SecProbe.io

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[GIBSON, DUNN & CRUTCHER LLP LETTERHEAD]

gconklin@gibsondunn.com

July 19, 2006

    (415) 393-8263

    C 18861-00008

(415) 374-8418

VIA EDGAR AND MESSENGER

Kathleen Collins

Accounting Branch Chief and

Kari Jin

Staff Accountant

Division of Corporation Finance

Securities and Exchange Commission

Mail Stop 4-6

450 Fifth Street, N.W.

Washington, D.C. 20549

    Re:

    Cadence Design Systems, Inc.

    Form 10-K for the Fiscal Year Ended December 31, 2005 filed March 10, 2006

    Form 10-Q for the Quarterly Period Ended April 1, 2006 filed May 4, 2006

    File no. 1-106061

Dear Ms. Collins and Ms. Jin:

     On behalf of Cadence Design Systems, Inc., a Delaware corporation (“Cadence”), by this letter
we respond on behalf of Cadence to the comments of the staff (the “Staff”) of the Securities
and Exchange Commission (the “SEC”) in the letter dated June 16, 2006 (the “Comment Letter”),
relating to (i) Cadence’s Annual Report on Form 10-K for the year ended December 31,

    1

    For future reference, please note that
Cadence’s SEC file number is now 0-15867.

Kathleen Collins

Kari Jin

Securities and Exchange Commission

July 19, 2006

Page 2

2005 (the
“2005 10-K”) and (ii) Cadence’s Quarterly Report on Form 10-Q for the period ended April 1, 2006
(the “Q1 2006 10-Q”). For ease of reference, the headings and numbered paragraphs below correspond
to the headings and numbered comments in the applicable Comment Letter. Each response of Cadence
is set forth in ordinary type beneath the corresponding Staff comment from the Comment Letter
appearing in bold type.

          This letter is being filed with the SEC on EDGAR supplementally as correspondence and we also
are forwarding, by courier, a complete copy of this letter in paper format.

Form 10-K for the Fiscal Year Ended December 31, 2005

Note 2. Summary of Significant Accounting Policies

Revenue Recognition, page 63

    1.

    We note your response to our previous comment no. 1 where you indicate “since the
subscription license includes a right to access unspecified additional products that become
available during the term of the license, Cadences applies paragraphs 48 and 49 of SOP
97-2, as such, the entire arrangement fee is recognized as revenue ratably over the term of
the arrangement.” Paragraphs 48 and 49 of SOP 97-2 allows for subscription accounting
where a vendor agrees to deliver software currently and to deliver unspecified additional
products in the future. It appears that your customers are receiving the right to remix
additional product as opposed to the right to continue to use the previously delivered
software in addition to the right to use the unspecified additional product. Therefore
please explain further how the Company concluded that the remix rights included in
contracts that allow for unspecified additional software product do not constitute exchange
rights as contemplated by paragraphs 50 and 51 of SOP 97-2.

    Cadence supplementally advises the Staff that Cadence’s subscription license arrangements
offer the customer: (1) the right to use all software products delivered at the outset of
an arrangement throughout the entire term of the arrangement; (2) the right to use
unspecified additional software products that become available during the term of the
arrangement; and (3) the right to change or alternate its license mix, which may only
include software products that were delivered at the inception of the arrangement and
products that become available during the term of the arrangement and are delivered to the
customer.

    Consistent with the conclusions reached in TPA 5100.45 – Effect of Change in License Mix on
Software Revenue Recognition, the right to remix all software products delivered pursuant to
the subscription license agreement is not considered an exchange or return of software
because all software products have been licensed and delivered, and the
customer has the continuing right to use them. Thus, even if new software becomes available
during the term of the arrangement that the customer wishes to use, the software

Kathleen Collins

Kari Jin

Securities and Exchange Commission

July 19, 2006

Page 3

    products delivered at the inception of the arrangement need not be, and are not, returned to the
Company.

    Although Cadence does not consider the right to remix all software products delivered
pursuant to the subscription license agreement as an exchange, Cadence does not recognize
revenue upon delivery of the software at the inception of the license agreement because
these arrangements include the right for the customer to access unspecified additional
products that become available during the term of the license. As such, Cadence applies
paragraphs 48 and 49 of SOP 97-2 to such arrangements and the entire arrangement fee is
recognized as revenue ratably over the term of the arrangement (assuming that all other
revenue recognition criteria in SOP 97-2 are met) beginning with delivery of the first
product.

    2.

    We note your response to our previous comment no. 2. With regards to such information,
please explain the following:

    •
    Tell us when you deliver each of products that are subject to remix rights under
your term license agreements. For instance, are all such products delivered at once upon
the term license inception? If not, tell us how the timing of delivery impacts your
revenue recognition.

    •
    Your response indicates that the arrangements may limit the customer’s use at any time
to any mix or combination of the products as long as the cumulative value of all products
in use does not exceed “a value that was established at the outset of the arrangement.”
Tell us how you determine this value. Is the value established at the outset of the
arrangement equal to the total license fees? If not, tell us how you met the requirements
of TPA 5100.45 for these arrangements.

    Cadence supplementally advises the Staff that all software products available at the
inception of the license and subject to remix rights under Cadence’s term license
arrangements are delivered at once upon inception of the term license.

    The cumulative value of all software products that are delivered at the outset of the
arrangement, and in use during the term of the arrangement, is equal to the total license
fee. The cumulative value of the software products in use during the term of the
arrangement is based on the total of the list prices of the individual software products
less a discount negotiated with the customer at the outset of the arrangement.

    Kathleen Collins

Kari Jin

Securities and Exchange Commission

July 19, 2006

Page 4

    [***] Confidential Treatment Requested

Pursuant to 17 CFR Section 200.83

by Cadence Design Systems, Inc.

Page Code Number CDN CTR 7/19/06-1

Note 16. Income Taxes, page 102

    3.

    We note your response to our previous comment no. 4 where you indicate that the Company has
accrued a tax liability related to the proposed tax deficiency based on your best estimate,
for each proposed adjustment, of what ultimately will be sustained upon the final resolution
of the matter through future negotiations. Tell us how much of the $143 million tax
deficiency has be accrued for and tell us where you have classified this accrual in your
balance sheet (i.e. current or long-term liabilities) and why. Also, tell us what
consideration you gave to disclosing the amount accrued pursuant to paragraph 9 of SFAS 5.

    Cadence supplementally advises the Staff that Cadence has accrued a total tax liability,
including applicable interest, of approximately $[***] related to the proposed tax
deficiency based on its best estimate of each uncertain tax position that is probable of
being ultimately sustained upon the final resolution of the matter through future settlement
negotiations or litigation with the taxing authorities. Cadence has classified
approximately $[***] of the tax liability as a current liability because this liability is
expected to be settled within one year of the balance sheet date. Cadence has classified
$[***] of the tax liability as a non-current liability because this liability is not
expected to be settled within one year of the balance sheet date. This liability is the
subject of the IRS appeals process and potentially, if settlement cannot be reached,
protracted litigation.

    Cadence has considered paragraph 9 of SFAS 5 and believes that it has provided sufficient
information in the financial statements for investors to assess Cadence’s tax contingency by
disclosing the following:

    •

    The nature of the tax contingency, being related to transfer pricing arrangements
with a foreign subsidiary (Note 16 – Income Taxes);

    •

    The aggregate proposed tax deficiency of $143 million plus interest (Note 16 –
Income Taxes);

    •

    The current status of the tax contingency (i.e., that Cadence is protesting certain
of the proposed adjustments and has meritorious defenses to the proposed tax
deficiency, and that the matter is presently being considered by the Appeals Office of
the IRS) (Note 16 – Income Taxes);

    •

    That Cadence, in determining the adequacy of its provision for income taxes,
assessed the likelihood of adverse outcomes from tax examinations including the IRS
Revenue Agent’s Report for the tax years 1997 through 1999 (Note 16 – Income Taxes);

    •

    The components of the current federal, state and international provision (benefit)
for income taxes (Note 16 – Income Taxes);

    •

    The amount of Income taxes payable – current and the amount of Income taxes payable
– long term (Note 3 — Balance Sheet Components);

Kathleen Collins

Kari Jin

Securities and Exchange Commission

July 19, 2006

Page 5

    •

    The tax contingency in Note 11 – Contingencies, in addition to Note 16 – Income
Taxes; and

    •

    The potential effect of the tax contingency in Management’s Discussion and Analysis
of Liquidity and Capital Resources under Other Factors Affecting Liquidity and Capital
Resources.

    Based on the above described disclosures, Cadence believes that it is has made adequate
disclosure of the tax contingency such that disclosure of the amount accrued is neither
required nor necessary for the financial statements not to be misleading. Cadence also
believes disclosure of the amounts accrued for individual tax positions that are subject to
ongoing tax examinations, negotiation or litigation would be detrimental to its
shareholders’ interests through its potential impact on the amount of any settlement that
may be achieved with the tax authority.

    4.

    You further indicate that the Company provides for tax liabilities on its Consolidated
Balance Sheets unless it is probable that Cadence’s tax position will be sustained. Has the
Company therefore determined it is probable that your tax position regarding transfer
pricing arrangements will be sustained? Please explain your conclusions and its impact on
your current tax provisions.

    Cadence supplementally advises the Staff that Cadence has concluded that its tax return
filing position regarding its transfer pricing arrangements is probable of being sustained
based on its technical merits. However, Cadence has established tax liabilities, including
estimated interest, relating to its transfer pricing arrangement based on the amount Cadence
estimates it will settle in connection with the final resolution of the matter through
negotiations or litigation with the taxing authorities. This accounting treatment is
consistent with the tax accrual policy discussed in Note 16 of the 2005 Form 10-K.

    Cadence reached its conclusion based on an evaluation of the applicable tax laws, the
relevant facts of the transfer pricing arrangements, and the progress of the IRS appeals
process.

    For the 2005 fiscal year, Cadence did not change its prior assessment of the amount of the
probable tax liability and did not accrue an additional amount in the current tax provision
for such transfer pricing arrangements.

Form 10-Q for the Quarterly Period Ended April 1, 2006

Condensed Consolidated Statements of Operations, page 2

    5.

    We note that the Company included stock-based compensation expense throughout the various
cost and expenses during the three months ended, April 1, 2006. We further note that you
included similar expenses in a single line item for the three

Kathleen Collins

Kari Jin

Securities and Exchange Commission

July 19, 2006

Page 6

    months ended, April 2, 2005 with footnote disclosures indicating the individual line items
impacted by such expense. While we understand that the 2005 expenses were calculated
pursuant to APB 25 and SFAS 123 and the 2006 expenses were calculated pursuant to SFAS 123R,
please explain how the Company determined that presenting such expenses differently in
comparative financial statement disclosures is appropriate. Please note that pursuant to
SAB 107, the Staff believes that companies should present expenses related to share-based
payment arrangements in the same line or line items as cash compensation paid to the same
employees. Please explain.

    Cadence supplementally advises the Staff that Cadence considered SAB 107 in the presentation
of current interim period share-based payment expenses. Cadence presented the expenses
related to share-based payment for the three months ended April 1, 2006 in the same line
items as cash compensation paid to the same employees in the Condensed Consolidated
Statement of Operations.

    As noted by the Staff, Cadence included similar expenses in a single line item for the three
months ended April 2, 2005 with footnote disclosure indicating the individual line items
impacted by such expense. In so doing, Cadence considered SAB 107 in the presentation of
the prior period interim share-based payment expenses in the Condensed Consolidated
Statement of Operations as described below in Cadence’s application of the modified
prospective method:

    “H. First Time Adoption of Statement 123R in an Interim Period

    Interpretive Response:

             If Company I applies the modified prospective method, the financial statements for
Company I’s prior interim periods and fiscal years will not reflect any restated amount.”

    Cadence believes the disclosures were adequate because the previous footnote disclosures
provided information on the functional category of share-based payment expenses. Cadence
nevertheless agrees that in future filings it will present prior year period expenses
related to share-based payment arrangements in the same line or line items as cash
compensation paid to the same employees.

    6.

    We note that the Company estimates the volatility of your common stock based on the implied
volatility. Tell us what publicly traded options the Company looked to determine implied
volatility. Also, tell us how you considered each of the factors in Question 4 of SAB 107 in
determining that use of the implied volatility is appropriate.

Kathleen Collins

Kari Jin

Securities and Exchange Commission

July 19, 2006

Page 7

Cadence supplementally advises the Staff that, during the first quarter of 2006, Cadence
used publicly traded call options (Bloomberg ticker symbols YRV US 1/08 C17.50 and YRV US
1/08 C20.00) to determine the implied volatility.

In addition, Cadence considered each of the following factors, identified below in italics,
as detailed in Question 4 of SAB 107, in determining that the use of the implied volatility
is appropriate:

    •

    Company B utilizes a valuation model that is based upon a constant
volatility assumption to value its employee share options;

Cadence utilized the Black-Scholes valuation model, which is based upon a constant
volatility assumption, to value its employee share options.

    •

    The implied volatility is derived from options that are actively traded;

C