and short-term investment
balances, cash flows from operations, and the $120 million revolving line of
credit should be sufficient to meet its working capital and capital expenditure
requirements on a short and long-term basis.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Because of rapid technological changes in the EDA industry, the Company's
future revenues will depend on its ability to develop or acquire new products
and enhance its existing products on a timely basis to keep pace with
innovations in technology and to support a range of changing computer software
and hardware platforms and customer preferences. Changes in manufacturing
technology may render the Company's software tools obsolete. Lack of market
acceptance or significant delays in product development could result in a loss
of competitiveness of the Company's products, with a resulting loss of revenues.

The Company has been involved in a number of significant merger and
acquisition transactions. These transactions have been motivated by many
factors, including the desire to obtain new technologies, the desire to expand
and enhance the Company's product lines and the desire to attract key personnel.
Growth through acquisition has several identifiable risks, including risks
related to integration of the previously distinct businesses into a single unit,
the substantial management time devoted to such activities, undisclosed
liabilities, the failure to realize anticipated benefits (such as cost savings
and synergies) and issues related to product transition (such as distribution,
engineering, and customer support).

During the fourth quarter of 1996, the Company acquired HLDS and entered
into a merger agreement with CCT (Mergers). Both Mergers have several
identifiable risks, including those described above. To maintain and increase
profitability, the Company, HLDS, and CCT will need to successfully integrate
and streamline overlapping functions. Costs generally associated with this type
of integration that may be incurred by the Company include the write-off of
capitalized software, severance payments, closing of excess facilities, and
disposition of excess equipment. While some of these costs have not been
currently identified, any such costs will have an adverse effect on the
Company's operating results in the periods in which they are incurred. The
Company, HLDS, and CCT each have different systems and procedures in many
operational areas that must be rationalized and integrated. There can be no
assurance that such integration will be accomplished smoothly, expeditiously or
successfully. Failure to effectively accomplish the integration of the
operations of the Company, HLDS and CCT could have a material adverse effect on
Cadence's results of operations and financial condition. Moreover, uncertainty
in the marketplace or customer hesitation relating to the Mergers could
negatively affect the Company's results of operations.

19
<PAGE>
Among the conditions that must be fulfilled in order to consummate the CCT
Merger is the expiration or termination of the waiting period applicable to the
CCT Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the HSR Act). The review of the Merger pursuant to the HSR Act may
substantially delay the Company's ability to consummate the Merger. There can be
no assurance that a challenge to the CCT Merger on antitrust grounds will not be
made, or if such a challenge is made, the Company will prevail or would not be
required to terminate the merger agreement, divest certain assets, license
certain proprietary technology or accept certain conditions in order to
consummate the CCT Merger. In addition, the Company has the right to waive the
condition that the CCT Merger be qualified for pooling of interests accounting
treatment. If the CCT Merger is consummated but fails to qualify for pooling of
interests accounting treatment, then the transaction would be accounted for as a
purchase. Accounting for the CCT Merger as a purchase could result in a
significant intangible asset or a significant charge against results of
operations or both, which could materially and adversely affect future results
of operations. There can be no assurance that all of the aforementioned
conditions will be satisfied or waived, and therefore, there can be no assurance
that the CCT Merger will be consummated.

During the first quarter of 1997, the Company completed the reorganization
of its sales force and other operating groups into business units. These
business units (Alta, Deep Submicron, Logic Verification, Full Custom and
Performance Engineering) are focused on delivering solutions to customers for
specific areas of the design process. Short-term customer uncertainty relating
to this reorganization could negatively affect the Company's results of
operations.

The Company's operating expenses are partially based on its expectations
regarding future revenue. The Company's results of operations may be adversely
affected if revenue does not materialize in a quarter as anticipated. Since
expenses are usually committed in advance of revenues and because only a small
portion of expenses vary with revenue, the Company's operating results may be
impacted significantly by lower revenue which would be attributable to various
factors and could affect quarter to quarter comparisons. The Company's focus on
providing services is relatively recent. The percentage revenue growth from this
source from 1995 to 1996 may not be indicative of future growth.

In addition, a substantial portion of the Company's revenues from services
are earned pursuant to fixed price contracts. Variances in costs associated with
those contracts could have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company's revenues
are not generally seasonal in nature, the Company has experienced, and may
continue to experience, decreases in first quarter revenue compared with the
preceding fourth quarter, which is believed to result primarily from the capital
purchase cycle of the Company's customers.

The Company is dependent upon the efforts and abilities of its senior
management, its research and development staff and a number of other key
management, sales, support, technical and services personnel. As noted above,
the Company has recently increased its focus on offering professional services
to its customers. To the extent that the Company is not able to attract, retain,
train, and motivate highly skilled employees who are able to provide services
that satisfy customers' expectations, the Company's business and operating
results would be adversely affected.

The Company expects that international revenues will continue to account for
a significant portion of its total revenues. The Company's international
operations involve a number of risks normally associated with such operations,
including, among others, adoption and expansion of government trade
restrictions, volatile foreign exchange rates, currency conversion risks,
limitations on repatriation of earnings, reduced protection of intellectual
property rights, the impact of possible recessionary environments in economies
outside the U.S., longer receivables collection periods and greater difficulty
in accounts receivable collection, difficulties in managing foreign operations,
political and economic instability, unexpected changes in regulatory
requirements and tariffs and other trade barriers. Currency exchange
fluctuations in countries in which the Company conducts business could also
materially adversely affect Cadence's business, financial condition and results
of operations. The Company enters into foreign currency forward

20
<PAGE>
contracts to hedge the impact of foreign currency fluctuations. Although the
Company attempts to reduce the impact of foreign currency fluctuations,
significant exchange rate movements may have a material adverse impact on the
Company's results of operations.

Due to the foregoing, as well as other factors, past financial performance
should not be considered an indicator of future performance. In addition, the
Company's participation in a highly dynamic industry often results in
significant volatility of the Company's common stock price. Any change in
revenues or operating results below levels expected by securities analysts for
the Company or its competitors, and the timing of the announcement of such
shortfalls, could have an immediate and significant adverse effect on the
trading price of the Company's common stock in any given period.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item are submitted as a separate
section of this Form 10-K. See Item 14.

SUMMARY QUARTERLY DATA-UNAUDITED
(In thousands, except per share amounts)

Revenue....................... $ 212,262 $ 188,741 $ 177,026 $ 163,430 $ 163,756 $ 140,090 $ 128,539 $ 116,033

Cost of revenue............... $ 42,807 $ 39,262 $ 37,765 $ 33,639 $ 31,767 $ 30,349 $ 29,451 $ 24,963

Income (loss) from operations
(1)......................... $ (40,729) $ 49,982 $ 43,433 $ 38,573 $ 42,588 $ 32,666 $ 24,117 $ 18,489

Net income (loss) (2)......... $ (57,816) $ 32,687 $ 28,588 $ 25,579 $ 30,840 $ 35,909 $ 16,971 $ 13,550

Net income (loss) per share... $ (.72) $ .36 $ .31 $ .28 $ .33 $ .39 $ .18 $ .14
</TABLE>

(1) Income (loss) from operations for the fourth quarter ended December 28, 1996
included unusual items totaling $100.5 million, of which $95.7 million was
for the write-off of in-process research and development.

(2) Net income (loss) included a $13.6 million after tax gain on the sale of
stock of a subsidiary in third quarter ended September 30, 1995.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

21
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 401(a) as to directors is incorporated by
reference from the section entitled "Election of Directors" in the Company's
Proxy Statement for its annual stockholders' meeting to be held May 1, 1997. The
information required by this Item as to executive officers is included in Part I
under "Executive Officers of the Registrant."

To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 28, 1996, all
section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.

The executive officers of Cadence are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES
- ----------------------------------- --------- ----------------------------------------------------------------------
<S> <C> <C>

Joseph B. Costello................. 43 President, Chief Executive Officer and Director

H. Raymond Bingham................. 51 Executive Vice President and Chief Financial Officer

M. Robert Leach.................... 49 Senior Vice President, Services

Darrel A. Mank..................... 49 Senior Vice President, Design Services

K.C. Murphy........................ 42 Senior Vice President, Corporate Strategy

John F. Olsen...................... 45 Senior Vice President, Worldwide Sales

Shane Robison...................... 42 Senior Vice President, Engineering

Timothy Q. Unger................... 42 Senior Vice President, Human Resources

Anthony Zingale.................... 41 Senior Vice President, Worldwide Marketing

R.L. Smith McKeithen............... 52 Vice President, General Counsel and Secretary

Stephen Y. Fong.................... 39 Vice President of Finance and Corporate Treasurer

William Porter..................... 42 Vice President, Corporate Controller and Assistant Secretary
</TABLE>

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

JOSEPH B. COSTELLO has served as President and a director of Cadence since
May 1988. In addition, Mr. Costello has served as Chief Executive Officer of the
Company since June 1988. Mr. Costello is also a director of Racotek, Inc.

H. RAYMOND BINGHAM joined Cadence in June 1993 as Executive Vice President
and Chief Financial Officer. Prior to joining the Company, he was Executive Vice
President and Chief Financial Officer of Red Lion Hotels and Inns for eight
years. Mr. Bingham is a director of Sunstone Hotel Investors, Inc. and
Integrated Measurement Systems, Inc.

M. ROBERT LEACH joined Cadence in June 1993 as Senior Vice President of
Services. Prior to joining the Company, Mr. Leach was partner-in-charge of the
worldwide electronics industry consulting practice for Andersen Consulting for
more than 10 years.

DARREL A. MANK joined Cadence in June 1996 as Senior Vice President, Design
Services. From 1991 through 1996, Mr. Mank served as Vice President and General
Manager of the portable products division of Cirrus Logic, Inc.

22
<PAGE>
K.C. MURPHY joined Cadence in April 1996 as Senior Vice President, Corporate
Strategy. Prior to joining the Company, Mr. Murphy worked for 17 years at
Advanced Micro Devices where he held various positions, most recently Vice
President of Strategic Marketing.

JOHN F. OLSEN joined Cadence in May 1994 as Senior Vice President, Field
Operations, and became Senior Vice President, Worldwide Sales, in April 1996.
Prior to joining the Company, Mr. Olsen served as a partner for KPMG Peat
Marwick for five years.

SHANE V. ROBISON joined Cadence in July 1995 as Senior Vice President,
Engineering. Prior to joining the Company, Mr. Robison served as Vice President
and General Manager of Apple Computer's Personal Interactive Electronics
Division for more than seven years.

TIMOTHY Q. UNGER joined Cadence in September 1994 as Vice President, Human
Resources, and became Senior Vice President, Human Resources in January 1996.
From 1988 through 1994, Mr. Unger was Group Director of Human Resources for
Unisys Corporation.

ANTHONY ZINGALE joined Cadence in April 1989 and currently holds the
position of Senior Vice President, Worldwide Marketing. He previously served the
Company as Vice President and General Manager of the HDL Design Group, Vice
President of Corporate Marketing and Vice President of Marketing for the Systems
Division. Prior to joining the Company, Mr. Zingale was Vice President of
Marketing at EDA Systems, Inc., which was acquired by Digital Equipment
Corporation.

R.L. SMITH MCKEITHEN joined Cadence in June 1996 as Vice President, General
Counsel and Secretary. From 1994 to 1996, he served as Vice President, General
Counsel and Secretary of Strategic Mapping, Inc. From 1988 to 1994, he served as
Vice President, General Counsel and Secretary of Silicon Graphics, Inc.

STEPHEN Y. FONG joined Cadence in November 1995 as Vice President of Finance
and Corporate Treasurer. From 1982 to 1995, he held various financial management
positions with Syntex Corporation, a multi-national pharmaceutical company based
in Palo Alto, California, most recently as Assistant Treasurer. From 1979 to
1982, Mr. Fong was with Deloitte and Touche, most recently as Senior Accountant.

WILLIAM PORTER joined Cadence in February 1994 as Vice President, Corporate
Controller and Assistant Secretary. From September 1988 to February 1994, Mr.
Porter served as Technical Accounting and Reporting Manager and most recently as
Controller of Cupertino Operations with Apple Computer Corporation, a worldwide
manufacturer of computer equipment. From 1976 until 1988, he held various
positions with Arthur Andersen LLP, most recently as Senior Audit Manager.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference from the
sections entitled "Compensation of Directors" and "Compensation of Executive
Officers" in the Company's Proxy Statement for its annual stockholders' meeting
to be held May 1, 1997.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for its annual stockholders'
meeting to be held May 1, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated by reference from the
section entitled "Certain Transactions" in the Company's Proxy Statement for its
annual stockholders' meeting to be held May 1, 1997.

23
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)1. Financial Statements

- Report of Independent Public Accountants........................................................ 30

- Consolidated Balance Sheets as of December 28, 1996 and December 30, 1995....................... 31

- Consolidated Statements of Income for the three fiscal years ended December 28,
1996......................................................................................... 32

- Consolidated Statements of Stockholders Equity for the three fiscal years ended
December 28, 1996............................................................................ 33

- Consolidated Statements of Cash Flows for the three fiscal years ended December 28,
1996......................................................................................... 34

- Notes to Consolidated Financial Statements...................................................... 35

(a)2. Financial Statement Schedules

II. Valuation and Qualifying Accounts and Reserves................................................ 54

All other schedules are omitted because they are not required or the required information is shown in the
financial statements or notes thereto.

(a)3. Exhibits
</TABLE>

24
<PAGE>
The following exhibits are filed herewith:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>

2.03 Agreement and Plan of Merger and Reorganization dated as of October 28, 1996, among the Registrant,
Cooper & Chyan Technology, Inc. (CCT) and Wyoming Acquisition Sub, Inc. (incorporated by reference to
Registrant's Current Report on Form 8-K filed on November 7, 1996 (the November 7, 1996 8-K)).

2.04 Form of Certificate of Merger to be entered into by Registrant and CCT (incorporated by reference to
Exhibit 2.2 to the Registrant's Form S-4 Registration Statement No. 333-16779 filed on November 26, 1996
(the November 26, 1996 Form S-4))

3.01 (a) The Registrant's Certificate of Incorporation, as filed with the Secretary of State of the State of
Delaware on April 8, 1987 (incorporated by reference to Exhibit 3.01 to the Registrant's Form S-1
Registration Statement (No. 33-13845) originally filed on April 29, 1987 (the 1987 Form S-1)).

(b) The Registrant's Certificate of Retirement of Stock as filed with the Secretary of State of the
State of Delaware on September 28, 1987 (incorporated by reference to Exhibit 3.01(b) to the
Registrant's Form S-4 Registration Statement (No. 33-20724) originally filed on February 25, 1988).

(c) The Registrant's Certificate of Ownership and Merger as filed with the Secretary of State of the
State of Delaware on June 1, 1988 (incorporated by reference to Exhibit 3.02(c) to the Registrant's Form
S-1 Registration Statement (No. 33-23107) originally filed on July 18, 1988 (the 1988 Form S-1)).

(d) The Registrant's Certificate of Designations of Series A Junior Participating Preferred Stock as
filed with the Secretary of State of the State of Delaware on June 8, 1989 (incorporated by reference to
Exhibit 3A to the Registrant's Form 8-K originally filed on June 12, 1989 (the 1989 Form 8-K)).

(e) The Registrant's Certificate of Amendment of Certificate of Incorporation as filed with the
Secretary of State of the State of Delaware on July 26, 1991 (incorporated by reference to Exhibit
3.01(e) to the Registrant's Form S-4 Registration Statement (No. 33-43400) originally filed on October
7, 1991 (the 1991 Form S-4)).

(f) The Registrant's Certificate of Designation of Series A Convertible Preferred Stock as filed with
the Secretary of State of the State of Delaware on December 30, 1991 (incorporated by reference to
Exhibit 3.01(f) from the Registrant's Form 10-K for the fiscal year ended December 31, 1991).

(g) The Registrant's Amendment of Certificate of Incorporation to increase the number of authorized
shares of common stock dated February 1997.

3.02 The Registrant's Bylaws, as currently in effect (as incorporated by reference to Exhibit 3.02 to the
1987 Form S-1 and as amended by Exhibit 3-b to the 1989 Form 8-K).

4.01 Specimen Certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4.01 to the
1991 Form S-4).

4.02 Rights Agreement, dated as of February 9, 1996, between the Registrant and Harris Trust and Savings Bank
which includes as exhibits thereto the Certificate of Designations for the Series A Junior Participating
Preferred Stock, the form of Right Certificate and the Summary of Rights to Purchase Preferred Shares
(incorporated by reference to Exhibit 1A, 1B and 1C to the Registrant's Form 8-K filed February 16,
1996.)
</TABLE>

25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
9.05 Form of Voting Agreement, dated as of October 28, 1996, between the Registrant and each of John F.
Cooper, David Chyan, William J. Portelli, Robert D. Selvi and John R. Harding (incorporated by reference
to Exhibit 99.3 to the November 7, 1996 Form 8-K).

10.01 Employment Agreement, dated as of October 28, 1996, between the Registrant and David Chyan (incorporated
by reference to Exhibit 99.5 to the November 7, 1996 Form 8-K).

10.02 The Registrant's 1987 Stock Option Plan, as amended on February 5, 1997.

10.03 Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under
the Registrant's 1987 Stock Option Plan (incorporated by reference to Exhibit 4.01 to the Registrant's
Form S-8 Registration Statement (No. 33-22652) filed on June 20, 1988).*

10.04 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock Option Grant
and Form of Stock Option Exercise Notice and Agreement (the first document is incorporated by reference
to Exhibit 4.02 to the Registrant's 1994 Form S-8 and the latter two documents are incorporated by
reference to Exhibit 10.08 - 10.10 to the Registrant s 1988 Form S-1).*

10.05 The Registrant's 1993 Directors Stock Option Plan including the Form of Stock Option Grant (incorporated
by reference to Exhibit 10.04 of the 1994 Form S-8).*

10.06 The Registrant's 1995 Directors Stock Option Plan including the Form of Stock Option Grant.
(incorporated by reference to Exhibit 10.05 to the 1995 Form 10-K).

10.07 The Registrant's 1990 Employee Stock Purchase Plan as amended on March 4, 1997.

10.08 The Registrant's Senior Executive Bonus Plan for 1995 (incorporated by reference to Exhibit 10.08 of the
Registrant's Form 10-K for the fiscal year ended December 31, 1994 (the 1994 Form 10-K)).*

10.09 The Registrant's Senior Executive Bonus Plan for 1996 (incorporated by reference to Exhibit 10.08 to the
1995 Form 10-K).

10.10 The Registrant's Chief Executive Officer Bonus Plan for 1996 (incorporated by reference to Exhibit 10.09
to the 1995 Form 10-K).

10.11 The Registrant's Deferred Compensation Plan for 1994 (incorporated by reference to Exhibit 10.09 to the
1994 Form 10-K).*

10.12 The Registrant's 1996 Deferred Compensation Venture Investment Plan (incorporated by reference to
Exhibit 10.11 to the 1995 Form 10-K).

10.13 Amended and Restated Lease, dated June 29, 1989, by and between River Oaks Place Associates (ROPA), a
California limited partnership, and the Registrant, for the Registrant's executive offices at 555 River
Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.14 to the Registrant's Form
10-K for the fiscal year ended December 31, 1990 (the 1990 Form 10-K)).

10.14 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 575
River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.16 to the 1990 Form
10-K).

10.15 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 535 and
545 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.17 to the 1990
Form 10-K).
</TABLE>

26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.16 Lease dated September 3, 1985 by and among the Richard T. Peery and John Arrillaga Separate Property
Trusts (P/A Trusts) and Valid Logic Systems Incorporated (Valid) (which merged into the Registrant) for
the Registrant's offices at 75 West Plumeria Avenue, San Jose, California (incorporated by reference to
Exhibit 10.16 to the Form 10-K for Valid for the fiscal year ended December 30, 1990 (the 1990 Valid
Form 10-K)).

10.17 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 75 West Plumeria Avenue, San Jose,
California, by and among Valid and the P/A Trusts (incorporated by reference to Exhibit 10.17 to the
1990 Valid Form 10-K).

10.18 Lease dated December 19, 1988 by and among the P/A Trusts and Valid for the Registrant's offices at 2835
North First Street, San Jose, California (incorporated by reference to Exhibit 10.18 to the 1990 Valid
Form 10-K).

10.19 Lease dated September 3, 1985 by and among the P/A Trusts and Valid for the Registrant's offices at 2820
Orchard Parkway, San Jose, California (incorporated by reference to Exhibit 10.14 to the 1990 Valid Form
10-K).

10.20 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 2820 Orchard Parkway, San Jose,
California, by and among Valid and the P/A Trusts (incorporated by reference to Exhibit 10.15 to the
1990 Valid Form 10-K).

10.21 Form of Executive Compensation Agreement dated May 1989 between Registrant and Mr. Costello
(incorporated by reference to Exhibit 10.20 to the Registrant's Form S-4 registration statement (No.
33-31673), originally filed on October 18, 1989).*

10.22 Offer letter to H. Raymond Bingham dated May 12, 1993 (incorporated by reference to Exhibit 10.24 to the
Form 10-K for the fiscal year ended December 31, 1993 (the 1993 Form 10-K)).*

10.23 Offer letter to M. Robert Leach dated May 17, 1993 (incorporated by reference to Exhibit 10.25 to the
1993 Form 10-K).*

10.24 1993 Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 4.05 to the 1994 Form S-8).*

10.25 Consulting agreement dated May 1, 1994 with Henry E. Johnston, who was made a director on July 5, 1994
by unanimous written consent (incorporated by reference to the Registrant's Form 10-Q for the quarterly
period ended June 30, 1994 (the 1994 Second Quarter Form 10-Q)).*

10.26 Consulting agreement dated October 26, 1993 with Alberto Sangiovanni-Vincentelli (incorporated by
reference to the 1994 Second Quarter Form 10-Q).*

10.27 Letter agreement dated August 17, 1994 by and among Registrant, Morris Management Company (the General
Partner), and Morris Associates VI, L.P. (Morris) whereby Registrant acquired all of the interests in
River Oaks Place Associates, L.P. (incorporated by reference to the Registrant's Form 8-K filed November
14, 1994).

10.28 Agreement of Merger and Plan of Reorganization by and among Registrant, Simon Software, Inc. and Redwood
Design Automation, Inc. (Redwood) dated as of July 8, 1994 (incorporated by reference to the
Registrant's Form 10-Q/A, Amendment Number 1 to the 1994 Second Quarter Form 10-Q, filed November 14,
1994 (the 1994 Second Quarter 10-Q/A)).

10.29 Agreement of Merger dated as of August 1, 1994 between Redwood and CDS Corporation (incorporated by
reference to the Registrant's 1994 Second Quarter 10-Q/A).
</TABLE>

27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.30 The Registrant's amended and restated 401 (k) Plan (incorporated by reference to the Registrant's Form
10-Q for the first quarter ended March 30, 1996 (the March 30, 1996 10-Q)).

10.31 Amendment dated May 3, 1996 (incorporated by reference to the Registrant's Form 10-Q for the first
quarter ended March 30, 1996) to Registrant's 1993 Non Statutory Stock Option Plan (incorporated by
reference to the Registrant's Form 10-Q for the third quarter ended September 30, 1994).

10.32 Revolving line of credit dated April 1996, by and between Credit Lyonnais and the Registrant
(incorporated by reference to the March 30, 1996 10-Q).

10.33 Term loan dated May 31, 1996, by and between Credit Lyonnais and River Oaks Place Associates L.P.
(ROPA), a California limited partnership (the Term Loan) (incorporated by reference to the Registrant's
Form 10-Q for the second quarter ended June 29, 1996 (the June 29, 1996 10-Q)).

10.34 Deed of Trust, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing
Statement dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996
10-Q)

10.35 Assignment of Leases and Rents dated May 31, 1996, Schedule to Term Loan (incorporated by reference to
the June 29, 1996 10-Q).

10.36 Assignment of Partnership Interests by Seeley Properties, Inc. dated May 31, 1996, Schedule to Term Loan
(incorporated by reference to the June 29, 1996 10-Q).

10.37 Assignment of Partnership Interests by the Registrant dated May 31, 1996, Schedule to Term Loan
(incorporated by reference to the June 29, 1996 10-Q).

10.38 Environmental Indemnity dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June
29, 1996 10-Q).

10.39 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to Registrant's
1987 Stock Option Plan filed on May 31, 1994 (incorporated by reference to Exhibit 4.01 to the
Registrant's Form S-8 Registration Statement (No. 33-53913) filed on May 31, 1994).

10.40 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to Registrant's
1993 Non Statutory Stock Option Plan (incorporated by reference to the 1994 Third Quarter 10-Q).

10.41 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway, San Jose, California,
by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.14 to the Registrant's
Form 10-K for the fiscal year ended December 31, 1990 (the 1990 Form 10-K)).

10.42 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway, San Jose, California,
by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.14 to the 1990 Form
10-K).

10.43 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose, California, by and
between ROPA and the Registrant (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K).
</TABLE>

28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.44 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose, California, by and
between ROPA and the Registrant (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K).

10.45 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California, by
and between ROPA and the Registrant (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K).

10.46 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California, by
and between ROPA and the Registrant (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K).

10.47 Agreement and Plan of Merger and Reorganization dated as of October 3, 1996, among the Registrant, High
Level Design Systems, Inc. (HLDS) and Harbor Acquisition Sub, Inc. (incorporated by reference to the
November 7, 1996 8-K).

21.01 Subsidiaries of the Registrant.

23.01 Consent of Arthur Andersen LLP

27.1 Financial data schedule for the period ended December 28, 1996.
</TABLE>

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

* A management contract or compensatory plan required to be filed as an
exhibit to Form 10-K.

(b) Reports on Form 8-K

On November 7, 1996, the Registrant filed a current report on Form 8-K,
announcing the execution of an Agreement and Plan of Merger and
Reorganization with High Level Design Systems, Inc. on October 3, 1996, and
the execution of an Agreement and Plan of Merger and Reorganization with
Cooper & Chyan Technology, Inc. on October 28, 1996.

On December 31, 1996, Registrant filed a current Report on Form 8-K,
reporting that the Company had completed its acquisition of High Level
Design Systems, Inc.

On January 13, 1997, Registrant filed a Current Report on Form 8-K,
reporting that it has received requests for additional information from the
United States Federal Trade Commission with respect to its proposed merger
with Cooper & Chyan Technology, Inc.

The Company hereby files as part of this Form 10-K the Exhibits listed in
Item 14.(a)3. above.

(d) Financial Statement Schedules

See Item 14.(a)2. of this Form 10-K.

29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of

CADENCE DESIGN SYSTEMS, INC:

We have audited the accompanying consolidated balance sheets of Cadence Design
Systems, Inc. (a Delaware corporation) and subsidiaries as of December 28, 1996
and December 30, 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 28, 1996. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Cadence Design Systems, Inc.
and subsidiaries as of December 28, 1996 and December 30, 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 28, 1996, in conformity with generally accepted accounting
principles.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14. (a) 2. is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic 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.

/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP

San Jose, California
January 17, 1997

30
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 28, 1996 AND DECEMBER 30, 1995

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash investments............................................................. $ 284,512 $ 84,867
Short-term investments................................................................ 1,015 11,774
Accounts receivable, less allowances of $8,772 in 1996 and $7,420 in 1995............. 148,449 88,503
Inventories........................................................................... 8,133 8,203
Prepaid expenses and other............................................................ 49,026 13,576
----------- -----------
Total current assets................................................................ 491,135 206,923
Property, Plant and Equipment, net...................................................... 160,927 124,103
Software Development Costs, net......................................................... 21,295 25,793
Purchased Software and Intangibles, net................................................. 10,267 8,268
Other Assets............................................................................ 33,377 8,948
----------- -----------
Total assets........................................................................ $ 717,001 $ 374,035
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion of long-term debt................................... $ 3,349 $ 1,497
Accounts payable and accrued liabilities.............................................. 116,174 91,999
Income taxes payable.................................................................. 4,901 14,524
Deferred revenue...................................................................... 107,154 92,407
----------- -----------
Total current liabilities........................................................... 231,578 200,427
----------- -----------
LONG-TERM LIABILITIES
Long-term debt........................................................................ 20,292 1,619
Deferred income taxes................................................................. -- 7,307
Minority interest liability........................................................... 15,205 12,167
Other long-term liabilities........................................................... 22,378 18,434
----------- -----------
Total long-term liabilities......................................................... 57,875 39,527
----------- -----------
COMMITMENTS AND CONTINGENCIES

Stockholders' Equity
Preferred stock -- $.01 par value; authorized 2,000 shares, none issued...............
Common stock and capital in excess of $.01 par value
Authorized: 150,000 shares
Issued: 118,084 shares in 1996 and 113,794 shares in 1995
Outstanding: 86,611 shares in 1996 and 78,564 shares in 1995........................ 603,430 299,544
Treasury stock at cost (31,473 shares in 1996 and 35,230 shares in 1995).............. (325,637) (290,884)
Retained earnings..................................................................... 151,596 124,471
Accumulated translation adjustment.................................................... (1,841) 950
----------- -----------
Total stockholders' equity.......................................................... 427,548 134,081
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 717,001 $ 374,035
----------- -----------
----------- -----------
</TABLE>

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

31
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE FISCAL YEARS ENDED DECEMBER 28, 1996

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Product.................................................................... $ 414,029 $ 292,198 $ 241,545
Services................................................................... 114,620 65,860 28,365
Maintenance................................................................ 212,810 190,360 159,162
---------- ---------- ----------
Total revenue............................................................ 741,459 548,418 429,072
---------- ---------- ----------
COSTS AND EXPENSES
Cost of product............................................................ 48,383 44,793 52,897
Cost of services........................................................... 80,963 54,988 22,590
Cost of maintenance........................................................ 24,127 16,749 14,313
Marketing and sales........................................................ 226,496 185,025 163,408
Research and development................................................... 115,301 88,566 77,381
General and administrative................................................. 54,387 40,437 39,729
Unusual items.............................................................. 100,543 -- 14,707
---------- ---------- ----------
Total costs and expenses................................................. 650,200 430,558 385,025
---------- ---------- ----------
Income from operations....................................................... 91,259 117,860 44,047
Other income (expense), net.................................................. (782) 17,237 4,816
---------- ---------- ----------
Income before provision for income taxes..................................... 90,477 135,097 48,863
Provision for income taxes................................................... 61,439 37,827 12,215
---------- ---------- ----------
Net income................................................................... $ 29,038 $ 97,270 $ 36,648
---------- ---------- ----------
---------- ---------- ----------
Net income per share......................................................... $ .32 $ 1.05 $ .37
---------- ---------- ----------
---------- ---------- ----------
Weighted average common and common equivalent shares outstanding............. 91,590 92,948 98,805
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

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

32
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED DECEMBER 28, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK
------------------------
PAR VALUE AND TREASURY STOCK ACCUMULATED
CAPITAL IN ---------------------- RETAINED TRANSLATION
SHARES EXCESS OF PAR SHARES AMOUNT EARNINGS ADJUSTMENT
--------- ------------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993........... 103,588 $ 250,961 (10,929) $ (52,178) $ 8,527 $ (1,188)
Purchase of treasury stock........... -- -- (13,441) (95,119) -- --
Issuance of common stock............. 3,498 13,516 1,444 7,231 (1,165) --
Tax benefits from employee stock
transactions....................... -- 626 -- -- -- --
Treasury stock issued in connection
with acquisitions.................. -- 70 1,131 6,338 (633) --
Translation adjustment............... -- -- -- -- -- 2,429
Net income........................... -- -- -- -- 36,648 --
--------- ------------- --------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1994........... 107,086 265,173 (21,795) (133,728) 43,377 1,241
Purchase of treasury stock........... -- -- (14,430) (163,928) -- --
Issuance of common stock............. 6,708 26,984 995 6,772 (734) --
Tax benefits from employee stock
transactions....................... -- 8,463 -- -- -- --
Purchase of warrant.................. -- (1,746) -- -- (15,442) --
Unrealized gain on investment in
subsidiary......................... -- 670 -- -- -- --
Translation adjustment............... -- -- -- -- -- (291)
Net income........................... -- -- -- -- 97,270 --
--------- ------------- --------- ----------- ---------- ------------
BALANCE, DECEMBER 30, 1995........... 113,794 299,544 (35,230) (290,884) 124,471 950
Purchase of treasury stock........... -- -- (5,157) (124,204) -- --
Issuance of common stock............. 4,290 30,498 602 5,401 (3) --
Tax benefits from employee stock
transactions....................... -- 58,418 -- -- -- --
Purchase of warrant.................. -- (2,437) -- -- (1,910) --
Treasury stock issued in connection
with an acquisition................ -- 73,492 2,562 25,906 -- --
Shares issued in secondary offering,
net of expenses.................... -- 143,915 5,750 58,144 -- --
Translation adjustment............... -- -- -- -- -- (2,791)
Net income........................... -- -- -- -- 29,038 --
--------- ------------- --------- ----------- ---------- ------------
BALANCE, DECEMBER 28, 1996........... 118,084 $ 603,430 (31,473) $ (325,637) $ 151,596 $ (1,841)
--------- ------------- --------- ----------- ---------- ------------
--------- ------------- --------- ----------- ---------- ------------
</TABLE>

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

33
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED DECEMBER 28, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
CASH AND CASH INVESTMENTS AT BEGINNING OF YEAR................................ $ 84,867 $ 75,011 $ 61,382
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................. 29,038 97,270 36,648
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 51,742 46,019 44,257
Gain on sale of stock of subsidiary....................................... -- (18,873) --
Deferred income taxes..................................................... (15,943) 5,693 (2,105)
Write-off of in-process research and development.......................... 95,700 -- 4,653
Write-off of software development costs and costs related to
restructure............................................................. 4,843 -- --
Increase in other long-term liabilities and minority interest expense..... 5,992 3,135 3,985
Write-offs of equipment and other long-term assets........................ 1,719 2,281 1,229
Provisions for doubtful accounts and inventory write-offs................. 2,672 5,821 3,334
Changes in current assets and liabilities, net of effect of acquired
businesses:
Accounts receivable..................................................... (59,736) (13,760) 22,413
Inventories............................................................. (981) (4,059) (592)
Prepaid expenses and other.............................................. (33,091) (2,132) 7,871
Accrued liabilities and payables........................................ 78,836 44,439 10,612
Deferred revenue........................................................ 14,521 31,262 22,133
---------- ---------- ----------
Net cash provided by operating activities............................. 175,312 197,096 154,438
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of short-term investments...................................... 18,618 43,296 69,796
Purchases of short-term investments....................................... (7,859) (33,205) (60,238)
Purchases of property, plant and equipment................................ (62,089) (28,338) (15,196)
Capitalization of software development costs.............................. (13,560) (11,845) (10,790)
Change in purchased software and intangibles and other assets............. (20,797) (5,454) 1,129
Net proceeds from sale of subsidiary stock................................ -- 29,920 --
Payment for purchase of third-party interests in partnerships, net of cash
acquired................................................................ -- -- (14,624)
Cash advanced to a company prior to acquisition........................... -- -- (1,855)
Sale of put warrants...................................................... 13,870 1,304 10,321
Purchase of call options.................................................. (13,870) (1,304) (10,321)
---------- ---------- ----------
Net cash used for investing activities................................ (85,687) (5,626) (31,778)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable and long-term debt.................... (2,676) (26,542) (29,209)
Net proceeds from issuance of long-term debt.............................. 19,763 -- --
Sale of common stock...................................................... 226,749 26,500 13,516
Purchases of treasury stock............................................... (124,204) (163,928) (95,119)
Purchase of warrant....................................................... (4,347) (17,188) --
---------- ---------- ----------
Net cash provided by (used for) financing activities.................. 115,285 (181,158) (110,812)
---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH....................................... (5,265) (456) 1,781
---------- ---------- ----------
INCREASE IN CASH AND CASH INVESTMENTS......................................... 199,645 9,856 13,629
---------- ---------- ----------
CASH AND CASH INVESTMENTS AT END OF YEAR...................................... $ 284,512 $ 84,867 $ 75,011
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................................ $ 2,185 $ 2,423 $ 915
---------- ---------- ----------
---------- ---------- ----------
Income taxes (including foreign withholding tax)........................ $ 24,349 $ 12,968 $ 6,885
---------- ---------- ----------
---------- ---------- ----------
Non-cash investing and financing activities:
Capital lease obligations incurred for equipment........................ $ 3,070 $ 1,149 $ 1,466
---------- ---------- ----------
---------- ---------- ----------
Common and treasury stock issued under the Employee
Stock Purchase Plan and for an acquisition.............................. $ 110,607 $ 6,522 $ 6,066
---------- ---------- ----------
---------- ---------- ----------
Tax benefits from employee stock transactions............................. $ 58,418 $ 8,463 $ 626
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

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

34
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 28, 1996

THE COMPANY

Cadence Design Systems, Inc. (the Company) develops, markets and supports
electronic design automation software tools that automate, enhance and
accelerate the design and verification of integrated circuits and electronic
systems. The Company combines its technology with services to help optimize its
customers' product development processes. The Company's products and services
are used by companies throughout the world to design and develop electronic
circuits and systems, including semiconductors, computer systems and
peripherals, telecommunications and networking equipment, mobile and wireless
devices, automotive electronics, consumer products and other advanced
electronics.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries after elimination of intercompany accounts
and transactions. The functional currency of all of the Company's foreign
subsidiaries is the local currency. Gains and losses resulting from the
translation of the subsidiaries' financial statements are reported as a separate
component of stockholders' equity.

The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

The Company's fiscal year end is the Saturday closest to December 31.

Certain prior year financial statement balances have been reclassified to
conform to the 1996 presentation.

REVENUE RECOGNITION

Product revenue consists principally of revenue earned under software
license agreements and is generally recognized when the software has been
shipped and there are no significant obligations remaining. Revenue from
subscription license agreements which include software and maintenance is
deferred and recognized ratably over the term of the subscription period. Test
equipment revenue is recognized upon shipment of the test equipment.

Services revenue consists primarily of revenues received for performing
product design development and process improvement, and education and
assimilation of software products into the customers' product development
process. Services revenue is generally recognized as the services are performed
or on the percentage of completion method of accounting, depending upon the
nature of the project. Under the percentage of completion method, revenue
recognized is that portion of the total contract price that costs expended to
date bears to the anticipated final total costs based on current estimates of
the costs to complete the project. If the total estimated costs to complete a
project exceed the total contract amount, indicating a loss, the entire
anticipated loss would be recognized currently.

Maintenance revenue consists of fees for providing system updates, user
documentation and technical support for software products. Maintenance revenue
is recognized ratably over the term of the agreement.

35
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

In 1996, 1995 and 1994, one customer (a distributor), which also holds a
minority interest in a subsidiary of the Company, accounted for 14%, 15% and 10%
of total revenue, respectively. Outstanding trade accounts receivable from this
related party were approximately $3.4 million and $5.4 million at December 28,
1996 and December 30, 1995, respectively.

SOFTWARE DEVELOPMENT COSTS, PURCHASED SOFTWARE AND INTANGIBLES

The Company capitalizes software development costs in compliance with
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Capitalization of software development costs begins upon the establishment of
technological feasibility of the product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
requires considerable judgment by management with respect to certain external
factors including, but not limited to, anticipated future gross product revenue,
estimated economic life and changes in software and hardware technology.
Amortization of capitalized software development costs begins when the products
are available for general release to customers and is generally computed on a
straight-line basis over three years or, if less, the remaining estimated
economic life of the product. Purchased software and intangibles are amortized
on a straight-line basis over the remaining estimated economic life of the
underlying product (two to seven years). It is reasonably possible that the
estimates of anticipated future gross revenues, the remaining estimated economic
life of the products, 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 the costs in the near term.

In the accompanying statements of income, amortization is included in cost
of product for capitalized software development costs and in either cost of
product or cost of services for purchased software costs, as determined by the
nature of the underlying transaction. In total, amortization of capitalized and
purchased software and intangibles amounted to approximately $22.5 million,
$19.7 million and $20.2 million for 1996, 1995 and 1994, respectively. The
Company wrote off approximately $4.3 million of capitalized software development
costs related to products at the end of their life cycle in 1996, of which $2.7
million related to products that were replaced (or discontinued) as a result of
the High Level Design Systems, Inc. (HLDS) acquisition, and wrote off $.8
million of purchased software in 1995 for projects discontinued during that
year.

NET INCOME PER SHARE

Net income per share for each period is calculated by dividing net income by
the weighted average shares of common stock and common stock equivalents
outstanding during the period (calculated using the modified treasury stock
method). Common stock equivalents consist of dilutive shares issuable upon the
exercise of outstanding common stock options and warrants. Fully diluted net
income per share is substantially the same as primary net income per share.

CASH, CASH INVESTMENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid debt instruments, including
commercial paper, Euro time deposits, repurchase agreements, and certificates of
deposit with an original maturity of ninety days or less to be cash investments.

36
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

Debt instruments included in cash investments consisted of the following:

<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
(IN THOUSANDS)
Commercial paper............................................. $ 112,965 $ --
Certificates of deposit...................................... 4,221 --
Corporate debt securities.................................... -- 2,063
Euro time deposits........................................... 20,000 --
Repurchase agreements........................................ 19,803 6,034
U.S. Government notes........................................ -- 4,450
---------- ---------
$ 156,989 $ 12,547
---------- ---------
---------- ---------
</TABLE>

The Company classifies its short-term investments in debt securities as
"held-to-maturity". Accordingly, these investments, which mature through June
1997, are valued using the amortized cost method. The fair value of the
investments approximates amortized cost, and as such, the gross unrealized
holding gains and losses at December 28, 1996 and December 30, 1995 are not
material. Short-term investments consisted of $1.0 million of corporate debt
securities at December 28, 1996, and $8.8 million of corporate debt securities
and $3.0 million of U.S. Government notes at December 30, 1995.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes labor, material and manufacturing overhead. Inventories
are composed of test equipment.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost. Depreciation and
amortization are provided over the estimated useful lives, by the straight-line
method, as follows: buildings -- 31 years; leasehold and building
improvements -- shorter of the lease term or the estimated useful life;
equipment -- 2-7 years; and furniture and fixtures -- 3-5 years.

FINANCIAL INSTRUMENTS

The Company has a seasoned authorized stock repurchase program under which
it repurchases common stock to satisfy estimated requirements for shares to be
issued under its Employee Stock Purchase Plan (ESPP). Such repurchases are
intended to cover the Company's expected reissuances under the ESPP for the next
12 months. The Company also has an unseasoned systematic repurchase program for
anticipated re-issuances of stock under the Company's stock option plans. In
connection with and prior to the consummation of the merger with Cooper & Chyan
Technology, Inc. (CCT) described below, the Company will rescind its stock
repurchase program, with the exception of continued systematic stock repurchases
under its seasoned stock repurchase program for the Company's ESPP.

Since 1994, as part of its authorized repurchase program, the Company has
sold put warrants through private placements. As of December 28, 1996, there
were outstanding 1.9 million put warrants which entitle the holder to sell one
share of common stock to the Company on a specified date and at a specified
price ranging from $34.92 to $36.11 per share. Additionally, during this same
period, the Company purchased call options that entitle the Company to buy on a
specified date one share of common stock at a specified price. As of December
28, 1996, the Company had 1.4 million outstanding call options at prices

37
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

ranging from $35.17 to $36.36 per share to satisfy anticipated stock repurchase
requirements under the Company's systematic repurchase programs. The put
warrants and call options outstanding at December 28, 1996 are exercisable on
various dates through September 1997. At December 28, 1996, the fair value of
the call options was approximately $9.7 million and the fair value of the put
warrants was approximately $6.3 million. The fair value of put warrants and call
options was estimated by the Company's investment bankers.

The Company has the right to settle the put warrants with stock, cash or a
combination of stock and cash equal to the difference between the exercise price
and the fair value at the date of exercise. Settlement of the put warrants with
stock could cause the Company to issue a substantial number of shares, depending
on the exercise price of the put warrants and the per share fair value of the
Company's common stock at the time of exercise. In addition, settlement of put
warrants in stock or cash could lead to the disposition by put warrant holders
of shares of the Company's common stock that such holders may have accumulated
in anticipation of the exercise of the put warrants or call options, which may
impact the price of the Company's common stock.

At December 28, 1996, the Company had both the unconditional right and the
intent to settle these put warrants with stock and, therefore, no amount was
classified out of stockholders' equity in the accompanying balance sheet. The
effect of the exercise of these put warrants and call options is reported in
stockholders' equity.

The Company enters into foreign currency forward exchange contracts (forward
contracts) to hedge the impact of foreign currency fluctuations. Due to the
short-term nature of these forward contracts, the unrealized gains and losses
were not material at December 28, 1996 and will be recorded when realized. The
estimated fair value for foreign exchange contracts is primarily based on quoted
market prices for the same or similar instruments, adjusted where necessary for
maturity differences. The estimated fair value at December 28, 1996 and December
30, 1995 was negligible. The notional amount of the forward contracts was
approximately $30.1 million at December 28, 1996. These contracts expired on
January 29, 1997.

For certain of the Company's financial instruments, including cash and cash
investments, short-term investments and debt, the carrying amounts approximate
fair value due to their short-term nature.

The estimated fair values discussed above may not be representative of
actual values that could have been realized as of year-end or that will be
realized in the future.

CONCENTRATION OF CREDIT RISK

Financial instruments which may potentially subject the Company to
concentrations of credit risk consist principally of cash investments,
short-term investments, accounts receivable, foreign exchange forward contracts,
and call options purchased in conjunction with its stock repurchase program. The
Company's investment policy limits investments to short-term, low-risk
instruments. Concentration of credit risk related to accounts receivable is
limited due to the varied customers comprising the Company's customer base and
their dispersion across geographies. Credit exposure related to the forward
contracts is limited to the unrealized gains on these contracts. Credit exposure
on call options is limited to the unrealized gains on the option contracts. All
financial instruments are executed with financial institutions with strong
credit ratings which minimizes risk of loss due to nonpayment. The Company has
not experienced any losses due to credit impairment related to its financial
instruments.

38
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

OTHER INCOME (EXPENSE)

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Interest income................................................................. $ 4,362 $ 4,854 $ 3,262
Interest expense................................................................ (1,913) (2,222) (1,045)
Gain on sale of IMS stock....................................................... -- 18,873 --
Gain on sale of investment...................................................... -- -- 4,196
Minority interest............................................................... (3,016) (1,341) (485)
Gain (loss) on foreign exchange................................................. 164 (117) (204)
Other expense, net.............................................................. (379) (2,810) (908)
--------- --------- ---------
Total other income (expense)................................................ $ (782) $ 17,237 $ 4,816
--------- --------- ---------
--------- --------- ---------
</TABLE>

39
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Inventories
Raw materials and supplies.............................................................. $ 3,981 $ 2,335
Work-in-process......................................................................... 3,031 3,825
Finished goods.......................................................................... 1,121 2,043
---------- ----------
Total inventories..................................................................... $ 8,133 $ 8,203
---------- ----------
---------- ----------
Property, Plant and Equipment
Land.................................................................................... $ 38,848 $ 38,848
Buildings............................................................................... 38,613 38,612
Leasehold and building improvements..................................................... 26,091 23,349
Equipment............................................................................... 161,155 108,911
Furniture and fixtures.................................................................. 23,524 19,834
---------- ----------
Total cost............................................................................ 288,231 229,554
Less: Accumulated depreciation and amortization......................................... 127,304 105,451
---------- ----------
Property, plant and equipment, net.................................................... $ 160,927 $ 124,103
---------- ----------
---------- ----------
Software Development Costs
Cost.................................................................................... $ 58,781 $ 47,944
Less: Accumulated amortization.......................................................... 37,486 22,151
---------- ----------
Software development costs, net....................................................... $ 21,295 $ 25,793
---------- ----------
---------- ----------
Purchased Software and Intangibles
Cost.................................................................................... $ 32,226 $ 23,086
Less: Accumulated amortization.......................................................... 21,959 14,818
---------- ----------
Purchased software and intangibles, net............................................... $ 10,267 $ 8,268
---------- ----------
---------- ----------
Accounts Payable and Accrued Liabilities
Payroll and payroll related accruals.................................................... $ 65,424 $ 48,668
Other accrued liabilities............................................................... 34,990 25,739
Accounts payable........................................................................ 15,760 17,592
---------- ----------
Total accounts payable and accrued liabilities........................................ $ 116,174 $ 91,999
---------- ----------
---------- ----------
</TABLE>

INTEGRATED MEASUREMENT SYSTEMS, INC.

In July 1995, the Company and its wholly owned subsidiary, Integrated
Measurement Systems, Inc. (IMS) sold to the public approximately 3.0 million
shares of common stock at $11 per share in a registered initial public offering.
Of these shares, approximately .4 million were sold by IMS and approximately 2.6
million were sold by the Company as the sole selling stockholder of IMS. The
sale generated net proceeds to the Company, after underwriting expenses,
discounts, commissions and other expenses, of approximately $26.6 million and a
pre-tax gain of approximately $18.9 million, which is reflected as other income
in the accompanying statement of income. The Company also recognized a $.7
million unrealized gain, net of taxes, which was recorded in stockholders'
equity. IMS received net proceeds of approximately

40
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

$3.3 million. As a result of the offering and sale of shares by the Company, the
Company's ownership interest in IMS decreased to approximately 55%. The minority
interest liability of $13.5 million and $10.6 million related to IMS is recorded
in minority interest liability in the accompanying December 28, 1996 and
December 30, 1995 balance sheets, respectively.

In January 1997, IMS filed a registration statement with the Securities and
Exchange Commission with the intent to sell 1.7 million shares to the public of
which .9 million are owned by the Company. The sale will result in the Company
reducing its ownership in IMS to approximately 37%.

ACQUISITIONS

HIGH LEVEL DESIGN SYSTEMS, INC.

In December 1996, the Company acquired all of the outstanding stock of High
Level Design Systems, Inc. (HLDS) for approximately 2.6 million shares of the
Company's common stock. The total purchase price was approximately $101.4
million. HLDS developed, marketed and supported electronic design automation
software for the design of high-density, high-performance integrated circuits.
The acquisition was accounted for as a purchase and, accordingly, the results of
HLDS from the date of acquisition forward have been recorded in the Company's
consolidated financial statements. In connection with the acquisition, net
intangibles of $99.6 million were acquired, of which $95.7 million was reflected
as a one-time charge to operations for 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. This one-time charge was
reflected in the Company's 1996 statement of income as an unusual item within
operating expenses. The remaining intangible of $3.9 million, consisting of
goodwill, is included in purchased software and intangibles in the accompanying
balance sheets and is being amortized over its estimated useful life of five
years.

In connection with the acquisition, net assets acquired were as follows (in
thousands):

<TABLE>
<S> <C>
Trade accounts receivable and other current assets........ $ 1,840
Intangibles, including in-process research and
development............................................. 99,594
Property, equipment and other long-term assets............ 5,945
Current liabilities assumed............................... (5,680)
Long-term liabilities assumed............................. (300)
---------
Net assets acquired................................... $ 101,399
---------
---------
</TABLE>

The following unaudited pro forma information shows the results of
operations for the two fiscal years ended December 28, 1996 as if the HLDS
acquisition had occurred at the beginning of each period presented and at the
purchase price established in December 1996. The results are not necessarily
indicative of what would have occurred had the acquisition actually been made at
the beginning of each of the respective periods presented or of future
operations of the combined companies. The pro forma results for 1996 combine the
Company's results for the year ended December 28, 1996 with the results of HLDS
for the period from January 1, 1996 through the date of acquisition and includes
the $95.7 million write-off

41
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

discussed above. The following unaudited pro forma results include the
straight-line amortization of intangibles over a period of five years.

<TABLE>
<CAPTION>
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenue..................................................... $ 751,453 $ 558,545
Net income.................................................. $ 24,924 $ 94,819
Net income per share........................................ $ .26 $ .99
Weighted average common and common equivalent shares
outstanding............................................... 94,309 95,667
</TABLE>

REDWOOD DESIGN AUTOMATION, INC.

In August 1994, the Company acquired the business and certain assets of
Redwood Design Automation, Inc. (Redwood) for approximately .9 million shares of
the Company's common stock valued at $4.6 million. Prior to the acquisition of
Redwood, the Company advanced $1.8 million to Redwood which was not repaid.
Redwood was a development stage company formed to design, develop and market
software for use in electronic systems design. The acquisition was accounted for
as a purchase and, accordingly, the results of Redwood from the date of
acquisition forward have been recorded in the Company's consolidated financial
statements. In connection with the acquisition, net intangibles of $6.8 million
were acquired, of which $4.7 million was reflected as a one-time charge to
operations for 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. This one-time charge was reflected in the Company's 1994
statement of income as an unusual item within operating expenses. The remaining
intangibles of $2.1 million were included in purchased software and intangibles.
These amounts were fully amortized as of December 28, 1996 after being amortized
over their useful life of two years.

In connection with the acquisition, net assets acquired were as follows (in
thousands):

<TABLE>
<S> <C>
Trade accounts receivable and other current assets........ $ 562
Intangibles, including in-process research and
development............................................. 6,756
Property, equipment and other long-term assets............ 541
Current liabilities assumed............................... (1,162)
Long-term liabilities assumed............................. (292)
---------
Net assets acquired................................... $ 6,405
---------
---------
</TABLE>

The following unaudited pro forma information shows the results of
operations for the year ended December 31, 1994 as if the Redwood acquisition
had occurred at the beginning of the period presented and at the purchase price
established in August 1994. The results are not necessarily indicative of what
would have occurred had the acquisition actually been made at the beginning of
the period or of future operations of the combined companies. The pro forma
results combine the Company's results for the year ended December 31, 1994 with
the results of Redwood for the period from January 1, 1994 through the

42
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

date of acquisition. The following unaudited pro forma results include the
straight-line amortization of intangibles over a period of two years (in
thousands, except per share amount).

<TABLE>
<S> <C>
Revenue................................................... $ 429,658
Net income................................................ $ 33,531
Net income per share...................................... $ .34
Weighted average common and common equivalent shares
outstanding............................................. 99,471
</TABLE>

REAL ESTATE PARTNERSHIPS

In March 1994, the Company acquired all third-party interests in two real
estate partnerships in which it was a 46.5% and 80% limited partner,
respectively, for approximately $8.7 million in cash and the assumption of a
secured construction loan of approximately $23.5 million. The Company leased
buildings from one of the limited partnerships, and the second limited
partnership owned unencumbered land adjacent to the leased property. The Company
repaid the secured construction loan in May 1994.

In October 1994, the Company acquired all third-party interests in a third
real estate partnership in which it was a 49% limited partner for approximately
$5.9 million in cash. The partnership owns land and buildings which are leased
to the Company and were subject to a secured note in the amount of approximately
$23.7 million which the Company repaid in October 1995.

In connection with the acquisition of the partnerships, net assets acquired
were as follows (in thousands):

<TABLE>
<CAPTION>
<S> <C>
Property and other assets............................................... $ 66,030
Liabilities assumed..................................................... (47,423)
Less: Cash acquired..................................................... (3,983)
----------
Net cash paid......................................................... $ 14,624
----------
----------
</TABLE>

UNUSUAL ITEMS

Unusual items included within operating expenses are described below. No
unusual items were recorded during 1995.

<TABLE>
<CAPTION>
1996 1994 1993 1992
---------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Write-off of in-process research and development....................... $ 95,700 $ 4,653 $ -- $ --
Write-off of capitalized software development costs for
products replaced by HLDS products................................... 2,724 -- -- --
Restructuring costs.................................................... 2,119 -- 13,450 --
Provision for settlement of litigation................................. -- 10,054 -- --
(Income) loss from operations of disposed division..................... -- -- 6,200 (253)
---------- --------- --------- ---------
Total unusual items.................................................. $ 100,543 $ 14,707 $ 19,650 $ (253)
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>

43
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

associated with the HLDS acquisition and the Redwood acquisition, respectively.
The acquired in-process research and development had not reached technological
feasibility and, in management's opinion, had no probable alternative future
use. Also included in 1996 unusual items were $2.7 million of capitalized
software development costs for products developed by the Company which were
replaced by HLDS products in connection with the acquisition of HLDS. The 1996
restructuring costs of $2.1 million include employee termination costs
associated with the outsourcing of the Company's management information
technology services, as well as costs associated with excess facilities.
Included in the 1994 unusual items was an approximately $10 million provision
for settlement of litigation. In April 1994, the Company entered into agreements
to settle two class action lawsuits for a combined settlement of $16.5 million,
of which approximately $7.5 million was covered by the Company's insurance
carriers. Reflected in the statement of income in 1994 was the net settlement
cost of approximately $9.0 million plus approximately $1.0 million for related
legal costs.

In December 1993, the Company sold its Automated Systems (ASI) division for
a nominal amount of cash and future royalties. During 1996, ASI filed for
bankruptcy and it is unknown if the Company will ultimately receive any such
royalties. In light of the nominal proceeds received, the sale of ASI resulted
in a loss on disposal of approximately $6.0 million. The loss was due
principally to the loss on the sale of the net operating assets, as well as
amounts accrued for estimated costs to be incurred in connection with the
disposal. Loss on operations of ASI totalled $6.2 million in 1993.

In March 1993, the Company recorded restructuring costs of approximately
$13.5 million associated with a planned restructure of certain areas of sales,
operations and administration due to business conditions. The restructuring
charge included approximately $4.5 million for employee terminations. The
Company terminated approximately 270 employees at an actual total cost of
approximately $4.6 million. In addition, the restructuring charge included
approximately $3.5 million for excess facilities and approximately $2.1 million
for the write-off of purchased software and intangibles arising from required
adjustments to the Company's cost structure necessitated by lower revenue
levels. Substantially all of the excess facilities accrual was utilized by
December 31, 1993. The restructuring charge also included an additional
provision for doubtful accounts of approximately $3.0 million, which was
utilized by December 31, 1993 and write-off of certain software development
costs of $.4 million resulting from changes in the systems product strategy.

LINE OF CREDIT AND NOTE PAYABLE

In April 1996, the Company entered into a senior secured revolving credit
facility (the Facility) which allows the Company to borrow up to $120 million
through April 1999. The Facility is secured by the majority of the Company's
property, plant and equipment, cash, investments, intangibles, and certain other
assets. The Company has the option to pay interest based upon the London
Interbank Offered Rate (LIBOR) plus 1.5%, or the higher of the federal funds
effective rate plus .5% or prime. The Company must comply with certain financial
covenants and conditions as defined in the Facility which the Company was in
compliance with at December 28, 1996. As of December 28, 1996, the Company had
no outstanding borrowings under the Facility. The Facility has scheduled
mandatory reductions.

In May 1996, the Company's wholly owned real estate partnership, River Oaks
Place Associates L.P. (the Partnership), entered into a $20 million long-term
financing arrangement (the ROPA Loan) with a bank. The financing agreement
expires on December 31, 2005, and requires quarterly principal payments, which
began on September 30, 1996, in amounts ranging from $.4 million to $.7 million.
The Partnership has the option to pay interest at the LIBOR plus 1.5% or the
higher of the bank's prime rate plus .5% or

44
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

the Federal Funds rate plus 1.5%. The ROPA Loan is secured by the real and
personal properties of the Partnership. In connection with the ROPA Loan
agreement, the Company extended its lease agreements with the Partnership until
December 31, 2005 and minimum lease payments under the agreements have been
assigned as security under the ROPA Loan agreement.

NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt consisted of the following:

<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations...................................... $ 4,016 $ 3,116
Note payable (ROPA Loan)....................................... 19,625 --
--------- ---------
Total........................................................ 23,641 3,116
Less: Current portion.......................................... 3,349 1,497
--------- ---------
Long-term debt............................................... $ 20,292 $ 1,619
--------- ---------
--------- ---------
</TABLE>

The note payable will be repaid as follows (in millions): $1.6 in 1997 and
1998, $1.4 in 1999, $1.7 in 2000, $1.9 in 2001, and $11.4 thereafter.

LEASES

Equipment and facilities are leased under various capital and operating
leases expiring on different dates through the year 2008. Certain of these
leases contain renewal options. Rental expense was approximately $12.3 million,
$10.7 million and $19.0 million for 1996, 1995 and 1994, respectively.

In connection with a previous merger, the Company has closed certain
facilities and, accordingly, has accrued for estimated future minimum rent and
maintenance costs related to these facilities. Total costs accrued at December
28, 1996 were $5.7 million of which $2.3 million was included in accrued
liabilities and $3.4 million was included in other long-term liabilities in the
accompanying balance sheet.

45
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

At December 28, 1996, 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:
1997......................................................... $ 2,038 $ 11,043
1998......................................................... 1,394 8,814
1999......................................................... 782 6,238
2000......................................................... 302 4,570
2001......................................................... 53 3,165
Thereafter..................................................... -- 1,641
--------- -----------
Total lease payments........................................... $ 4,569 $ 35,471
-----------
-----------
Less: Amount representing interest (Average rate of 7.5%)...... 553
---------
Present value of lease payments................................ 4,016
Less: Current portion.......................................... 1,800
---------
Long-term portion.............................................. $ 2,216
---------
---------
</TABLE>

The cost of equipment under capital leases included in the balance sheets as
property, plant and equipment at December 28, 1996 and December 30, 1995 was
approximately $11.0 million and $12.6 million, respectively. Accumulated
amortization of the leased equipment at December 28, 1996 and December 30, 1995
was approximately $8.4 million and $10.1 million, respectively.

COMMITMENTS AND CONTINGENCIES

As part of its overall investment strategy, the Company has committed to
participating in a venture capital partnership as a limited partner. The
Company's total committed investment of at least $25 million will be made over
the next two to three years. As of December 28, 1996, the Company had
contributed approximately $6.5 million, which is reflected in other assets in
the accompanying balance sheet.

During the fourth quarter of 1996, the Company entered into a merger
agreement with Cooper & Chyan Technology, Inc. (CCT). The transaction will
entail a tax-free, stock-for-stock exchange at a fixed ratio of .85 shares of
the Company's common stock for each share of CCT stock. Based on CCT's 13.1
million shares outstanding on December 31, 1996, the Company expects to issue
approximately 11.1 million shares. In addition, the Company will assume
outstanding stock options of CCT based upon the exchange ratio of .85. The
merger, which is currently awaiting regulatory approval, is expected to be
accounted for as a pooling of interests.

The Company filed a complaint in the United States District Court for the
Northern District of California on December 6, 1995 against Avant! Corporation
(a company formed by a merger of companies

46
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

formerly known as ArcSys, Inc. and ISS, Inc. (Avant!)) and certain of its
employees for misappropriation of trade secrets, copyright infringement,
conspiracy and other illegalities.

On January 16, 1996, Avant! filed various counterclaims against the Company
and the Company's President and CEO, and on April 12, 1996, Avant! filed a First
Amended Counterclaim. The amended counterclaim alleges, INTER ALIA, that the
Company and its President and CEO had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anti-competitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The amended
counterclaim also alleges that certain Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its President
and CEO believe that each has meritorious defenses to Avant!'s claims, and each
intends to defend such action vigorously. By an order dated July 13, 1996, the
court bifurcated Avant!'s counter-claim from the Company's complaint.

On April 19, 1996, the Company filed a motion seeking a preliminary
injunction to prevent Avant! from continuing to market ArcCell and ArcCell xo,
two software lines which the Company alleges were misappropriated. A hearing on
the motion was held on September 10, 1996. The Court has not yet issued a
ruling.

Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse impact on
the Company's financial position or results of operations.

STOCKHOLDERS' EQUITY

STOCK SPLIT

In May 1996 and October 1995, the Company's Board of Directors effected
three-for-two stock splits payable in the form of a dividend of one additional
share of the Company's common stock for every two shares owned by stockholders.
Par value remained at $.01 per share. The stock split resulted in the issuance
of approximately 25.8 million and 37.8 million additional shares of common stock
from authorized but unissued shares in 1996 and 1995, respectively. Accordingly,
all share and per share data have been adjusted to retroactively reflect the
stock splits.

STOCK COMPENSATION PLANS

FIXED STOCK OPTION PLANS

The Company's Employee Stock Option Plan (the Plan) provides for the
issuance of either incentive or non-qualified options to its employees to
purchase up to 30,685,050 shares of common stock at an exercise price not less
than fair market value of the stock on the date of grant. Options granted under
the Plan become exercisable over periods of one to four years and expire five to
ten years from the date of grant.

The Company's Non-Statutory Stock Option Plan (the Non-Statutory Plan)
provides for the issuance of non-qualified options to its employees to purchase
up to 12,375,000 shares of common stock at an exercise price not less than the
fair market value of the stock on the date of grant. Options granted under the
Non-Statutory Plan become exercisable over a four year period, with one-fourth
of the shares vesting one year from the vesting commencement date and the
remaining shares vesting in 36 equal monthly installments. Options under the
Non-Statutory Plan generally expire ten years from the date of grant.

47
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

Under the Directors Stock Option Plans (the Directors Plans), the Company
may grant non-qualified options to its non-employee directors for up to
1,676,248 shares of common stock at an exercise price not less than the fair
market value of the stock on the date of grant. Options granted under the
Directors Plans have a term of up to ten years. Certain of the option grants
vest one year from the date of grant and certain other option grants vest
one-third one year from the date of grant and two-thirds ratably over the
subsequent two years.

The Company has assumed certain options granted to former employees of
acquired companies (Acquired Options). The Acquired Options were assumed by the
Company outside of the Plan, but all are administered as if assumed under the
Plan. All of the Acquired Options have been adjusted to effectuate the
conversion under the terms of the Agreements and Plans of Reorganization between
the Company and the companies acquired. The Acquired Options generally become
exercisable over a four year period and generally expire either five or ten
years from the date of grant. No additional options will be granted under any of
the acquired companies' plans.

A summary of the status of all of the Company's fixed stock option plans as
of and during the year ended December 28, 1996 is as follows:

<TABLE>
<CAPTION>
1996
-------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ -----------------
<S> <C> <C>
Outstanding at beginning of year.................... 20,574,794 $ 8.46
Assumption of HLDS options.......................... 506,110 14.89
Granted............................................. 3,539,798 31.99
Exercised........................................... (4,290,058) 5.53
Forfeited........................................... (841,633) 13.04
Expired............................................. (1,794) 4.27
------------
Outstanding at end of year........................ 19,487,217 $ 6.81
------------
------------
Options exercisable at year end..................... 10,149,039
Options available for future grant.................. 4,977,784
Weighted average fair value of options
granted during the year........................... $11.80
</TABLE>

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/28/96 CONTRACTUAL LIFE PRICE AT 12/28/96 PRICE
- ----------------- ------------ ------------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
$.28 - $10.00 10,444,315 8.7 $ 5.11 8,419,146 $ 4.83
$10.01 - $20.00 4,864,326 9.0 15.28 1,520,376 15.14
$20.01 - $30.00 2,261,921 9.1 27.03 168,028 23.87
$30.01 - $40.00 1,895,605 8.9 35.68 41,489 33.41
$40.01 - $46.00 21,050 9.7 40.25 -- --
------------ ------------
19,487,217 10,149,039
------------ ------------
------------ ------------
</TABLE>

48
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

Combined activity for the years ended December 30, 1995 and December 31,
1994 was as follows:

<TABLE>
<CAPTION>
1995 1994
-------------- --------------
SHARES SHARES
-------------- --------------
<S> <C> <C>
Outstanding at beginning of year.................................................. 22,793,616 25,094,804
Granted........................................................................... 6,483,705 4,604,715
Exercised ($.19 per share to $11.69 per share).................................... (6,708,491) (3,498,376)
Cancelled......................................................................... (1,994,036) (3,407,527)
-------------- --------------
Outstanding at end of year...................................................... 20,574,794 22,793,616
-------------- --------------
-------------- --------------
Range of exercise prices of outstanding options at end of year.................... $ 0.19-$25.96 $ 0.19-$13.28
Options exercisable at year end................................................... 9,120,039 10,293,154
Options available for future grant................................................ 7,566,197 4,648,079
</TABLE>

OPTION AGREEMENTS

Prior to 1996, the Company occasionally has issued options outside of the
Plan. As of December 28, 1996, options to purchase 55,705 shares were
outstanding and exercisable at prices ranging from $4.14 to $5.22 per share.

EMPLOYEE STOCK PURCHASE PLAN

Under the 1990 ESPP, the Company is authorized to issue up to 6,750,000
shares of common stock to its employees. Under the terms of the ESPP, employees
can choose each year to have up to 12% of their annual base earnings plus
bonuses withheld to purchase the Company's common stock. The purchase price of
the stock is 85% of the lesser of the fair market value as of the beginning or
the end of the semiannual option periods. Under the ESPP, the Company issued
605,537, 994,728 and 1,444,473 shares to employees in 1996, 1995 and 1994,
respectively. The weighted average fair value of shares issued in 1996 was
$7.33.

PRO FORMA INFORMATION

The Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for the stock compensation
plans (the Plans) described above. Accordingly, no compensation cost has been
recognized for the Plans. If compensation cost for the Plans had been determined
consistent with SFAS No. 123 "Accounting for Stock-Based Compensation", the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C> <C>
IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS
Net Income As Reported $ 29,038 $ 97,270
Pro Forma $ 6,445 $ 87,300

Earnings per share -- primary As Reported $ .32 $ 1.05
Pro Forma $ .07 $ .94
Earnings per share -- fully diluted Pro Forma $ .04 $ .91
</TABLE>

Because the method of accounting prescribed by SFAS 123 has not been applied
to options granted prior to January 1, 1995, and because the Black-Scholes
option valuation model was developed for traded

49
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

options and requires the input of subjective assumptions, the resulting pro
forma compensation cost may not be representative of that to be expected in
future years.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
1996 and 1995: risk-free interest rate of 6.16% for 1996 and 6.41% for 1995,
dividend yields of 0%, volatility factors of the expected market price of the
Company's common stock of 35%, and a weighted average expected life of an option
of four years.

WARRANT

In connection with the purchase of the business and certain assets of
Comdisco Systems, Inc. (Comdisco), a subsidiary of Comdisco, Inc., in June 1993,
the Company issued a warrant (Comdisco Warrant) to purchase 2,925,000 shares of
the Company's common stock at $6.45 per share. Pursuant to the original terms of
the warrant agreement, during 1996 and 1995, the Company repurchased portions of
the warrant applicable to 150,000 and 2,655,000 shares, respectively, for
approximately $4.3 million and $17.2 million, respectively. The warrant for the
remaining 120,000 shares expires in June 2003 and can be exercised at any time
in increments of not less than 50,000 shares. The warrant was valued at the time
of issuance at approximately $1.8 million and was included as part of the total
purchase price of Comdisco.

RESERVED FOR FUTURE ISSUANCE

As of December 28, 1996, the Company has reserved the following shares of
authorized but unissued common stock for future issuance:

<TABLE>
<S> <C>
Employee stock option plans................................. 23,430,961
Other option agreements..................................... 55,705
Directors stock option plans................................ 978,335
Employee stock purchase plan................................ 1,347,149
Put warrants................................................ 1,883,143
Comdisco Warrant............................................ 120,000
----------
Total................................................... 27,815,293
----------
----------
</TABLE>

STOCKHOLDER RIGHTS PLAN

On February 9, 1996, the Company adopted a new Stockholder Rights Plan (the
Preferred Rights Plan) to protect stockholders' rights in the event of a
proposed or actual acquisition of 15% or more of the outstanding shares of the
Company's common stock. As part of this plan, each share of the Company's common
stock carries a right to purchase one one-thousandth (1/1000) of a share of
Series A Junior Participating Preferred Stock (the Right), par value $.01 per
share, of the Company at a price of $240 per one one-thousandth of a share,
subject to adjustment. The Rights are subject to redemption at the option of the
Board of Directors at a price of $.01 per Right until the occurrence of certain
events. The Rights expire on February 20, 2006.

Concurrent with the adoption of the Preferred Rights Plan, the Board of
Directors amended the Company's 1989 Stockholder Rights Plan to provide for the
expiration of the rights thereunder effective February 9, 1996.

50
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

INCOME TAXES

The provision for income taxes consisted of the following components:

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current
Federal.......................................... $ 59,412 $ 11,954 $ 4,624
State............................................ 9,712 4,095 881
Foreign.......................................... 8,258 16,085 8,815
--------- --------- ---------
Total current...................................... 77,382 32,134 14,320
--------- --------- ---------
Deferred (prepaid)
Federal.......................................... (15,309) 4,989 (1,103)
State............................................ (750) 201 (384)
Foreign.......................................... 116 503 (618)
--------- --------- ---------
Total deferred (prepaid)........................... (15,943) 5,693 (2,105)
--------- --------- ---------
Total provision for income taxes............... $ 61,439 $ 37,827 $ 12,215
--------- --------- ---------
--------- --------- ---------
</TABLE>

Income before income taxes for 1996, 1995 and 1994 included income of
approximately $25.3 million, $34.2 million and $19.2 million, respectively, from
the Company's foreign subsidiaries.

The provision for income taxes is net of the benefit of operating loss
carryforwards totaling $2.6 million, $9.7 million and $20.8 million, for 1996,
1995 and 1994, respectively.

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

<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Provision computed at federal statutory rate.................................. $ 31,667 $ 47,284 $ 17,074
State income tax, net of federal tax effect................................... 5,964 2,662 572
Change in valuation allowance................................................. (11,835) (19,999) (10,457)
Research and development tax credit........................................... (207) (494) (379)
Foreign income tax at a higher rate........................................... -- 2,129 --
Foreign tax credit............................................................ -- (769) (446)
Foreign withholding taxes..................................................... 2,823 3,414 3,446
Amortization of goodwill...................................................... 897 390 2,398
Write-off of in-process research and development.............................. 33,495 -- --
Other......................................................................... (1,365) 3,210 7
---------- ---------- ----------
Provision for income taxes.................................................... $ 61,439 $ 37,827 $ 12,215
---------- ---------- ----------
---------- ---------- ----------
Effective tax rate............................................................ 68% 28% 25%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

51
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

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

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets
Merger reserves......................................................................... $ 2,228 $ 3,394
Deferred revenue........................................................................ 5,367 5,075
Vacation accrual........................................................................ 3,517 2,902
Net operating losses.................................................................... 7,789 6,202
Tax credits............................................................................. 12,029 32,845
Other................................................................................... 17,063 12,148
---------- ----------
Total deferred tax assets................................................................. 47,993 62,566
Valuation allowance-provision for income taxes.......................................... (1,714) (13,549)
Valuation allowance-equity and intangibles.............................................. (9,041) (34,223)
---------- ----------
Net assets................................................................................ 37,238 14,794
---------- ----------
Deferred tax liabilities
Capitalized software.................................................................... (8,132) (10,091)
Other................................................................................... (9,202) (7,273)
---------- ----------
Total deferred tax liabilities............................................................ (17,334) (17,364)
---------- ----------
Total net deferred tax assets (liabilities)............................................... $ 19,904 $ (2,570)
---------- ----------
---------- ----------
</TABLE>

The Company has recorded deferred tax assets of approximately $48.0 million
offset by a valuation allowance of $10.8 million. Certain of these deferred tax
assets will affect equity and intangibles and will not be available to offset
future provisions for income taxes and are identified in the above table as
"valuation allowance-equity and intangibles". Realization of the net deferred
tax assets of $37.2 million is dependent on generating sufficient taxable income
prior to the expiration of the loss and tax credit carryforwards. Although
realization is not assured, management believes it is more likely than not that
the net deferred tax assets of $37.2 million will be realized. The amount of the
net deferred tax assets considered realizable, however, could be reduced or
increased in the near term if actual facts, including the estimate of future
taxable income, differ from those estimated.

The net valuation allowance decreased by $37.0 million in 1996. The decrease
in valuation allowance-equity and intangibles of $25.2 million is due to the
realization of the tax benefits of stock option deductions generated in prior
years. The valuation allowance-provision for income taxes decreased by $11.8
million due to the realization of net operating losses and tax credits generated
in prior years. The remaining valuation allowance-provision for income taxes of
$1.7 million is due to net operating losses and tax credits of foreign
subsidiaries, the use of which is dependent upon generating sufficient taxable
income prior to their expiration.

The remaining net operating loss carryforwards will expire at various dates
from 1997 through 2010 and federal tax credit carryforwards will expire at
various dates from 1997 through 2011.

The Company's federal income tax returns for 1989 through 1991 have been
examined by the Internal Revenue Service (IRS). Tax credits of $15.6 million
have been disallowed by the IRS. The Company is contesting these adjustments and
is pursuing administrative remedies. Management believes that adequate provision
has been made for any deficiency that may result from this examination and that
the resolution

52
<PAGE>
CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 28, 1996

of this matter will not have a material adverse impact on the Company's
financial position or results of operations.

OPERATIONS BY GEOGRAPHIC AREA

The Company operates primarily in one industry segment: the development and
marketing of computer-aided design software and related services. The Company's
products have been marketed internationally through distributors and through the
Company's subsidiaries in Europe and Asia/Pacific. Intercompany revenue results
from licenses that are based on a percentage of the subsidiaries' revenue from
unaffiliated customers. The following table presents a summary of operations by
geographic area.

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Revenue
Domestic operations(1)................................................... $ 633,997 $ 440,618 $ 344,696
European operations...................................................... 119,455 97,596 79,404
Asia/Pacific operations.................................................. 129,157 107,556 86,022
Eliminations............................................................. (141,150) (97,352) (81,050)
----------- ----------- -----------
Consolidated............................................................... $ 741,459 $ 548,418 $ 429,072
----------- ----------- -----------
----------- ----------- -----------
Intercompany revenue (eliminated in consolidation)
Domestic operations...................................................... $ 94,156 $ 58,719 $ 58,837
European operations...................................................... 16,984 15,893 9,495
Asia/Pacific operations.................................................. 30,010 22,740 12,718
----------- ----------- -----------
Consolidated............................................................... $ 141,150 $ 97,352 $ 81,050
----------- ----------- -----------
----------- ----------- -----------
Income from operations
Domestic operations...................................................... $ 67,222 $ 85,308 $ 25,763
European operations...................................................... 13,257 9,705 7,412
Asia/Pacific operations.................................................. 10,780 22,847 10,872
----------- ----------- -----------
Consolidated............................................................... $ 91,259 $ 117,860 $ 44,047
----------- ----------- -----------
----------- ----------- -----------
Identifiable assets
Domestic operations...................................................... $ 750,040 $ 396,676 $ 368,226
European operations...................................................... 53,716 50,303 56,343
Asia/Pacific operations.................................................. 59,008 63,680 42,095
Eliminations............................................................. (145,763) (136,624) (105,616)
----------- ----------- -----------
Consolidated............................................................... $ 717,001 $ 374,035 $ 361,048
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

(1) Domestic operations revenue includes export revenue of approximately $25.0
million, $14.7 million and $12.9 million to Europe for 1996, 1995 and 1994,
respectively, and approximately $125.9 million, $90.6 million and $65.4
million to Asia/Pacific for 1996, 1995 and 1994, respectively.

53
<PAGE>
SCHEDULE II

CADENCE DESIGN SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND FROM END OF
DESCRIPTION PERIOD EXPENSES RESERVES PERIOD
- ----------------------------------------------------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 28, 1996
Allowance for doubtful accounts................................ $7,420 $1,621 $ (269)(1) $8,772
Accrued costs for disposed division............................ 865 -- (219) 646
Accrued restructuring costs.................................... -- 2,119 -- 2,119

Year Ended December 30, 1995
Allowance for doubtful accounts................................ $4,905 $4,827 $(2,312)(1) $7,420
Accrued costs for disposed division............................ 874 -- (9) 865

Year Ended December 31, 1994
Allowance for doubtful accounts................................ $3,471 $2,178 $ (744)(1) $4,905
Accrued restructuring costs.................................... 3,669 -- (3,669) --
Accrued costs for disposed division............................ 1,373 -- (499) 874
</TABLE>

(1) Uncollectible accounts written-off

54
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Cadence Design Systems, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, March
21, 1997.

CADENCE DESIGN SYSTEMS, INC.

<TABLE>
<S> <C>
/s/ JOSEPH B. COSTELLO
-------------------------------------------
Joseph B. Costello
President & Chief Executive Officer
</TABLE>

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

<TABLE>
<CAPTION>
NAME/TITLE DATE
- ------------------------------------------------------ -----------------

<S> <C> <C>
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR

/s/ JOSEPH B. COSTELLO
- -------------------------------------------
Joseph B. Costello March 21, 1997

CHIEF FINANCIAL OFFICER

/s/ H. RAYMOND BINGHAM
- -------------------------------------------
H. Raymond Bingham March 21, 1997

CONTROLLER (Principal Accounting Officer)

/s/ WILLIAM PORTER
- -------------------------------------------
William Porter March 21, 1997

ADDITIONAL DIRECTORS

/s/ CAROL BARTZ
- -------------------------------------------
Carol Bartz March 21, 1997

/s/ HENRY E. JOHNSTON
- -------------------------------------------
Henry E. Johnston March 21, 1997

/s/ DONALD L. LUCAS
- -------------------------------------------
Donald L. Lucas March 21, 1997

</TABLE>

55
<PAGE>
<TABLE>
<CAPTION>
NAME/TITLE DATE
- ------------------------------------------------------ -----------------
/s/ DR. LEONARD Y. W. LIU
- -------------------------------------------
Dr. Leonard Y. W. Liu March 21, 1997
<S> <C> <C>

/s/ DR. ALBERTO SANGIOVANNI-VINCENTELLI
- -------------------------------------------
Dr. Alberto Sangiovanni-Vincentelli March 21, 1997

/s/ GEORGE M. SCALISE
- -------------------------------------------
George M. Scalise March 21, 1997

/s/ DR. JOHN B. SHOVEN
- -------------------------------------------
Dr. John B. Shoven March 21, 1997

/s/ JAMES E. SOLOMON
- -------------------------------------------
James E. Solomon March 21, 1997
</TABLE>

56
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ----------- ---------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
2.03 Agreement and Plan of Merger and Reorganization dated as of October 28, 1996, among the
Registrant, Cooper & Chyan Technology, Inc. (CCT) and Wyoming Acquisition Sub, Inc.
(incorporated by reference to Registrant's Current Report on Form 8-K filed on November 7,
1996 (the November 7, 1996 8-K)).

2.04 Form of Certificate of Merger to be entered into by Registrant and CCT (incorporated by
reference to Exhibit 2.2 to the Registrant's Form S-4 Registration Statement No. 333-16779
filed on November 26, 1996 (the November 26, 1996 Form S-4))

3.01 (a) The Registrant's Certificate of Incorporation, as filed with the Secretary of State of the
State of Delaware on April 8, 1987 (incorporated by reference to Exhibit 3.01 to the
Registrant's Form S-1 Registration Statement (No. 33-13845) originally filed on April 29, 1987
(the 1987 Form S-1)).

(b) The Registrant's Certificate of Retirement of Stock as filed with the Secretary of State
of the State of Delaware on September 28, 1987 (incorporated by reference to Exhibit 3.01(b)
to the Registrant's Form S-4 Registration Statement (No. 33-20724) originally filed on
February 25, 1988).

(c) The Registrant's Certificate of Ownership and Merger as filed with the Secretary of State
of the State of Delaware on June 1, 1988 (incorporated by reference to Exhibit 3.02(c) to the
Registrant's Form S-1 Registration Statement (No. 33-23107) originally filed on July 18, 1988
(the 1988 Form S-1)).

(d) The Registrant's Certificate of Designations of Series A Junior Participating Preferred
Stock as filed with the Secretary of State of the State of Delaware on June 8, 1989
(incorporated by reference to Exhibit 3A to the Registrant's Form 8-K originally filed on June
12, 1989 (the 1989 Form 8-K)).

(e) The Registrant's Certificate of Amendment of Certificate of Incorporation as filed with
the Secretary of State of the State of Delaware on July 26, 1991 (incorporated by reference to
Exhibit 3.01(e) to the Registrant's Form S-4 Registration Statement (No. 33-43400) originally
filed on October 7, 1991 (the 1991 Form S-4)).

(f) The Registrant's Certificate of Designation of Series A Convertible Preferred Stock as
filed with the Secretary of State of the State of Delaware on December 30, 1991 (incorporated
by reference to Exhibit 3.01(f) from the Registrant's Form 10-K for the fiscal year ended
December 31, 1991).

(g) The Registrant's Form of Amendment of Certificate of Incorporation to increase the number 62
of authorized shares of common stock dated February 1997.

3.02 The Registrant's Bylaws, as currently in effect (as incorporated by reference to Exhibit 3.02
to the 1987 Form S-1 and as amended by Exhibit 3-b to the 1989 Form 8-K).

4.01 Specimen Certificate of the Registrant's Common Stock (incorporated by reference to Exhibit
4.01 to the 1991 Form S-4).

4.02 Rights Agreement, dated as of February 9, 1996, between the Registrant and Harris Trust and
Savings Bank which includes as exhibits thereto the Certificate of Designations for the Series
A Junior Participating Preferred Stock, the form of Right Certificate and the Summary of
Rights to Purchase Preferred Shares (incorporated by reference to Exhibit 1A, 1B and 1C to the
Registrant's Form 8-K filed February 16, 1996.)
</TABLE>

57
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ----------- ---------------------------------------------------------------------------------------------- -------------
9.05 Form of Voting Agreement, dated as of October 28, 1996, between the Registrant and each of
John F. Cooper, David Chyan, William J. Portelli, Robert D. Selvi and John R. Harding
(incorporated by reference to Exhibit 99.3 to the November 7, 1996 Form58-K).
<C> <S> <C>

10.01 Employment Agreement, dated as of October 28, 1996, between the Registrant and David Chyan
(incorporated by reference to Exhibit 99.5 to the November 7, 1996 Form 8-K).

10.02 The Registrant's 1987 Stock Option Plan, as amended on February 5, 1997. 63

10.03 Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in
effect under the Registrant's 1987 Stock Option Plan (incorporated by reference to Exhibit
4.01 to the Registrant's Form S-8 Registration Statement (No. 33-22652) filed on June 20,
1988).*

10.04 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock
Option Grant and Form of Stock Option Exercise Notice and Agreement (the first document is
incorporated by reference to Exhibit 4.02 to the Registrant's 1994 Form S-8 and the latter two
documents are incorporated by reference to Exhibit 10.08 - 10.10 to the Registrant's 1988 Form
S-1).*

10.05 The Registrant's 1993 Directors Stock Option Plan including the Form of Stock Option Grant
(incorporated by reference to Exhibit 10.04 of the 1994 Form S-8).*

10.06 The Registrant's 1995 Directors Stock Option Plan including the Form of Stock Option Grant.
(incorporated by reference to Exhibit 10.05 to the 1995 Form 10-K).

10.07 The Registrant's 1990 Employee Stock Purchase Plan as amended on March 4, 1997. 70

10.08 The Registrant's Senior Executive Bonus Plan for 1995 (incorporated by reference to Exhibit
10.08 of the Registrant's Form 10-K for the fiscal year ended December 31, 1994 (the 1994 Form
10-K)).*

10.09 The Registrant's Senior Executive Bonus Plan for 1996 (incorporated by reference to Exhibit
10.08 to the 1995 Form 10-K).

10.10 The Registrant's Chief Executive Officer Bonus Plan for 1996 (incorporated by reference to
Exhibit 10.09 to the 1995 Form 10-K).

10.11 The Registrant's Deferred Compensation Plan for 1994 (incorporated by reference to Exhibit
10.09 to the 1994 Form 10-K).*

10.12 The Registrant's 1996 Deferred Compensation Venture Investment Plan (incorporated by reference
to Exhibit 10.11 to the 1995 Form 10-K).

10.13 Amended and Restated Lease, dated June 29, 1989, by and between River Oaks Place Associates
(ROPA), a California limited partnership, and the Registrant, for the Registrant's executive
offices at 555 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit
10.14 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990 (the 1990 Form
10-K)).

10.14 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices
at 575 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.16 to
the 1990 Form 10-K).
</TABLE>

58
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ----------- ---------------------------------------------------------------------------------------------- -------------
10.15 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices
at 535 and 545 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit
10.17 to the 1990 Form 10-K).
<C> <S> <C>

10.16 Lease dated September 3, 1985 by and among the Richard T. Peery and John Arrillaga Separate
Property Trusts (P/A Trusts) and Valid Logic Systems Incorporated (Valid) (which merged into
the Registrant) for the Registrant's offices at 75 West Plumeria Avenue, San Jose, California
(incorporated by reference to Exhibit 10.16 to the Form 10-K for Valid for the fiscal year
ended December 30, 1990 (the 1990 Valid Form 10-K)).

10.17 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 75 West Plumeria Avenue, San
Jose, California, by and among Valid and the P/A Trusts (incorporated by reference to Exhibit
10.17 to the 1990 Valid Form 10-K).

10.18 Lease dated December 19, 1988 by and among the P/A Trusts and Valid for the Registrant's
offices at 2835 North First Street, San Jose, California (incorporated by reference to Exhibit
10.18 to the 1990 Valid Form 10-K).

10.19 Lease dated September 3, 1985 by and among the P/A Trusts and Valid for the Registrant's
offices at 2820 Orchard Parkway, San Jose, California (incorporated by reference to Exhibit
10.14 to the 1990 Valid Form 10-K).

10.20 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 2820 Orchard Parkway, San
Jose, California, by and among Valid and the P/A Trusts (incorporated by reference to Exhibit
10.15 to the 1990 Valid Form 10-K).

10.21 Form of Executive Compensation Agreement dated May 1989 between Registrant and Mr. Costello
(incorporated by reference to Exhibit 10.20 to the Registrant's Form S-4 registration
statement (No. 33-31673), originally filed on October 18, 1989).*

10.22 Offer letter to H. Raymond Bingham dated May 12, 1993 (incorporated by reference to Exhibit
10.24 to the Form 10-K for the fiscal year ended December 31, 1993 (the 1993 Form 10-K)).*

10.23 Offer letter to M. Robert Leach dated May 17, 1993 (incorporated by reference to Exhibit 10.25
to the 1993 Form 10-K).*

10.24 1993 Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 4.05 to the 1994
Form S-8).*

10.25 Consulting agreement dated May 1, 1994 with Henry E. Johnston, who was made a director on July
5, 1994 by unanimous written consent (incorporated by reference to the Registrant's Form 10-Q
for the quarterly period ended June 30, 1994 (the 1994 Second Quarter Form 10-Q)).*

10.26 Consulting agreement dated October 26, 1993 with Alberto Sangiovanni-Vincentelli (incorporated
by reference to the 1994 Second Quarter Form 10-Q).*

10.27 Letter agreement dated August 17, 1994 by and among Registrant, Morris Management Company (the
General Partner), and Morris Associates VI, L.P. (Morris) whereby Registrant acquired all of
the interests in River Oaks Place Associates, L.P. (incorporated by reference to the
Registrant's Form 8-K filed November 14, 1994).
</TABLE>

59
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ----------- ---------------------------------------------------------------------------------------------- -------------
10.28 Agreement of Merger and Plan of Reorganization by and among Registrant, Simon Software, Inc.
and Redwood Design Automation, Inc. (Redwood) dated as of July 8, 1994 (incorporated by
reference to the Registrant's Form 10-Q/A, Amendment Number 1 to the 1994 Second Quarter Form
10-Q, filed November 14, 1994 (the 1994 Second Quarter 10-Q/A)).
<C> <S> <C>

10.29 Agreement of Merger dated as of August 1, 1994 between Redwood and CDS Corporation
(incorporated by reference to the Registrant's 1994 Second Quarter 10-Q/A).

10.30 The Registrant's amended and restated 401 (k) Plan (incorporated by reference to the
Registrant's Form 10-Q for the first quarter ended March 30, 1996 (the March 30, 1996 10-Q)).

10.31 Amendment dated May 3, 1996 (incorporated by reference to the Registrant's Form 10-Q for the
first quarter ended March 30, 1996) to Registrant's 1993 Non Statutory Stock Option Plan
(incorporated by reference to the Registrant's Form 10-Q for the third quarter ended September
30, 1994).

10.32 Revolving line of credit dated April 1996, by and between Credit Lyonnais and the Registrant
(incorporated by reference to the March 30, 1996 10-Q).

10.33 Term loan dated May 31, 1996, by and between Credit Lyonnais and River Oaks Place Associates
L.P. (ROPA), a California limited partnership (the Term Loan) (incorporated by reference to
the Registrant's Form 10-Q for the second quarter ended June 29, 1996 (the June 29, 1996
10-Q)).

10.34 Deed of Trust, Security Agreement, Assignment of Leases and Rents, Fixture Filing and
Financing Statement dated May 31, 1996, Schedule to Term Loan (incorporated by reference to
the June 29, 1996 10-Q)

10.35 Assignment of Leases and Rents dated May 31, 1996, Schedule to Term Loan (incorporated by
reference to the June 29, 1996 10-Q).

10.36 Assignment of Partnership Interests by Seeley Properties, Inc. dated May 31, 1996, Schedule to
Term Loan (incorporated by reference to the June 29, 1996 10-Q).

10.37 Assignment of Partnership Interests by the Registrant dated May 31, 1996, Schedule to Term
Loan (incorporated by reference to the June 29, 1996 10-Q).

10.38 Environmental Indemnity dated May 31, 1996, Schedule to Term Loan (incorporated by reference
to the June 29, 1996 10-Q).

10.39 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to
Registrant's 1987 Stock Option Plan filed on May 31, 1994 (incorporated by reference to
Exhibit 4.01 to the Registrant's Form S-8 Registration Statement (No. 33-53913) filed on May
31, 1994).

10.40 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to
Registrant's 1993 Non Statutory Stock Option Plan (incorporated by reference to the 1994 Third
Quarter 10-Q).
</TABLE>

60
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ----------- ---------------------------------------------------------------------------------------------- -------------
10.41 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway,
San Jose, California, by and between ROPA and the Registrant (incorporated by reference to
Exhibit 10.14 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990 (the
1990 Form 10-K)).
<C> <S> <C>

10.42 Amendment Number 2, dated May 31,1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway,
San Jose, California, by and between ROPA and the Registrant (incorporated by reference to
Exhibit 10.14 to the 1990 Form 10-K).

10.43 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose,
California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.16
to the 1990 Form 10-K).

10.44 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose,
California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.16
to the 1990 Form 10-K).

10.45 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San
Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit
10.17 to the 1990 Form 10-K).

10.46 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San
Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit
10.17 to the 1990 Form 10-K).

10.47 Agreement and Plan of Merger and Reorganization dated as of October 3, 1996, among the
Registrant, High Level Design Systems, Inc. (HLDS) and Harbor Acquisition Sub, Inc.
(incorporated by reference to the November 7, 1996 8-K).

21.01 Subsidiaries of the Registrant. 77

23.01 Consent of Arthur Andersen LLP 78

27.1 Financial data schedule for the period ended December 28, 1996. 79
</TABLE>

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

*A management contract or compensatory plan required to be filed as an exhibit
to Form 10-K.

<PAGE>
Exhibit 3.01(g)

FORM OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CADENCE DESIGN SYSTEMS, INC.
TO BE APPROVED BY STOCKHOLDERS

The undersigned, , the of Cadence
Design Systems, Inc., a corporation duly organized and existing under the laws
of the State of Delaware (hereinafter referred to as the "Corporation"), does
hereby certify that the following amendment of the Certificate of Incorporation
of the following amendment of the Certificate of Incorporation of the
Corporation, as heretofore amended, has been duly adopted by the Board of
Directors and the stockholders in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware, said amendment being
effected by deleting the introductory paragraph of Article IV of said
Certificate of Incorporation, as heretofore amended, and substituting in lieu
thereof a new introductory paragraph reading as follows:

The total number of shares of all classes of stock which the Corporation
shall have authority to issue is 300,400,000, consisting of (1) 300,000,000
shares of Common Stock, par value $.01 per share (hereinafter referred to as
"Common Stock" and (2) 400,000 shares of Preferred Stock, par value $.01 per
share (hereinafter called the "Preferred Stock").

IN WITNESS WHEREOF, the undersigned has made this certificate under the seal
of the Corporation and has signed the same as [state title] thereof this day
of , 1997.

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

Name:
Title:

Attest:

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

Name:
Title:

<PAGE>
Exhibit 10.02

CADENCE DESIGN SYSTEMS, INC.
1987 STOCK OPTION PLAN
AS ADOPTED APRIL 24, 1987
AS AMENDED MAY 4, 1993
AS AMENDED AUGUST 1, 1996 TO BECOME EFFECTIVE AUGUST 15, 1996
AS AMENDED FEBRUARY 5, 1997
AS APPROVED BY STOCKHOLDERS , 1997

1. PURPOSES OF THE PLAN.

The purposes of this Stock Option Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to the employees of the Company and any parent or
subsidiary corporations, and to promote the success of the Company's business.

Options granted hereunder may be either "incentive stock options," as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
"non-statutory stock options," at the discretion of the Board and as reflected
in the terms of the written option agreement.

2. DEFINITIONS.

As used herein, the following definitions shall apply:

A. "BOARD" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company, if no Committee is appointed.

B. "CODE" shall mean the Internal Revenue Code of 1986, as amended.

C. "COMMON STOCK" shall mean the Common Stock of the Company.

D. "COMPANY" shall mean CADENCE DESIGN SYSTEMS, INC., a Delaware
corporation.

E. "COMMITTEE" shall mean the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan,
if one is appointed.

F. "CONSULTANT" shall mean any consultants, independent contractors or
advisers (provided that such persons render bona fide services not in
connection with the offering and sale of securities in capital
raising transactions) rendering services to the Company or a Parent
or Subsidiary.

G. "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" shall mean the
absence of any interruption of termination of service, whether as an
Employee or Consultant. Continuous Status as an Employee or
Consultant shall not be considered interrupted in the case of sick
leave, military leave, or any other leave of absence.

H. "EMPLOYEE" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee or other compensation paid solely on
account of service as a director by the Company shall not be
sufficient to constitute "employment" by the Company.

I. "INCENTIVE STOCK OPTION" shall mean an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended.

J. "OPTION" shall mean a stock option granted pursuant to the Plan.

K. "OPTIONED STOCK" shall mean the Common Stock subject to an Option.

63
<PAGE>
L. "OPTIONEE" shall mean an Employee or Consultant who receives an
Option.

M. "PARENT" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Internal Revenue Code
of 1986, as amended.

N. "PLAN" shall mean this 1987 Stock Option Plan.

O. "RULE 16B-3" shall mean Rule 16b-3 of the Securities Exchange Act of
1934, as amended, or any successor to Rule 16b-3, as in effect when
discretion is being exercised with respect to the Plan.

P. "SHARE" shall mean a share of Common Stock, as adjusted in accordance
with Section 11 of the Plan.

Q. "SUBSIDIARY" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Internal
Revenue Code of 1986, as amended.

3. STOCK SUBJECT TO THE PLAN.

Subject to the provisions of Section 11 of the Plan, the number of shares
reserved for issuance under the Plan from and after Febraury 5, 1997 is
11,766,689 shares of Common Stock. This share reserve is comprised of: (x)
3,608,025 shares not subject to options which remain available to be optioned
and sold under the Plan as of February 5, 1997, plus (y) 8,158,664 shares
underlying options which have been previously granted under the Plan and which
remain outstanding as of February 5, 1997, reduced (z) on a share-by-share basis
for each share of Common Stock issued upon exercise of an option described in
clause (y) above. Shares issued under the Plan may be authorized, but unissued,
or reacquired Common Stock.

If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan.

4. ADMINISTRATION OF THE PLAN.

(A) PROCEDURE. The Plan shall be administered by the Board of Directors
of the Company.

The Board of Directors may appoint a Committee consisting of not less than
two members of the Board of Directors to administer the Plan on behalf of the
Board of Directors, subject to such terms and conditions as the Board of
Directors may prescribe. One or more of these members may be "Non-Employee
Directors" (a director who is receiving no compensation from the Company other
than for service on the Board of Directors or who does not receive such
additional compensation which exceeds the limits specified in the definition of
such term under Rule 16b-3) or "Outside Directors" (a director who is not either
a current or former officer of the Company nor a current employee of the
Company, and who is receiving no compensation from the Company other than for
service on the Board of Directors or who does not receive such additional
compensation which exceeds the limits specified in the definition of such term
under Section 162(m) of the Code). Once appointed, the Committee shall continue
to serve until otherwise directed by the Board of Directors. From time to time
the Board of Directors may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause), and appoint
new members in substitution therefor, fill vacancies however caused and remove
all members of the Committee, and thereafter directly administer the Plan.
Notwithstanding anything in this Section 4 to the contrary, at any time the
Board or the Committee may delegate to a committee of one or more members of the
Board of Directors the authority to grant Options to all Employees and
Consultants or any portion or class thereof.

Members of the Board who are either eligible for Options or have been
granted Options may vote on any matters affecting the administration of the Plan
or grant of any Options pursuant to the Plan, except that no such member shall
act upon the granting of an Option to himself, but any such member may be

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counted in determining the existence of a quorum at any meeting of the Board
during which action is taken with respect to the granting of Options to him.

(B) POWERS OF THE BOARD. Subject to the provisions of the Plan, the Board
shall have the authority, in its discretion: (i) to grant Incentive Stock
Options, in accordance with Section 422 of the Internal Revenue Code of 1986, as
amended, or "non-statutory stock options"; (ii) to determine, upon review of
relevant information and in accordance with Section 8(b) of the Plan, the fair
market value of the Common Stock; (iii) to determine the exercise price per
share of Options to be granted, which exercise price shall be determined in
accordance with Section 8(a) of the Plan; (iv) to determine the Employees or
Consultants to whom, and the time or times at which, Options shall be granted
and the number of shares to be represented by each Option; (v) to interpret the
Plan; (vi) to prescribe, amend and rescind rules and regulations relating to the
Plan; (vii) to determine the terms and provisions of each Option granted (which
need not be identical) in accordance with the Plan, and, with the consent of the
holder thereof with respect to any adverse change, modify or amend each Option;
(viii) to accelerate or defer (the latter with the consent of the Optionee) the
exercise date of any Option; (ix) to authorize any person to execute on behalf
of the Company any instrument required to effectuate the grant of an Option
previously granted by the Board; and (x) to make all other determinations deemed
necessary or advisable for the administration of the Plan.

(C) EFFECT OF BOARD'S DECISION. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.

5. ELIGIBILITY.

Options may be granted only to Employees or Consultants as defined in
Section 2 hereof. An Employee or Consultant who has been granted an Option may,
if he is otherwise eligible, be granted an additional Option or Options.

Incentive Stock Options may only be granted to Employees. The aggregate fair
market value (determined at the time the Option is granted) of the stock with
respect to which Incentive Stock Options are exercisable for the first time by
such individual during any calendar year (under this Plan or under any other
incentive stock option plan of the Company or any Parent or Subsidiary of the
Company) shall not exceed $100,000. To the extent that the grant of an Option
exceeds this limit, the portion of the Option which exceeds such limit shall be
treated as a non-statutory stock option.

The Plan shall not confer upon any Optionee any right with respect to
continuation of employment or consultancy by the Company, nor shall it interfere
in any way with his right or the Company's right to terminate his employment at
any time or his consultancy pursuant to the terms of the Consultant's agreement
with the Company.

No person shall be eligible to be granted Options covering more than
1,330,021 shares of Common Stock in any calendar year (such number representing
1.5% of the issued and outstanding Common Stock of the Company entitled to vote
as of the record date for the 1997 Annual Meeting of Stockholders). The
foregoing limit shall be adjusted pursuant to the provisions of Section 11.

6. TERM OF THE PLAN.

The Plan became effective upon its adoption by the Board of Directors.
Subsequently amended, the Plan shall continue in effect until January 31, 2002
unless sooner terminated under Section 13 of the Plan.

7. TERM OF OPTION.

The term of each Option shall be ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Stock Option Agreement.
However, in the case of an Incentive Stock Option granted to an Employee who
immediately before the Incentive Stock Option is granted, owns stock

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representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Incentive
Stock Option shall be five (5) years from the date of grant thereof or such
shorter time as may be provided in the Stock Option Agreement.

8. EXERCISE PRICE AND CONSIDERATION.

(a) The per Share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:

(i) In the case of an Incentive Stock Option:

(A) Granted to an Employee who, immediately before the grant of such
Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be no
less than 110% of the fair market value per Share on the date of
grant.

(B) Granted to any Employee, the per Share exercise price shall be no
less than 100% of the fair market value per Share on the date of
grant.

(ii) In the case of an Option granted on or after the effective date of
registration of any class of equity security of the Company pursuant to
Section 12 of the Exchange Act and prior to six months after the
termination of such registration, the per Share exercise price shall be
not less than 100% of the fair market value per Share on the date of
grant.

(iii) Notwithstanding the foregoing, an Option (whether an Incentive Stock
Option or non-statutory stock option) may be granted with an exercise
price lower than set forth in the preceding paragraphs if such Option
is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code.

(b) The fair market value shall be determined by the Board in its
discretion: PROVIDED HOWEVER, that where there is a public market for the Common
Stock, the fair market value per Share shall be the average of the high and low
prices of the Common Stock on the date of grant, as reported on the New York
Stock Exchange.

(c) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the Board
and may consist entirely of cash, check, promissory note, other Shares of Common
Stock having a fair market value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said option shall be exercised, or any
combination of such methods of payment, or such other consideration and method
of payment for the issuance of Shares to the extent permitted under applicable
law. In making its determination as to the type of consideration to accept, the
Board shall consider if acceptance of such consideration may be reasonably
expected to benefit the Company.

9. EXERCISE OF OPTION.

(A) PROCEDURE FOR EXERCISE RIGHTS AS A SHAREHOLDER. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan.

An Option may not be exercised for a fraction of a Share.

An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(c) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the

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books of the Company or of a duly authorized transfer agent of the Company) of
the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 11 of the
Plan.

Exercise of an Option in any manner shall result in a decrease in the number
of Shares which thereafter may be available, both for purposes of the Plan and
for sale under the Option, by the number of Shares as to which the Option is
exercised.

(B) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. If an employee
ceases to serve as an Employee or Consultant, he may, but only within thirty
(30) days (or such other period of time not exceeding three (3) months as is
determined by the Board) after the date he ceases to be an Employee or
Consultant of the Company, exercise his Option to the extent that he was
entitled to exercise it at the date of such termination. To the extent that he
was not entitled to exercise the Option at the date of such termination, or if
he does not exercise such Option (which he was entitled to exercise) within the
time specified herein, the Option shall terminate.

(i) during the term of the Option who is at the time of his death an
Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of
grant of the Option, the Option may be exercised at any time within
three (3) months following the date of death, by the Optionee's
estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to
exercise that would have accrued had the Optionee continued living
three (3) months after the date of death; or

(ii) within one (1) month after the termination of Continuous Status as
an Employee or Consultant, the Option may be exercised, at any time
within three (3) months following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued at the date of termination.

10. NON-TRANSFERABILITY OF OPTIONS.

Except as otherwise expressly provided in the terms of an individual Option
which is a non-statutory stock option, the Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee. Notwithstanding the foregoing,
the person to whom the Option is granted may, by delivering written notice to
the Company, in a form satisfactory to the Company, designate a third party who,
in the event of the death of the Optionee, shall thereafter be entitled to
exercise the Option.

11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.

Subject to any required action by the shareholders of the Company, the
number of shares of Common Stock covered by each outstanding Option, and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per share of Common Stock covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split or the payment of a
stock dividend with respect to the Common Stock or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company;

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PROVIDED, HOWEVER, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Such adjustments shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option.

In the event of the proposed dissolution or liquidation of the Company, or
in the event of a proposed sale of all or substantially all of the assets of the
Company, or the merger of the Company with or into another corporation, the
Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. If the Board,
at its sole discretion, permits acceleration as to all or any part of the
Optioned Stock, the aggregate fair market value (determined at the time an
Option is granted) of stock with respect to which Incentive Stock Options first
become exercisable in the year of such dissolution, liquidation, sale of assets
or merger cannot exceed $100,000. Any remaining accelerated Incentive Stock
Options shall be treated as non-statutory stock options.

12. TIME OF GRANTING OPTIONS.

The date of grant of an Option shall, for all purposes, be the date on which
the Board makes the determination granting such Option. Notice of the
determination shall be given to each Employee or Consultant to whom an Option is
so granted within a reasonable time after the date of such grant.

13. AMENDMENT AND TERMINATION OF THE PLAN.

(A) AMENDMENT AND TERMINATION. The Board may amend or terminate the Plan
from time to time in such respects as the Board may deem advisable; provided
that, no amendment shall be effective unless approved by the stockholders of the
Company to the extent stockholder approval is necessary for the Plan to satisfy
the requirements of Section 422 of the Code, Rule 16b-3 or any listing
requirements of any securities exchange or national market system on which the
Common Stock is traded.

(B) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination
of the Plan shall not adversely affect Options already granted and such Options
shall remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the Board,
which agreement must be in writing and signed by the Optionee and the Company.

14. CONDITIONS UPON ISSUANCE OF SHARES.

Shares shall not be issued pursuant to the exercise of an Option unless the
exercise of such Option and the issuance and delivery of such Shares pursuant
thereto shall comply with all relevant provisions of the law, including without
limitation, the Securities Act of 1933, as amended; the Securities Exchange Act
of 1934, as amended; the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.

As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company. Such a representation is required by any of the
aforementioned relevant provisions of law.

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15. RESERVATION OF SHARES.

The Company, during the term of this Plan, will at all times reserve and
keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.

Inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company's counsel to be necessary
to the lawful issuance and sale of any Shares hereunder, shall relieve the
Company of any liability in respect of the failure to issue or sell such Shares
as to which such requisite authority shall not have been obtained.

16. OPTION AGREEMENT.

Options shall be evidenced by written option agreements in such form as the
Board shall approve.

<PAGE>
Exhibit 10.07

CADENCE DESIGN SYSTEMS, INC.

EMPLOYEE STOCK PURCHASE PLAN

AS ADOPTED JANUARY 30, 1990
AS AMENDED MAY 7, 1992
AS AMENDED MAY 4, 1993
AS AMENDED MAY 17, 1994
AS AMENDED AUGUST 1, 1996 TO BECOME EFFECTIVE AUGUST 15, 1996
AS AMENDED MARCH, 1997
AS APPROVED BY STOCKHOLDERS , 1997

1. ESTABLISHMENT OF PLAN. Cadence Design Systems, Inc. (the "Company")
proposes to grant options for purchase of the Company's Common Stock to eligible
employees of the Company and Subsidiaries (as hereinafter defined) pursuant to
this Employee Stock Purchase Plan (the "Plan"). For purposes of this Plan,
"parent corporation" and "Subsidiary" (when used in the plural, "Subsidiaries")
shall have the same meaning as "parent corporation" and "subsidiary corporation"
in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of
1986, as amended (the "Code"). The Company intends that the Plan shall qualify
as an "employee stock purchase plan" under Section 423 of the Code (including
any amendments or replacements of such section), and the Plan shall be so
construed. Any term not expressly defined in the Plan but defined for purposes
of Section 423 of the Code shall have the same definition herein. Subject to
adjustment as provided in Section 14 of the Plan, the aggregate number of shares
of Common Stock which may be purchased under this Plan shall not exceed
8,750,000(1) shares of Common Stock of the Company (including the 2,000,000
shares reserved for issuance in March 1997), which may be treasury shares
reacquired by the Company or authorized and unissued shares, or a combination of
both.

2. PURPOSE. The purpose of the Plan is to provide employees of the Company
and Subsidiaries designated by the Board of Directors as eligible to participate
in the Plan with a convenient means to acquire an equity interest in the Company
through payroll deductions, to enhance such employees' sense of participation in
the affairs of the Company and Subsidiaries, and to provide an incentive for
continued employment.

3. ADMINISTRATION. The Plan is administered by the Board of Directors of
the Company or by a committee of one or more members of the Board of Directors
of the Company designated by the Board of Directors of the Company (in which
event all references herein to the Board of Directors shall be to the
committee). Subject to the provisions of the Plan and the limitations of Section
423 or the Code or any successor provision in the Code, all questions of
interpretation or application of the Plan shall be determined by the Board and
its decisions shall be final and binding upon all participants. Members of the
Board shall receive no compensation for their services in connection with the
administration of the Plan, other than standard fees as established from time to
time by the Board of Directors of the Company for services rendered by Board
members serving on Board committees. All expenses incurred in connection with
the administration of the Plan shall be paid by the Company.

4. ELIGIBILITY. Any employee of the Company or the designated Subsidiaries
is eligible to participate in an Offering Period (as hereinafter defined) under
the Plan except the following:

a) employees who are not employed by the Company or Subsidiaries on the
fifteenth (15th) day of the month before the beginning of such Offering
Period;

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

(1) Adjusted to reflect the 3-2 stock splits which occurred in October 1995 and
May 1996.

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b) employees who are customarily employed for less than 20 hours per week;

c) employees who are customarily employed for less than five months in a
calendar year; and

d) employees who, together with any other person whose stock would be
attributed to such employee pursuant to Section 425(d) of the Code, own
stock or hold options to purchase stock or who, as a result of being
granted an option under the Plan with respect to such Offering Period,
would own stock or hold options to purchase stock possessing 5 percent or
more of the total combined voting power or value of all classes of stock
of the Company or any of its Subsidiaries.

5. OFFERING DATES. The Board or the committee shall have the authority to
determine the terms and conditions of each Offering Period in accordance with
the terms of the Plan. The first day of each Offering Period is referred to as
the "Offering Date." The last day of each Offering Period is hereinafter
referred to as the "Purchase Date." An Offering Period shall begin on the first
day of February of each calendar year and shall end on the last day of July of
the same year. An Offering Period shall also begin on the first day of August of
each calendar year and end on the last day of January of the calendar year
immediately following. The Board of Directors or the committee shall have the
power to change the duration of Offering Periods with respect to future
offerings without stockholder approval if such change is announced to eligible
employees at least fifteen (15) days prior to the scheduled beginning of the
first Offering Period to be affected.

6. PARTICIPATION IN THE PLAN. Eligible employees may become participants
in an Offering Period under the Plan on the first Offering Date after satisfying
the eligibility requirements by delivering a subscription agreement authorizing
payroll deductions to the Company or Subsidiary (whichever employs such
employee) not later than the 15th day of the month before such Offering Date
(unless a later time for filing the subscription agreement is set by the Board
for all eligible Employees with respect to a given Offering Period). The form of
subscription agreement and the person or department to which the subscription
agreement must be submitted for processing shall be determined by the Company.
An eligible employee who does not deliver a subscription agreement by such date
after becoming eligible to participate in such Offering Period under the Plan
shall not participate in that Offering Period or any subsequent Offering Period
unless such employee enrolls in the Plan by filing the subscription agreement
not later than the specified date preceding a subsequent Offering Date. Once an
employee becomes a participant in an Offering Period, such employee will
automatically participate in the Offering Period commencing immediately
following the last day of the prior Offering Period unless the employee
withdraws from the Plan or terminates further participation in the Offering
Period as set forth in Section 11 below. Such participant is not required to
file any additional subscription agreements in order to continue participation
in the Plan. Any participant whose option expires and who has not withdrawn from
the Plan pursuant to Section 11 below will automatically be re-enrolled in the
Plan and granted a new option on the Offering Date of the next Offering Period.

7. GRANT OF OPTION ON ENROLLMENT. An eligible employee who enrolls in the
Plan with respect to an Offering Period pursuant to Section 6 hereof, will
receive a grant of an option (as of the Offering Date) to purchase on the
Purchase Date up to that number of shares of Common Stock of the Company
determined by dividing the amount accumulated in such employee's payroll
deduction account during such Offering Period by a lower of (i) eighty-five
percent (85%) of the fair market value of a share of the Company's Common Stock
on the Offering Date (the "Entry Price") or (ii) eighty-five percent (85%) of
the fair market value of a share of the Company's Common Stock on the Purchase
Date; provided, however, that the number of shares of the Company's Common Stock
subject to any option granted pursuant to this Plan shall not exceed the lesser
of (a) the maximum number of shares set by the Board pursuant to Section 10(c)
below with respect to the applicable Offering Period, or (b) 200% of the number
of shares which could be purchased for the Entry Price with the payroll
deductions authorized by a participant and actually withheld with respect to
such Offering Period. Fair market value of a share of the Company's Common Stock
shall be determined as provided in Section 8 hereof.

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8. PURCHASE PRICE. The purchase price per share at which a share of Common
Stock will be sold in Any Offering Period shall be 85% of the lesser of:

a) the fair market value on the Offering Date; or

b) the fair market value on the Purchase Date.

For purposes of the Plan, the term "fair market value" shall mean the
closing price in U.S. dollars of a share of the Company's Common Stock as
reported on the New York Stock Exchange. However, if the Offering Date or
Purchase Date falls on a non-business day then the fair market value of the
Common Stock shall be the closing sales price on the immediately preceding
business day.

9. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE OF
SHARES

a) The funds with which participants may purchase shares shall be
accumulated by regular payroll deductions made during each Offering
Period. The deductions are made as a percentage of the employee's
Compensation in one percent increments of not less than two percent (2%)
nor greater than twelve percent (12%). Compensation shall be limited to
base salary or wages, cash incentive compensation (including bonuses),
and commissions, if any, paid; PROVIDED, HOWEVER, that for purposes of
determining a participant's Compensation, any election by such
participant to reduce his or her regular cash remuneration under Sections
125 or 401(k) of the Code shall be treated as if the participant did not
make such election. The Board of Directors or the committee shall have
the power to interpret and/or alter the definition of "Compensation" with
respect to any or all future Offering Periods. Payroll deductions shall
commence on the first payday following the Offering Date and shall
continue to the end of the Offering Period unless sooner altered or
terminated as provided in the Plan.

b) A participant may lower (but not increase) the rate of payroll
deductions during an Offering Period by filing a new authorization for
payroll deductions, in which case the new rate shall become effective:
for the next payroll period commencing more than 15 days after receipt of
the authorization and shall continue for the remainder of the Offering
Period unless changed as described below. Such change in the rate of
payroll deductions may be made at any time during an Offering Period, but
not more than one change may be made effective during any Offering
Period. A participant may increase or lower the rate of payroll
deductions for any subsequent Offering Period by filing a new
authorization for payroll deductions not later than the 15th day of the
month (or other date specified by the Board of Directors or the
committee) before the beginning of such Offering Period.

c) All payroll deductions made for a participant are credited to his or her
account under the Plan and are deposited with the general funds of the
Company; no interest accrues on the payroll deductions. All payroll
deductions received or held by the Company may be used by the Company for
any corporate purpose, and the Company shall not be obligated to
segregate such payroll deductions.

d) On each Purchase Date, so long as the Plan remains in effect and the
participant remains eligible to participate in the Plan, and provided
that the participant has not submitted a signed and completed withdrawal
form before that date which notifies the Company that the participant
wishes to withdraw from that Offering Period under the Plan and have all
payroll deductions accumulated in the account maintained on behalf of the
participant as of that date returned to the participant, the Company
shall apply the funds then in the participant's account to the purchase
of whole shares of Common Stock reserved under the option granted to such
participant with respect to the Offering Period to the extent that such
option is exercisable on the Purchase Date. The purchase price per share
shall be as specified in Section 8 of the Plan. Any cash remaining in a
participant's account after such purchase of shares by reason of any
limitation on the number of shares that may be purchased under the Plan
as set forth in Section 10 hereof

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which is sufficient to purchase a whole share of the Company's Common
Stock, shall be refunded to such participant in cash; PROVIDED, HOWEVER,
that any amount remaining in such participant's account on a Purchase
Date which is less than the amount necessary to purchase a full share of
Common Stock of the Company shall be carried forward, without interest,
into the next Offering Period. In the event that the Plan has been
oversubscribed, all funds not used to purchase shares on the Purchase
Date shall be returned to the participant. No Common Stock shall be
purchased on a Purchase Date on behalf of any employee whose
participation in the Plan has terminated prior to such Purchase Date.

e) As promptly as practicable after the Purchase Date, the Company shall
arrange the delivery to each participant, as appropriate, of a
certificate representing the shares purchased upon exercise of his or her
option.

f) During a participant's lifetime, such participant's option to purchase
shares hereunder is exercisable only by him or her. In the event of the
participant's death, the rights of such participant's heirs or
beneficiaries shall be determined under Section 12 of the Plan. The
participant will have no interest or voting right in shares covered by
his or her option until such option has been exercised. Shares to be
delivered to a participant under the Plan will be registered in the name
of the participant or in the name of the participant and his or her
spouse.

10. LIMITATIONS ON SHARES TO BE PURCHASED.

a) No employee shall be entitled to purchase stock under the Plan at a rate
which, when aggregated with his or her rights to purchase stock under all
other employee stock purchase plans of the Company or any Subsidiary
which are intended to satisfy the requirements of Section 423 of the
Code, exceeds $25,000 in fair market value, determined as of the Offering
Date (or such other limit as may be imposed by the Code) for each
calendar year in which the employee participates in the Plan.

b) No more than 200% of the number of shares which could be purchased for
the Entry Price with the payroll deductions authorized by a participant
and actually withheld with respect to a given single Offering Period may
be purchased by the participant at the end of such Offering Period.

c) No employee shall be entitled to purchase more than the Maximum Share
Amount (as defined below) on any single Purchase Date. Not less than
thirty days prior to the commencement of any Offering Period, the Board
may, in its sole discretion, set a maximum number of shares which may be
purchased by any employee at any single Purchase Date (hereinafter the
"Maximum Share Amount"). In no event shall the Maximum Share Amount
exceed the amounts permitted under Section 10(b) above. If a new Maximum
Share Amount is set, then all participants must be notified of such
Maximum Share Amount not less than fifteen days prior to the commencement
of the next Offering Period. Once the Maximum Share Amount is set, it
shall continue to apply in respect of all succeeding Purchase Dates and
Offering Periods unless revised by the Board as set forth above.

d) If the number of shares to be purchased on a Purchase Date by all
employees participating in the Plan exceeds the number of shares then
available for issuance under the Plan, the Company will make a pro rata
allocation of the remaining shares in as uniform a manner as shall be
practicable and as the Board shall determine to be equitable. In such
event, the Company shall give written notice of such reduction of the
number of shares to be purchased under a participant's option to each
employee affected thereby.

e) Any payroll deductions accumulated in a participant's account which are
not used to purchase stock due to the limitations in this Section 10
shall be returned to the participant as soon as practicable after the end
of the Offering Period.

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<PAGE>
11. WITHDRAWAL.

(a) Each participant may withdraw from an Offering Period under the Plan by
signing and delivering notice on a form provided by the Company for such
purpose. Such withdrawal may be elected at any time prior to the 15th day
of the month in which an Offering Period ends (or other date specified by
the Board or committee).

(b) Upon withdrawal from the Plan, the accumulated payroll deductions shall
be returned to the withdrawn employee and his or her interest in the Plan
shall terminate. In the event an employee voluntarily elects to withdraw
from the Plan, he or she may not resume his or her participation in the
Plan during the same Offering Period, but he or she may participate in
any Offering Period under the Plan which commences on a date subsequent
to such withdrawal by filing a new authorization for payroll deductions
in the same manner as set forth above for initial participation in the
Plan.

12. TERMINATION OF EMPLOYMENT. Termination of a participant's employment
for any reason, including retirement or death or the failure of a participant to
remain an eligible employee, terminates his or her participation in the Plan
immediately. In such event, the payroll deductions credited to the participant's
account will be returned to him or her or, in the case of his or her death, to
his or her legal representative (including a beneficiary designated as permitted
under Section 22). For this purpose, an employee will not be deemed to have
terminated employment or failed to remain in the continuous employ of the
Company in the case of sick leave, military leave, or any other leave of absence
approved by the Board of Directors of the Company; provided that such leave is
for a period of not more than ninety (90) days or reemployment upon the
expiration of such leave is guaranteed by contract or statute.

13. RETURN OF PAYROLL DEDUCTIONS. In the event an employee's interest in
the Plan is terminated by withdrawal, termination of employment or otherwise, or
in the event the Plan is terminated by the Board, the Company shall promptly
deliver to the employee all payroll deductions credited to his account. No
interest shall accrue on the payroll deductions of a participant in the Plan.

14. CAPITAL CHANGES. Subject to any required action by the stockholders of
the Company, the number of shares of Common Stock covered by each option under
the Plan which has not yet been exercised and the number of shares of Common
Stock which have been authorized for issuance under the Plan but have not yet
been placed under option (collectively, the "Reserves"), as well as the price
per share of Common Stock covered by each option under the Plan which has not
yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split or the payment of stock dividend (but only on the Common Stock) or any
other increase or decrease in the number of shares of Common Stock effected
without receipt of consideration by the Company; PROVIDED, HOWEVER, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.

In the event of the proposed dissolution or liquidation of the Company, the
Offering Period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare that the options
under the Plan shall terminate as of a date fixed by the Board and give each
participant the right to exercise his or her option as to all of the optioned
stock, including shares which would not otherwise be exercisable. In the event
of a proposed sale of all or substantially all of the assets of the Company, or
the merger of the Company with or into another corporation or a parent or
subsidiary of such successor corporation, the Offering Period will terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board. The Board may, in the exercise of its sole discretion in

74
<PAGE>
such instances, and in lieu of assumption or substitution of the option, provide
that each participant shall have the right to exercise the option as to all of
the optioned stock. If the Board makes an option exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the Board
shall notify the participant that the option shall be fully exercisable for a
period of twenty (20) days from the date of such notice (or such other period of
time as the Board shall determine), and the option will terminate upon the
expiration of such period.

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

15. NONASSIGNABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 22 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect.

16. REPORTS. Individual accounts will be maintained for each participant
in the Plan. Each participant shall receive promptly after the end of each
Offering Period a report of his account setting forth the total payroll
deductions accumulated, the number of shares purchased, the per share price
thereof and the remaining cash balance, if any, carried forward to the next
Offering Period or returned to the participant.

17. NOTICE OF DISPOSITION. Each participant shall notify the Company if
the participant disposes of any of the shares purchased in any Offering Period
pursuant to this Plan if such disposition occurs within two years from the
Offering Date or within twelve months from the Purchase Date on which such
shares were purchased (the "Notice Period"). Unless such participant is
disposing of any of such shares during the Notice Period, such participant shall
keep the certificates representing such shares in his or her name (and not in
the name of a nominee) during the Notice Period. The Company may, at any time
during the Notice Period, place a legend or legends on any certificate
representing shares acquired pursuant to the Plan requesting the Company's
transfer agent to notify the Company of any transfer of the shares. The
obligation of the participant to provide such notice shall continue
notwithstanding the placement of such legend on certificates.

18. NO RIGHTS TO CONTINUED EMPLOYMENT. Neither this Plan nor the grant of
any option hereunder shall confer any right on any employee to remain in the
employ of the Company or any Subsidiary or restrict the right of the Company or
any Subsidiary to terminate such employee's employment.

19. EQUAL RIGHTS AND PRIVILEGES. All eligible employees shall have equal
rights and privileges with respect to the Plan so that the Plan qualifies as an
"employee stock purchase plan" within the meaning of Section 423 or any
successor provision of the Code and the related regulations. Any provision of
the Plan which is inconsistent with Section 423 or any successor provision of
the Code shall without further act or amendment by the Company or the Board be
reformed to comply with the requirements of Section 423. This Section 19 shall
take precedence over all other provisions in the Plan.

20. NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.

21. STOCKHOLDER APPROVAL OF AMENDMENTS. Any required approval of the
stockholders of the Company shall be solicited substantially in accordance with
Section 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder. Such approval of an
amendment shall be solicited at or prior to the first annual meeting of
stockholders held subsequent to the grant to an officer or director of the
Company of an option under the Plan as then

75
<PAGE>
amended. If such stockholder approval is obtained at a duly held stockholders'
meeting, it must be obtained by the affirmative vote of the holders of a
majority of the outstanding shares of the Company, or if such stockholder
approval is obtained by written consent, it must be obtained by a majority of
the outstanding shares of the Company; PROVIDED, HOWEVER, that approval at a
meeting or by written consent may be obtained by a lesser degree of stockholder
approval if the Board determines, in its discretion after consultation with the
Company's legal counsel, that such lesser degree of stockholder approval will
comply with all applicable laws and will not adversely affect the qualification
of the Plan under Section 423 of the Code or Rule 16b-3 promulgated under the
Exchange Act ("Rule 16b-3").

22. DESIGNATION OF BENEFICIARY.

a) A participant may file a written designation of a beneficiary who is to
receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end
of an Offering Period but prior to delivery to him of such shares and
cash. In addition, a participant may file a written designation of a
beneficiary who is to receive any cash from the participant's account
under the Plan in the event of such participant's death prior to a
Purchase Date.

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

23. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATIONS ON SALE OF
SHARES. Shares shall not be issued with respect to an option unless the
exercise of such option and the issuance and delivery of such shares pursuant
thereto shall comply with all applicable provisions of law, domestic or foreign,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to, such compliance.

24. APPLICABLE LAW. The Plan shall be governed by the substantive laws
(excluding the conflict of laws rules) of the State of Delaware.

25. AMENDMENT OR TERMINATION OF THE PLAN. This Plan shall be effective
July 1, 1990, and shall continue until the earlier to occur of termination by
the Board or issuance of all of the shares of Common Stock reserved for issuance
under the Plan. The Board of Directors of the Company may at any time amend or
terminate the Plan, except that any such termination cannot affect options
previously granted under the Plan, nor may any amendment make any change in an
option previously granted which would adversely affect the right of any
participant, nor may any amendment be made without approval of the stockholders
of the Company obtained in accordance with Section 21 hereof within 12 months of
the adoption of such amendment (or earlier if required by Section 21) if such
amendment would constitute an amendment for which stockholder approval is
required in order to comply with Rule 16b-3 (or any successor rule) of the
Exchange Act or Nasdaq or any securities exchange listing requirements.

<PAGE>
Exhibit 21.01

SUBSIDIARIES OF THE REGISTRANT

The Registrant's subsidiaries and the state or country in which each is
incorporated or organized, are as follows:

<TABLE>
<CAPTION>
Accent S.r.l................................... Italy
<S> <C>
Cadence China Limited.......................... Hong Kong
Cadence Design Systems (Canada) Ltd............ Canada
Cadence Design Systems (India) Private
Limited........................................ India
Cadence Design Systems (Israel) Ltd............ Israel
Cadence Design Systems (S) Pte Ltd............. Singapore
Cadence Design Systems AB...................... Sweden
Cadence Design Systems AG...................... Switzerland
Cadence Design Systems Asia Limited............ Hong Kong
Cadence Design Systems B.V..................... Netherlands
Cadence Design Systems GmbH.................... Germany
Cadence Design Systems K.K..................... Japan
Cadence Design Systems S.A..................... France
Cadence Design Systems S.r.l................... Italy
Cadence Design Systems, Ltd.................... United Kingdom
Cadence International Sales Corporation........ U.S. Virgin Islands
Cadence Korea Ltd.............................. Korea
Cadence Taiwan, Inc............................ Taiwan
High Level Design Systems, Inc................. Delaware
Integrated Measurement Systems, Inc............ Oregon
River Oaks Place Associates.................... California
Telos Venture Partners......................... California
Seeley Properties, Inc......................... California
Valid Europe S.A............................... Belgium
</TABLE>

<PAGE>
Exhibit 23.01

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements (File Nos. 33-36110, 33-43025, 33-45001, 33-48371 and
33-53913) on Form S-8.

/S/ ARTHUR ANDERSEN LLP
--------------------------------------

Arthur Andersen LLP

San Jose, California
March 21, 1997

78
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<PAGE>
Exhibit 27.1

FINANCIAL DATA SCHEDULE

<CAPTION>
PERIOD TYPE YEAR
- ------------------------------------------------------------------------------------------- ---------------
<S> <C>

FISCAL YEAR END............................................................................ DEC-28-1996

PERIOD END................................................................................. DEC-28-1996

CASH....................................................................................... 284,512

SECURITIES................................................................................. 1,015

RECEIVABLES, net........................................................................... 148,449

ALLOWANCES................................................................................. 8,772

INVENTORY.................................................................................. 8,133

CURRENT ASSETS............................................................................. 491,135

PP&E....................................................................................... 288,231

DEPRECIATION............................................................................... 127,304

TOTAL ASSETS............................................................................... 717,001

CURRENT LIABILITIES........................................................................ 231,578

BONDS...................................................................................... 0

COMMON..................................................................................... 277,793

PREFERRED-MANDATORY........................................................................ 0

PREFERRED.................................................................................. 0

OTHER STOCK EQUITY......................................................................... 149,755

TOTAL LIAB AND EQUITY...................................................................... 717,001

SALES...................................................................................... 741,459

TOTAL REVENUES............................................................................. 741,459

COGS....................................................................................... 153,473

TOTAL COSTS................................................................................ 153,473

OTHER EXPENSES............................................................................. 496,727

LOSS-PROVISION............................................................................. 0

INTEREST EXPENSE........................................................................... 1,913

INCOME-PRE-TAX............................................................................. 90,477

INCOME-TAX................................................................................. 61,439

INCOME-CONTINUING.......................................................................... 29,038

DISCONTINUED............................................................................... 0

EXTRAORDINARY.............................................................................. 0

CHANGES.................................................................................... 0

NET INCOME................................................................................. 29,038

EPS-PRIMARY................................................................................ 0.32

EPS-DILUTED................................................................................ 0.32

</TABLE>