UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

CADENCE DESIGN SYSTEMS, INC.

(Exact name of Registrant as Specified in Its Charter)

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

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

      On April 2, 2005, 276,310,619 shares of the registrant’s common stock, $0.01 par value, were outstanding.

CADENCE DESIGN SYSTEMS, INC.

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

ASSETS

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

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

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

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

      The Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, or this Quarterly Report, have been prepared by Cadence Design Systems, Inc., or Cadence, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, for a Quarterly Report on Form  10-Q and are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements are meant to be, and should be, read in conjunction with the Consolidated Financial Statements and the notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended January 1, 2005.

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

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

      Cadence reclassified $45.7 million of its auction rate securities from Cash and cash equivalents to Short-term investments as of April 3, 2004. This reclassification decreased Cash flows from investing activities by $45.7 million for the three months ended April 3, 2004 in the accompanying Condensed Consolidated Statements of Cash Flows. Cadence also reclassified the net gains and losses from its non-qualified deferred compensation plan in its Condensed Consolidated Statements of Operations, which decreased Deferred compensation by $3.9 million and decreased Other income (expense), net, by $3.9 million for the three months ended April 3, 2004. In addition, certain other reclassifications have been made to prior period amounts to conform to the current period presentation.

      The table below provides a pro forma illustration of the financial results of operations as if Cadence had accounted for its grants of employee stock options under the fair value method of Statement of Financial Accounting Standards, or SFAS, No. 123, “Accounting for Stock–Based Compensation.” The impact of employee stock options on the pro forma financial results of operations was estimated at the date of grant using the Black-Scholes option-pricing model. Cadence used expected volatility, as well as other economic data, to estimate the volatility for the option grants during the three months ended April 2, 2005 and April 3, 2004 because management believes the amount yielded by this method is representative of prospective trends. Cadence considered implied volatility in market-traded options on its common stock as well as third party volatility quotes. Cadence determined the estimated fair values of its options granted and shares purchased

under its employee stock purchase plans, or ESPPs, for the three months ended April 2, 2005 and April 3, 2004 using the following weighted average assumptions, assuming a dividend yield of zero for all periods:

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

      For many of Cadence’s acquisitions, payment of a portion of the purchase price is contingent upon the acquired entity’s achievement of certain performance goals, which relate to one or more of the following criteria: revenue, bookings, product proliferation, product development and employee retention. The portion of the contingent purchase price, or earnout, associated with employee retention is recorded as compensation

expense. The specific performance goal levels, and amounts and timing of earnout payments, vary with each acquisition.

      In the three months ended April 2, 2005, Cadence recorded $20.8 million of goodwill for achieved earnouts payable to former stockholders of acquired companies. The $20.8 million of goodwill consisted of $1.4 million of cash payments made, $18.1 million accrued for future cash payments, and the issuance of 0.1 million shares of Cadence’s common stock valued at $1.3 million.

      In connection with Cadence’s acquisitions completed prior to April 2, 2005, Cadence may be obligated to pay up to an aggregate of $40.0 million in cash during the next 12 months and an additional $37.0 million in cash during the three years following the next 12 months if certain performance goals related to one or more of the following criteria are achieved in full: revenue, bookings, product proliferation, product development and employee retention.

      Goodwill

      In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” Cadence conducts an annual impairment analysis of goodwill, which it completed during the third quarter of 2004. Based on the results of the impairment review, Cadence has determined that no indicators of impairment existed for any of its reporting units during 2004. In addition, no events or circumstances have indicated that it is more likely than not that an impairment loss has been incurred during the interim periods since the annual impairment analysis. Accordingly, no impairment charge has been recognized.

      The changes in the carrying amount of goodwill for the three months ended April 2, 2005 were as follows:

      Acquired intangibles, net

      Acquired intangibles with finite lives as of April 2, 2005 and January 1, 2005 were as follows: