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UNITED STATES SECURITIES
AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

                   (MARK ONE)

(X)         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JULY 31, 2003

OR

(   )         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                           TO

COMMISSION FILE NUMBER: 0-19807

_________________

SYNOPSYS,INC.

(Exact name of registrant as specified in its charter)

DELAWARE 56-1546236
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

700 EAST MIDDLEFIELD ROAD

MOUNTAIN VIEW, CA 94043

(Address of principal executive offices, including zip code)

TELEPHONE:(650) 584-5000

(Registrant’s telephone number, including area code)

  Indicate by check mark whether the registrant (l) 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 [  ]

  Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

77,660,120 shares of Common Stock as of September 5, 2003













SYNOPSYS, INC.QUARTERLY
REPORT ON FORM 10-Q

July 31, 2003

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 1
CONDENSED CONSOLIDATED BALANCE SHEETS 1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 35
ITEM 4. CONTROLS AND PROCEDURES 36
 
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 36
ITEM 2. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 36
ITEM 5. OTHER INFORMATION 37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 41
 
SIGNATURES 42


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SYNOPSYS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

JULY 31, OCTOBER 31,
       2003                 2002         
(unaudited)
ASSETS            
Current assets:  
  Cash and cash equivalents   $ 426,284   $ 312,580  
  Short-term investments    141,809    102,153  
     Total cash and short-term investments    568,093    414,733  
  Accounts receivable, net of allowances of $8,599 and  
     $11,565, respectively    201,802    207,206  
  Deferred taxes    286,146    282,867  
  Prepaid expenses and other    17,968    24,509  
     Total current assets    1,074,009    929,315  
Property and equipment, net    180,745    185,040  
Long-term investments    9,563    39,386  
Goodwill, net    551,103    434,554  
Intangible assets, net    317,083    355,334  
Other assets    36,747    35,085  
     Total assets   $ 2,169,250   $ 1,978,714  
LIABILITIES AND STOCKHOLDERS' EQUITY  
Current liabilities:  
  Accounts payable and accrued liabilities   $ 181,607   $ 246,789  
  Current portion of long-term debt    28    1,423  
  Accrued income taxes    178,497    169,912  
  Deferred revenue    425,830    359,245  
     Total current liabilities    785,962    777,369  
Deferred compensation and other liabilities    62,630    36,387  
Long-term deferred revenue    22,916    51,477  
Stockholders' equity:  
  Common stock, $0.01 par value; 400,000 shares  
     authorized; 77,047 and 73,562 shares outstanding, respectively    771    735  
  Additional paid-in capital    1,137,594    1,039,386  
  Retained earnings    240,139    198,863  
  Treasury stock, at cost    (74,374 )  (116,499 )
  Deferred stock compensation    (8,748 )  (8,858 )
  Accumulated other comprehensive income (loss)    2,360    (146 )
     Total stockholders' equity       1,297,742     1,113,481  
      Total liabilities and stockholders' equity     $ 2,169,250   $ 1,978,714  

        See accompanying notes to unaudited condensed consolidated financial statements.



SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2003 2002 2003 2002
Revenue:                    
   Product   $ 74,709   $ 60,096   $ 211,229   $ 151,944  
   Service    64,782    73,924    199,136    208,782  
   Ratable license    160,875    102,075    450,165    236,552  
     Total revenue     300,366    236,095    860,530    597,278  
Cost of revenue:   
   Product     3,536    4,400    11,134    11,687  
   Service     16,974    19,819    56,744    57,894  
   Ratable license     13,792    10,101    40,050    34,321  
   Amortization of intangible assets and    
     deferred stock compensation      23,856    13,366    68,959    13,366  
     Total cost of revenue    58,158    47,686    176,887    117,268  
Gross margin    242,208    188,409    683,643    480,010  
Operating expenses:  
   Research and development    70,716    61,581    206,597    156,936  
   Sales and marketing    78,189    69,122    230,397    192,122  
   General and administrative    19,763    21,908    66,554    58,153  
     Integration    --    117,266    --    117,266  
     In-process research and development    1,600    82,500    19,850    82,500  
   Amortization of goodwill, intangible  
     assets and deferred stock compensation    9,221    8,820    26,379    17,220  
     Total operating expenses    179,489    361,197    549,777    624,197  
Operating income (loss)    62,719    (172,788 )  133,866    (144,187 )
Other income, net    5,307    11,408    22,032    33,702  
Income(loss) before provision (benefit) for  
   income taxes    68,026    (161,380 )  155,898    (110,485 )
Provision (benefit) for income taxes    19,551    (23,791 )  50,749    (8,328 )
Net income (loss)   $ 48,475   $ (137,589 ) $ 105,149   $ (102,157 )
Basic earnings (loss) per share:  
Net income (loss) per share   $ 0.63   $ (1.93 ) $ 1.40   $ (1.59 )
Weighted-average common shares    76,620    71,157    75,004    64,157  
Diluted earnings (loss) per share:  
Net income (loss) per share   $ 0.60   $ (1.93 ) $ 1.35   $ (1.59 )
Weighted-average common shares and dilutive  
   stock options outstanding    81,348    71,157    78,160    64,157  

        See accompanying notes to unaudited condensed consolidated financial statements.



SYNOPSYS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

NINE MONTHS ENDED
JULY 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income (loss)   $ 105,149   $ (102,157 )
Adjustments to reconcile net income (loss) to net cash  
   provided by (used in) operating activities:  
   Amortization and depreciation    137,773    69,835  
    Deferred taxes    (673 )  (3,967 )
   In-process research and development    19,850    82,500  
   Write-down of long-term investments    3,942    7,539  
    Tax benefit associated with stock options    3,226    18,001  
   Deferred rent    1,560    2,538  
   Provision for doubtful accounts and sales returns    (1,577 )  3,065  
   Net change in unrecognized gains and losses on  
     foreign exchange contracts    18,644    --  
   Gain on sale of long-term investments    (20,375 )  (21,393 )
   Impairment of land and buildings    --    14,712  
   Net changes in operating assets and liabilities:  
     Accounts receivable    6,379    (22,774 )
     Prepaid expenses and other current assets    (5,353 )  1,079  
     Other assets    661    (7,323 )
     Accounts payable and accrued liabilities    (54,703 )  (75,978 )
     Accrued income taxes    21,184    (81,799 )
     Deferred revenue    33,500    33,225  
     Deferred compensation    7,992    4,748  
   Net cash provided by (used in) operating activities    277,179    (78,149 )
CASH FLOWS FROM INVESTING ACTIVITIES:  
   Purchase of contingently refundable insurance policy    --    (240,000 )
   Proceeds from sales and maturities of short-term  
     investments    177,886    778,501  
   Purchases of short-term investments    (221,235 )  (667,430 )
   Proceeds from sale of long-term investments    32,272    30,533  
   Purchases of long-term investments    (800 )  (5,205 )
   Purchases of property and equipment    (33,543 )  (35,902 )
   Cash paid for acquisitions, net of cash received    (167,744 )  234,963  
   Capitalization of software development costs    (1,962 )  (1,194 )
   Net cash (used in) provided by investing activities    (215,126 )  94,266  
CASH FLOWS FROM FINANCING ACTIVITIES:  
    Issuances of common stock    279,688    103,595  
   Purchases of treasury stock    (226,650 )  (41,773 )
     Net cash provided by financing activities    53,038    61,822  
Effect of exchange rate changes on cash    (1,387 )  (1,974 )
Net increase in cash and cash equivalents    113,704    75,965  
Cash and cash equivalents, beginning of period    312,580    271,696  
Cash and cash equivalents, end of period   $ 426,284   $ 347,661  

        See accompanying notes to unaudited condensed consolidated financial statements.



SYNOPSYS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.     BASIS OF PRESENTATION

        Synopsys, Inc. (Synopsys or the Company) has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the Securities and Exchange Commission’s (SEC) rules and regulations. Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its consolidated financial statements prepared in accordance with generally accepted accounting principles. In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments) necessary to fairly present its financial position, results of operations and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in Synopsys’ Annual Report on Form 10-K, as amended, for the fiscal year ended October 31, 2002.

        To prepare financial statements in conformity with generally accepted accounting principles, management must make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

        Synopsys’ fiscal year and third quarter end on the Saturday nearest October 31 and July 31, respectively. Fiscal 2003 and 2002 are both 52-week years. For presentation purposes, the unaudited condensed consolidated financial statements and accompanying notes use the applicable calendar month end.

Accounting for Stock-Based Compensation

        In accordance with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, the Company applies the intrinsic value method in accounting for employee stock options. Accordingly, the Company generally recognizes no compensation expense with respect to stock-based awards to employees. The Company has determined unaudited pro forma information regarding net income and earnings per share as if the Company had accounted for employee stock options under the fair value method as required by Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, and Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based Compensation Transition and Disclosure. The weighted-average expected life, risk-free interest rate and volatility for the three- and nine-month periods ended July 31, 2003 and for the same periods in fiscal 2002 are comparable to those for the year ended October 31, 2002.

        The Company’s unaudited pro forma net in