10-Q

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 September 30, 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 No.: 0-33213

MAGMA DESIGN AUTOMATION, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	77-0454924
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

5460 Bayfront Plaza

Santa Clara, California 95054

(Address of principal executive offices)

Telephone: (408) 565-7500

(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 at least 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 November 13, 2003, 33,175,711 shares of Registrant’s Common Stock, $.0001 par value were outstanding.

MAGMA DESIGN AUTOMATION, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

INDEX

			Page
Part I: Financial Information			1
	Item 1:	Financial Statements	1
		Condensed Consolidated Balance Sheets at September 30, 2003 and March 31, 2003	1
		Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended September 30, 2003 and 2002	2
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2003 and 2002	3
		Notes to Condensed Consolidated Financial Statements	4
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk	33
	Item 4:	Controls and Procedures	33
Part II: Other Information			34
	Item 1:	Legal Proceedings	34
	Item 2:	Changes in Securities or Use of Proceeds	34
	Item 4:	Submission of Matters to a Vote of Security Holders	34
	Item 6:	Exhibits and Reports on Form 8-K	35
	Signatures		36
	Exhibit Index		37

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements.

MAGMA DESIGN AUTOMATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	September 30, 2003			March 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	97,230		$	64,756
Short-term investments		—			3,059
Accounts receivable less allowance for doubtful accounts of $536 at September 30, 2003 and $531 at March 31, 2003, respectively		22,274			19,223
Prepaid expenses and other current assets		8,287			3,627
Total current assets		127,791			90,665
Property and equipment, net		7,907			5,808
Long-term investments		120,019			27,882
Other assets		15,295			3,123
Total assets	$	271,012		$	127,478
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,332		$	1,384
Accrued expenses		10,194			7,711
Deferred revenue		15,777			12,539
Total current liabilities		27,303			21,634
Convertible subordinated notes		150,000			—
Other long-term liabilities		7			72
Total liabilities		177,310			21,706
Commitments and contingencies (Note 3)
Stockholders’ equity:
Preferred Stock, $.0001 par value; 5,000,000 shares authorized and no shares issued and outstanding		—			—
Common stock, $.0001 par value; 150,000,000 shares authorized and 32,455,093 and 31,210,030 shares issued and 32,455,093 and 31,172,888 outstanding at September 30, 2003 and March 31, 2003, respectively		3			3
Additional paid-in capital		210,361			228,400
Deferred stock-based compensation		(1,422	)		(1,638	)
Notes receivable from stockholders		—			(2,037	)
Accumulated deficit		(115,050	)		(118,538	)
Treasury stock at cost, 0 and 37,142 shares at September 30, 2003 and March 31, 2003, respectively		—			(408	)
Accumulated other comprehensive loss		(190	)		(10	)
Total stockholders’ equity		93,702			105,772
Total liabilities and stockholders’ equity	$	271,012		$	127,478

See accompanying notes to unaudited condensed consolidated financial statements.

1

MAGMA DESIGN AUTOMATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	For the Three Months Ended September 30,						For the Six Months Ended September 30,
	2003			2002			2003			2002
Revenue:
Licenses	$	22,837		$	14,690		$	43,354		$	28,067
Services		2,980			3,081			5,276			7,827
Total revenue		25,817			17,771			48,630			35,894
Cost of revenue (including $3 and $19 of stock-based compensation for the three months ended September 30, 2003 and 2002 and $6 and $39 for the six months ended September 30, 2003 and 2002)		3,892			3,398			7,138			6,211
Gross profit		21,925			14,373			41,492			29,683
Operating expenses:
Research and development		6,019			4,441			11,027			9,778
Sales and marketing		8,314			6,878			15,403			12,915
General and administrative		2,399			2,105			4,837			4,330
Amortization of stock-based compensation*		1,755			711			5,733			2,592
Total operating expenses		18,487			14,135			37,000			29,615
Operating income		3,438			238			4,492			68
Other income (expense):
Interest income		635			590			1,243			1,023
Interest expense		(211	)		(1	)		(322	)		(3	)
Other income (expense)		419			—			(334	)		—
Other income (expense), net		843			589			587			1,020
Net income before income taxes		4,281			827			5,079			1,088
Income taxes		(866	)		(128	)		(1,591	)		(331	)
Net income	$	3,415		$	699		$	3,488		$	757
Net income per common share
Basic	$	0.11		$	0.02		$	0.12		$	0.03
Diluted	$	0.09		$	0.02		$	0.09		$	0.02
Weighted average shares:
Basic		30,255			30,182			30,264			30,006
Diluted		40,064			31,900			39,688			32,434
* Operating expense classification of stock-based compensation amortization are as follows:
Research and development	$	1,347		$	203		$	2,906		$	602
Sales and marketing		49			231			180			989
General and administrative		359			277			2,647			1,001
	$	1,755		$	711		$	5,733		$	2,592

See accompanying notes to unaudited condensed consolidated financial statements.

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MAGMA DESIGN AUTOMATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

	Six Months Ended September 30,
	2003			2002
Cash flows from operating activities:
Net income	$	3,488		$	757
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		2,572			2,419
Provision for doubtful accounts		171			350
Amortization of debt issuance costs		351			—
Loss on investments		(269	)		—
Accrued interest on note receivable from stockholders		8			(137	)
Amortization of stock-based compensation		5,740			2,631
Change in operating assets and liabilities:
Accounts receivable		(3,222	)		997
Prepaid expenses and other current assets		(3,473	)		69
Other assets		(1,701	)		—
Accounts payable		(52	)		258
Accrued expenses		2,483			(3,872	)
Deferred revenue		3,238			(3,701	)
Other long-term liabilities		(65	)		(20	)
Net cash provided by (used in) operating activities		9,269			(249	)
Cash flows from investing activities:
Purchase of property and equipment		(4,012	)		(1,993	)
Purchase of long-term investments		(94,000	)		—
Proceeds from the sale of short-term investments		5,000			13,468
Other assets		355			(472	)
Net cash provided by (used in) investing activities		(92,657	)		11,003
Cash flows from financing activities:
Net proceeds from issuance of convertible subordinated notes		145,187			—
Repurchase of common stock		(19,980	)		—
Proceeds from issuance of common stock		11,008			2,346
Repurchase of hedging instruments		(56,154	)		—
Proceeds from issuance of warrant		35,904			—
Proceeds from repayment of notes receivable from stockholder		214			—
Net cash provided by financing activities		116,179			2,346
Effect of exchange rate changes on cash and cash equivalents		(317	)		(75	)
Increase in cash and cash equivalents		32,474			13,025
Cash and cash equivalents at beginning of period		64,756			78,478
Cash and cash equivalents at end of period	$	97,230		$	91,503
Supplemental disclosure:
Non-cash investing and financing activities:
Deferred stock-based compensation	$	(5,509	)	$	(315	)
Settlement of note receivable from stockholder in connection with the purchase of common stock	$	(3,566	)	$	—
Repurchase of common stock by reducing note receivable from stockholder	$	—		$	813
Repayment of notes receivable from stockholders	$	—		$	16
Cash paid for:
Taxes	$	280		$	331

See accompanying notes to unaudited condensed consolidated financial statements.

3

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. The Company and Summary of Significant Accounting Policies

Basis of Presentation

The interim condensed consolidated financial statements included herein have been prepared by Magma Design Automation, Inc. (“Magma” or the “Company”) without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to these rules and regulations. However, management believes that the disclosures are adequate to ensure that the information presented is not misleading. The interim condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary (consisting only of normal recurring adjustments) to present a fair statement of results for the interim periods presented. The operating results for any interim period are not necessarily indicative of the results that may be expected for the entire fiscal year ending March 31, 2004. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s Form 10-K, as filed with the SEC on June 20, 2003. The accompanying condensed consolidated balance sheet at March 31, 2003 is derived from audited consolidated financial statements at that date. Certain amounts in the fiscal 2003 condensed consolidated financial statements have been reclassified to conform to the fiscal 2004 presentation.

Use of estimates

Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Revenue recognition

The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position SOP 97-2, “Software Revenue Recognition” (“SOP 97-2”), as modified by SOP 98-9, “Modifications of SOP 97-2, Software Revenue Recognition, with respect to certain transactions.” SOP 97-2, as modified, generally requires revenue earned on software arrangements involving multiple elements such as software products, upgrades, enhancements, post contract customer support (“PCS”), installation, and training to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence that is specific to the vendor. If evidence of fair value does not exist for all elements of a license agreement and PCS is the only undelivered element, then all revenue for the license agreement is recognized ratably over the term of the agreement. If evidence of fair value of all undelivered elements exists but evidence of fair value does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred, and the remaining portion of the arrangement fee is recognized as revenue. Revenue from licenses that include a right to specified upgrades is deferred until the upgrades are delivered.

The Company’s standard license agreement includes PCS for a specified period of time for its software products. Through June 30, 2001, the Company bundled PCS into its agreements for the entire license term. As a result, vendor-specific objective evidence of fair value did not exist for each element of the arrangement. Accordingly, revenue from all license agreements entered into through June 30, 2001, has been recognized ratably over the contract term after delivery of the product to the customer, provided that there are no uncertainties surrounding the product acceptance, fees are fixed or determinable, collection is probable, and the Company has no remaining obligations other than the delivery of PCS. If an arrangement involves extended payment terms, revenue is recognized to the extent of the lesser of the portion of the fee presently due and payable or the ratable portion of the entire fee. The Company considers arrangements where less than 100% of the license, services and initial period PCS fee is due within one year of the agreement date to have extended payment terms. Payments received from customers in advance of revenue being recognized are presented as deferred revenue in the accompanying consolidated balance sheets.

In addition to continuing to offer time-based licenses for its products bundled with PCS, beginning in the quarter ended December 31, 2001, the Company began offering time-based and perpetual licenses with PCS bundled for the first year of the license term. Thereafter, PCS can be renewed annually for an additional fee stated in the agreement. The Company uses the PCS renewal rate as evidence of fair value of PCS. Therefore, where the only undelivered element is PCS, license revenue from these contracts is recognized using the residual method. Under the residual method, the fair value of PCS is recognized over the PCS term and the

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remaining portion of the arrangement fee is recognized after the execution of a license agreement and the delivery of the product to the customer, provided that there are no uncertainties surrounding the product acceptance, fees are fixed or determinable, collection is probable, and the Company has no remaining obligations other than the delivery of PCS. If an agreement involves extended payment terms, revenue recognized on the residual method is limited to amounts due and payable.

License revenue is comprised of software licenses and PCS where the Company does not have vendor specific objective evidence of fair value of PCS. Service revenue is comprised of PCS on licenses where the Company has vendor specific evidence of fair value of PCS, and consulting and training on all products. The Company has vendor specific objective evidence of fair value for consulting and training services. Therefore, revenue from such services is recognized when such services are performed. The consulting and training services are generally not essential to the functionality of the software. Our products are fully functional upon delivery of the product. Factors considered in determining whether the revenue should be accounted for separately include, but are not limited to, degree of risk, availability of services from other vendors, timing of payments, and impact of milestones or acceptance criteria on the realizability of the software license fee.

Unbilled receivables

Unbilled receivables represent revenue that has been recognized in the financial statements in advance of being invoiced to the customer. The Company will invoice all of the unbilled receivables within one year. As of September 30, 2003 and March 31, 2003, unbilled receivables were approximately $8.5 million and $6.8 million, respectively, and are included in accounts receivable on the condensed consolidated balance sheets for each of these periods.

Commission expense

The Company recognizes sales commission expense as it is earned by its employees. For orders recorded in fiscal year 2003, commissions were earned as revenue from the respective order is recognized. For orders recorded in fiscal year 2004, commissions are earned by the employee over a period of time, typically over two to six quarters, depending on the size of the respective orders. As a result, the commission expense for the fiscal 2004 plan is recorded when the employee has earned the commission which coincides with the timing of the payment to the employee. These payments are spread evenly over two to six quarters, depending on the size of the respective orders. Commissions advanced to employees under the fiscal year 2002 and fiscal year 2003 compensation plans, in excess of amounts earned and which are considered recoverable, are reflected as prepaid expenses in the accompanying condensed consolidated financial statements. Net prepaid commissions on orders received during fiscal year 2002 and fiscal year 2003 totaled $3.5 million at September 30, 2003 and $0.6 million at March 31, 2003.

Trade accounts receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience, current market trends and for larger accounts, the ability of the customer to pay outstanding balances. When revenue is recognized, the Company has assessed the resultant accounts receivable as collectible. Thereafter, the Company reviews whether the accounts receivable is collectible and the adequacy of its allowance for doubtful accounts. Past due balances over 90 days and other higher risk amounts are reviewed individually for probability of collection. Account balances are charged off against the allowance after collection efforts have been exhausted and the potential for recovery is considered remote.

Strategic investments

The Company invests in debt and equity of private companies as part of its business strategy. The investments are carried at cost and are included in other assets in the consolidated balance sheets.

The Company has investments in two companies that are classified under the cost method. These investments have been written down to $0. The Company also has investments in three companies that are accounted for under the equity method. For its investments classified under each of these methods, the Company regularly reviews the assumptions underlying the operating performance and cash flow forecasts based on information requested from these privately held companies. Assessing each investment’s carrying value requires significant judgment by management as this financial information may be more limited, may not be as timely and may be less accurate than information available from publicly traded companies. If the Company determines that an other-than-temporary decline exists in the fair value of an investment, the Company writes down the investment to its fair value and records the related write-down as an investment loss in other income (expense) in its consolidated statements of operations.

The Company has consolidated the operating results of one of its equity investments based on the effective control, which the Company exerts over the investee and the risk of loss associated with this investment.

5

During the quarter ended September 30, 2003, the Company wrote down one of its strategic investments by $69,000. For the six months ended September 30, 2003, the Company wrote down $0.8 million. At September 30, 2003 and March 31, 2003, the carrying value of the strategic investments was $1.3 million and $0.9 million.

Stock-based compensation

The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. Deferred compensation is recorded on the date of grant if the exercise price of the stock award is less than the market value of the underlying common stock on the date of grant. Deferred compensation is expensed on an accelerated basis over the vesting period of the stock award.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123” (“SFAS 148”). SFAS 148 provides alternative methods of transition for companies making a voluntary change to fair value-based accounting for stock-based employee compensation. Effective for interim periods beginning after December 15, 2002, SFAS 148 also requires disclosure of pro-forma results on a quarterly basis as if the company had applied the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation.”

As the exercise price of all options granted under the 1997, 1998 and 2001 stock incentive plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation cost, other than acquisition-related compensation, is recognized in net income. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS 123, as amended, to employee options granted under the stock option plans and under the Company’s Employee Stock Purchase Plan, collectively called “options.” For purposes of this pro-forma disclosure, the estimated value of the options is amortized ratably to expense over the options’ vesting periods. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different.

	Three Months Ended September 30,						Six Months Ended September 30,
	2003			2002			2003			2002
Net income (loss):
As reported	$	3,415		$	699		$	3,488		$	757
Add: Stock-based employee compensation expense included in reported net income		1,758			730			5,740			2,631
Deduct: Stock-based employee compensation expense determined under fair value method for all awards		(5,187	)		(1,549	)		(11,372	)		(3,025	)
Pro forma	$	(14	)	$	(120	)	$	(2,144	)	$	363
Net income (loss) per share, basic:
As reported	$	0.11		$	0.02		$	0.12		$	0.03
Pro forma	$	0.00		$	0.00		$	(0.07	)	$	0.01
Net income (loss) per share, diluted:
As reported	$	0.09		$	0.02		$	0.09		$	0.02
Pro forma	$	0.00		$	0.00		$	(0.07	)	$	0.01

Such pro forma disclosures may not be representative of future compensation cost because options vest over several years and additional grants are made each year.

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The weighted average fair value per option at the date of grant for options granted to employees during the three months ended September 30, 2003 and 2002, was $9.05 and $8.08, respectively. The weighted average fair value per option at the date of grant for options granted to employees during the six months ended September 30, 2003 and 2002, was $8.72 and $8.73, respectively. The Black-Scholes option pricing model was used to calculate the fair value of options at the date of grant using the following assumptions:

	Three Months Ended September 30,		Six Months Ended September 30,
	2003	2002	2003	2002
Stock options:
Risk-free interest	2.41%	2.89%	2.31%	3.09%
Expected life	4.75 years	4.75 years	4.75 years	4.75 years
Expected dividend yield	0%	0%	0%	0%
Volatility	77%	79%	76%	79%
	Three Months Ended September 30,		Six Months Ended September 30,
	2003	2002	2003	2002
Employee stock purchase plans:
Risk-free interest	1.38%	1.71%	1.32%	1.73%
Expected life	.59 years	.25 years	.49 years	.32 years
Expected dividend yield	0%	0%	0%	0%
Volatility	68%	79%	69%	79%

Cash equivalents and short-term investments

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. As of September 30, 2003 and March 31, 2003, cash equivalents consisted primarily of corporate bonds, municipal bonds and money market funds.

Cash equivalents, short-term investments, and long-term investments are detailed as follows:

	Cost	Net Unrealized Gains	Net Unrealized Loss	Estimated Fair Value
	(In Thousands)
March 31, 2003
Classified as current assets:
Cash	3,452	—	—	3,452
Money market funds	2,854	—	—	2,854
Short-term municipal obligations	58,450	—	—	58,450
Corporate bonds	3,058	1	—	3,059
	67,814	1	—	67,815
Classified as non-current assets:
Debt securities	27,864	18	—	27,882
Total	95,678	19	—	95,697
	Cost	Net Unrealized Gains	Net Unrealized Loss	Estimated Fair Value
	(In Thousands)
September 30, 2003
Classified as current assets:
Cash	4,527	—	—	4,527
Money market funds	4,303	—	—	4,303
Short-term municipal obligations	81,050	—	—	81,050
Commercial paper	7,350	—	—	7,350
Corporate bonds	—	—	—	—
	97,230	—	—	97,230
Classified as non-current assets:
Debt securities	119,863	156	—	120,019
Total	217,093	156	—	217,249

Restricted cash

Included in other non-current asset, current assets and long-term investments on the condensed consolidated balance sheets at September 30, 2003 and March 31, 2003 is restricted cash of $667,000 and $517,000, respectively, to support letters of credit for security deposits on leased facilities. The deposits are required for the three-year and five-year terms of the leases. Restricted cash is included in other assets or other current assets based on the expected term for the release of the restriction.

Foreign currency

The financial statements of foreign subsidiaries are measured using the local currency of the subsidiary as the functional currency. Accordingly, assets and liabilities of the subsidiaries are translated at the current rates of exchange at the applicable balance sheet date, and revenue and expense items are translated using average exchange rates during the period.

Comprehensive income

Comprehensive income includes net income attributed to common stockholders, unrealized loss on investments and foreign currency translation adjustments as follows (in thousands):

	Three Months Ended September 30,						Six Months Ended September 30,
	2003			2002			2003			2002
Net income	$	3,415		$	699		$	3,488		$	757
Unrealized gain on available-for-sale investments		71			—			(156	)		—
Foreign currency translation adjustments		(323	)		(219	)		346			(75	)
Comprehensive income	$	3,163		$	480		$	3,678		$	682

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Newly Adopted and Recently Issued Accounting Pronouncements

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The annual disclosure provisions are effective for fiscal years ending after December 15, 2002. The Company adopted the disclosure requirements of this standard in fiscal 2003 and the adoption of SFAS 148 did not have a material effect on its consolidated financial statements.

In November 2002, the FASB issued Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). For guarantees issued or modified after December 31, 2002, a liability shall be recognized for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements are effective for interim and annual financial statements for periods ending after December 15, 2002. In June 2003, the FASB issued a FASB Staff Position, which indicated that indemnification clauses in software agreements related to intellectual property infringement are subject to disclosure requirements of FIN 45, but not the initial recognition or measurement provisions. The adoption of FIN 45 did not have a material effect on the Company’s consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” an Interpretation of ARB No 51 (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. The original effective date of FIN 46 was delayed to the first reporting period ending after December 15, 2003 (December 31, 2003 for the Company) for any variable interest entities or potential variable interest entities created before February 1, 2003. The Company is studying the impact of FIN 46 on its consolidated financial position, results of operations and cash flows.

Note 2. Basic and Diluted Net Income Per Share

The Company computes net income per share in accordance with SFAS 128, “Earnings per Share.” Basic net income per share is computed by dividing net income attributable to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted net income per share gives effect to all dilutive potential common shares outstanding during the period including stock options and warrants using the treasury stock method and convertible debt using the as-if-converted method.

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The following is a reconciliation of the weighted average common shares used to calculate basic net income per share to the weighted average common and potential common shares used to calculate diluted net income per share for the three and six months ended September 30, 2003 and 2002 (in thousands):

	Three Months Ended September 30,		Six Months Ended September 30,
	2003	2002	2003	2002
Weighted average common shares used to calculate basic net income per share	30,255	30,182	30,264	30,006
Options outstanding using the treasury method	3,033	1,315	2,725	1,946
Redeemable convertible subordinated notes using the as-if-converted method	6,562	—	6,562	—
Warrants using the treasury method	25	61	24	78
Options exercised and unvested	189	342	113	404
Weighted average common and potential common shares used to calculate diluted net income per share	40,064	31,900	39,688	32,434

For the three and six months ended September 30, 2003, 541,520 and 346,770 shares, respectively, of common stock issuable under stock option plans were excluded from the computation of diluted net income per share because their option exercise prices were greater than the average market price, which would result in antidilution under the treasury stock method. For the three and six months ended September 30, 2002, 641,134 and 415,876 shares, respectively, of common stock issuable under stock option plans were excluded from the computation of diluted net income per share. The weighted-average exercise price of such shares was $24.05 and $24.31 for the three and six months ended September 30, 2003, respectively. The weighted-average exercise price of such shares was $16.14 and $18.34 for the three and six months ended September 30, 2002, respectively.

Note 3. Commitments and Contingencies

Commitments

On July 10, 2003 the Company entered into an agreement to purchase a $1.0 million convertible note convertible into preferred or common stock from a private company. The Company has paid $250,000 in July 2003 and will pay $250,000 for each of the next three quarters.

Legal Proceedings

On February 6, 2003, the Company entered into a definitive agreement to settle a lawsuit initially filed in Santa Clara County, California Superior Court in August of 2001 by Prolific, Inc. The settlement agreement provided for two installment payments by the Company in the aggregate amount of $1.85 million. The first payment of $0.925 million was made in February 2003 and the second payment of $0.925 million was made in July 2003. There are no continuing obligations by the parties to each other.

From time to time, the Company is involved in other disputes that arise in the ordinary course of business. The number and significance of these disputes is increasing as the Company’s business expands and the Company grows larger. Any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. As a result, these disputes could harm the Company’s business.

Note 4. Segment Information

The Company follows the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which requires the reporting of segment information using the “management approach.” Under this approach, operating segments are identified in substantially the same manner as they are reported internally and used by the Company’s President and Chief Operating Officer (“COO”) for purposes of evaluating performance and allocating resources. Based on this approach, the Company has one reportable segment as the COO reviews financial information on a basis consistent with that presented in the condensed consolidated financial statements.

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Revenue from North America, Europe and the Asia Pacific region, which includes Japan, India, South Korea, Taiwan, Hong Kong and the People’s Republic of China, was as follows (in thousands):

	Three Months Ended September 30,						Six Months Ended September 30,
	2003			2002			2003			2002
North America	$	12,518		$	12,565		$	25,143		$	25,126
Europe		3,409			2,577			8,500			5,612
Japan		9,204			2,437			13,838			4,512
Asia Pacific		686			192			1,149			644
	$	25,817			17,771		$	48,630		$	35,894
	Three Months Ended September 30,						Six Months Ended September 30,
	2003			2002			2003			2002
North America		48	%		70	%		52	%		70	%
Europe		13			15			18			16
Japan		36			14			28			12
Asia Pacific		3			1			2			2
		100	%		100	%		100	%		100	%

Revenue attributable to significant customers, representing 10% or more of total revenue for at least one of the respective periods, is summarized as follows:

	Three Months Ended September 30,				Six Months Ended September 30,
	2003		2002		2003		2002
Customer A	15	%	6	%	16	%	6	%
Customer B	18		—		13		—
Customer C	14		7		14		7
Customer D	9		10		10		11
Customer E	5		18		5		15

Substantially all of the Company’s long-lived assets are located in the United States.

Note 5. Restructuring Charge

The Company incurred restructuring charges in the third quarter ended December 31, 2002 in the amount of $0.7 million related to employee termination costs of 32 technical, sales, marketing and administrative employees. As of September 30, 2003, all 32 employees were terminated and the Company paid $0.6 million in termination costs. As of September 30, 2003, $85,000 relating to the remaining termination costs is included in accrued expenses in the condensed consolidated financial statements.

Note 6. Asset Purchase of VeraTest, Inc.

On November 1, 2002, the Company completed an acquisition of VeraTest, Inc., a private California corporation (“VeraTest”), primarily for the purpose of acquiring VeraTest’s chip design verification software.

The Company previously acquired 18.0% of VeraTest, Inc. on April 10, 2002 for $0.2 million, which was charged to research and development. On November 1, 2002, the Company acquired the remaining outstanding common stock held by certain shareholders for approximately $1.6 million in cash, including the cancellation of indebtedness of $0.3 million of certain VeraTest stockholders to the Company. The Company accounted for this acquisition as an asset purchase. The purchase price was allocated to capitalized software, which has an estimated life of three years.

Under SFAS 86, “Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” amortization is based on the greater of the ratio of current gross revenue of the related product to current and anticipated future gross revenues or on a straight-line method over the remaining estimated economic life. As of September 30, 2003, the Company has amortized $0.5 million of the value of the capitalized software on a pro-rated straight-line basis and the remaining unamortized balance of $1.1 million is included in other assets in the accompanying consolidated balance sheet as of September 30, 2003.

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In connection with the November 2002 acquisition, the Company entered into an earn-out arrangement and employment and consulting agreements with the former VeraTest common stockholders. Under the terms of the earn out arrangement, these individuals have the right to receive 272,998 shares of the Company’s common stock upon the completion of certain milestones. Of these shares of common stock, 171,646 shares were placed in escrow, to be released upon completion of three milestone achievements: 20% for completion of the first milestone (no later than December 15, 2002), 40% for completion of the second milestone (no later than September 15, 2003), and 40% for the completion of the third milestone (no later than September 15, 2004). The remaining 101,352 shares were issued pursuant to a restricted stock grant and will vest on the same basis as the shares placed in escrow. The milestones are based upon testing and integration of certain current features, as well as the development of additional working features of the software tool. If it is determined that any milestone has not been attained, the shares will be cancelled. The first milestone was completed on November 30, 2002 and the second milestone was completed on September 15, 2003. The Company expects that the remaining milestone will be met and accordingly has remeasured the value of the contingent consideration for the three months ended September 30, 2003 and recorded $1.3 million in additional stock-based compensation expense.

Note 7. Convertible Subordinated Notes

On May 22, 2003, the Company completed an offering of $150.0 million principal amount of Zero Coupon Convertible Subordinated Notes due May 15, 2008 (the “Notes”) to qualified buyers pursuant to Rule 144A under the Securities Act of 1933, resulting in net proceeds to the Company of approximately $145.2 million. The Notes do not bear coupon interest and are convertible into shares of the Company’s common stock at an initial conversion price of $22.86 per share, for an aggregate of 6,561,680 shares. The Notes are subordinated to the Company’s existing and future senior indebtedness and effectively subordinated to all indebtedness and other liabilities of the Company’s subsidiaries. The Company may not redeem the Notes prior to their maturity date. The Company paid approximately $4.5 million in transaction fees to the underwriters of the offering and approximately $0.3 million in other debt issuance costs. The Company is amortizing the transaction fee and issuance costs over the life of the Notes using the effective interest method. As of September 30, 2003, approximately $0.4 million of transaction fees had been amortized. The shares issuable on the conversion of the Notes are included in “fully diluted shares outstanding” under the as-if-converted method of accounting for purposes of calculating diluted earnings per share.

In order to minimize the dilutive effect from the issuance of the Notes, the Company undertook the following additional transactions concurrent with the issuance of the Notes:

• The Company repurchased approximately 1.1 million shares of its common stock at a price of $18.00 per share, or approximately $20.0 million, from one of the initial purchasers of the Notes, and those shares were retired as of May 30, 2003.

• The Company and Credit Suisse First Boston International (“CSFB International”) entered into convertible bond hedge and warrant transactions with respect to the Company’s common stock, the exposure for which is held by CSFB International. Under the convertible bond hedge arrangement, CSFB International agreed to sell to the Company, for $22.86 per share, up to 6,561,680 shares of Magma common stock to cover the Company’s obligation to issue shares upon conversion of the Notes. In addition, the Company issued CSFB International a warrant to purchase up to 6,561,680 shares of common stock for a purchase price of $31.50 per share. Purchases and sales under this arrangement may be made only upon expiration of the Notes or their earlier conversion (to the extent thereof). Both transactions may be settled at the Company’s option either in cash or net shares, and will expire on the earlier of a conversion event or the maturity of the convertible debt on May 15, 2008. The transactions are expected to reduce the potential dilution from conversion of the Notes. The net cost incurred in connection with these arrangements was approximately $20.3 million, which is presented in stockholder’s equity as a reduction of additional paid-in-capital, in accordance with the guidance in Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” That net cost consists of the $56.2 million cost of the convertible bond hedge, offset in part by the $35.9 million proceeds from the issuance of the warrant.

Note 8. Stockholder’s Equity Transactions and Additional Paid in Capital Reconciliation

As previously discussed in detail in other notes to these condensed financial statements, the following is a summary of the significant transactions which were recorded in additional paid-in-capital for the six months ended September 30, 2003:

Balance at April 1, 2003	$	228,400
Issuance of common stock under stock incentive plans		11,008
Retirement of treasury stock		(408	)
Purchase of hedging instrument (Note 7)		(56,154	)
Proceeds from issuance of warrant (Note 7)		35,904
Repurchase of stockholder note		(1,800	)
Repurchase of common stock (Note 7)		(19,980	)
Issuance of common stock in connection with Aplus acquisition (Note 9)		7,882
Effect of stockholder note repurchase		2,828
Issuance and remeasurement of unvested restricted stock in connection with the Veratest acquisition (Note 6)		2,809
Reversal of stock-based compensation for terminated employees		(128	)
Balance at September 30, 2003	$	210,361

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Note 9. Business Combination

On June 10, 2003, the Company entered into an agreement (the “Aplus Agreement”) to acquire Aplus Design Technologies, Inc. (“Aplus”). Aplus designs and develops physical synthesis and physical prototyping solutions for programmable structured logic devices. The Company expects an increase in the number of embedded programmable devices on large ASIC devices and that the integration of the Aplus technology with Magma tools will allow the customers to address these embedded programmable structured logic devices in a single tool flow. The transaction was completed on July 1, 2003 and the results of operations from Aplus have been included in Magma’s results of operations thereafter.

In accordance with the Aplus Agreement, the Company acquired all the outstanding shares of Aplus and may issue up to 1,079,420 shares of the Company’s common stock and may make up to $4.5 million in cash payments, if all the earn-out milestones set forth in the Aplus Agreement are achieved by fiscal year 2005. The purchase price was determined to be approximately $22.6 million, based on the price per share of the Company’s common stock at the closing of the acquisition. Aplus has met two bookings and two technology earn-outs. To date, the Company has paid approximately $1.8 million in cash and issued 472,247 shares of the Company’s common stock. The remaining balance of the purchase consideration is payable pursuant to earn-out arrangements under which an additional 3% of the total merger consideration will be payable based upon Aplus bookings in fiscal 2004, 22% will be payable upon completion of certain technology milestones, and 30% will be payable based on operating income targets for fiscal year 2005. Upon achievement of the milestones, the Company will recognize a higher purchase price equal to the fair value of the cash paid and the Company’s common stock issued to Aplus shareholders on the date the milestones are achieved. The Company included the weighted average number of shares issued in the second quarter of fiscal 2004 in connection with the acquisition in their earnings per share calculation.

The acquisition was accounted for under the purchase method of accounting. The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The approximate purchase price was determined to be $22.6 million. The Company engaged an independent valuation expert to perform the valuation using a discounted cash flow methodology. As a result of this analysis of the acquired assets and liabilities, the Company determined that there was no acquired in process research and development and that all of the future cash flows were attributable to the acquired completed software technology.

The approximate purchase price (in thousands):

Purchase Price	$	22,484
Estimated transaction and other direct acquisition costs		160
	$	22,644

The total purchase price was allocated as follows:

Historical net tangible assets at July 1, 2003	$	72
Software		22,572
Total	$	22,644

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The following unaudited pro forma summary presents the consolidated results of operations as if the Aplus acquisition had occurred at the beginning of the three and six month periods ended September 30, 2003 and for the year ended March 31, 2003. This does not purport to be indicative of the results that would have been achieved had the acquisition been made as of those dates nor of the results which may occur in the future.

(In thousands, except per share data)	Three Months Ended September 30, 2003		Six Months Ended September 30, 2003		Year Ended March 31, 2003
Net revenue	$	25,880	$	48,693	76,092
Net income	$	2,650	$	2,723	2,797
Net income per share—basic	$	0.09	$	0.09	0.09
Net income per share—diluted	$	0.07	$	0.07	0.09

Note 10. Subsequent Events

Acquisition of Silicon Metrics Corporation (“Silicon Metrics”)

On October 17, 2003, the Company acquired Silicon Metrics, pursuant to an Agreement and Plan of Merger and Reorganization dated October 16, 2003. Pursuant to the Silicon Metrics merger agreement, a wholly-owned subsidiary of the Company merged with and into Silicon Metrics, with Silicon Metrics continuing as the surviving corporation and a wholly-owned subsidiary of the Company. Silicon Metrics develops characterization and modeling software for chip design.

The Company agreed to pay $18.0 million in cash to Silicon Metrics’ security holders, including approximately $2.6 million payable to participants in a Silicon Metrics acquisition bonus plan. Of the $18.0 million, the Company paid $5.0 million to Silicon Metrics on October 20, 2003. In addition, the Company may be required to pay up to $14.0 million in contingent cash consideration pursuant to an earn-out schedule, a portion of which may become payable to participants in the Silicon Metrics acquisition bonus plan. Pursuant to the terms of the Silicon Metrics merger agreement, $2.6 million of the consideration was retained by the Company in a segregated bank account to secure certain indemnification obligations of the Silicon Metrics stockholders and bonus plan participants. The acquisition of Silicon Metrics will be accounted for as a purchase and the results of operations will be included in the Company’s consolidated financial statements from the date of acquisition.

Acquisition of Random Logic Corporation (“Random Logic”)

On October 20, 2003, the Company acquired Random Logic, pursuant to an Agreement and Plan of Merger (the “RLC Merger Agreement”) dated October 18, 2003. A wholly-owned subsidiary of the Company merged with and into Random Logic, with Random Logic continuing as the surviving corporation and a wholly-owned subsidiary of the Company. Random Logic is the developer of the parasitic extraction software product QuickCap^™ .

The Company paid $20.0 million in cash to Random Logic security holders in October 2003. Pursuant to the terms of the RLC Merger Agreement, $5.0 million of that consideration was withheld and placed in an escrow account to secure the indemnification obligations of the Random Logic shareholders. The acquisition of Random Logic will be accounted for as a purchase and the results of operations will be included in the Company’s consolidated financial statements from the date of acquisition. Random Logic will be included in the Company’s consolidated financial statements from the date of acquisition.

Technology License Agreement

On October 20, 2003, the Company entered into an agreement (the “Circuit Semantics Agreement”) with Circuit Semantics, Inc. (“Circuit Semantics”) to license all of Circuit Semantics’ patents (the “Patents”), with a twenty-four month option to acquire the Patents and all related rights. Circuit Semantics develops in-place cell characterization and chip-level timing analysis for structured-custom methodologies.

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Under the Circuit Semantics Agreement, Circuit Semantics granted the Company a royalty free license to all of its Patents and Patent applications for $9 million in cash, which was paid in October 2003. In addition, the Company received a twenty-four month option to acquire all Patents and all related rights for $300,000 in cash.

Acquisition of Pleiades Design and Test Technologies, Inc. (“PDAT”)

On November 6, 2003, the Company acquired PDAT, pursuant to an Agreement and Plan of Merger (the “PDAT Merger Agreement”) dated November 5, 2003. PDAT develops memory built-in self test technology used in the design of system-on-a-chip semiconductors.

The Company paid $0.2 million in cash to PDAT security holders on November 6, 2003. Pursuant to the terms of the PDAT Merger Agreement, the Company may be required to pay up to $.35 million in contingent cash consideration pursuant to a technology milestone. PDAT will be included in the Company’s consolidated financial statements.

We have paid approximately $34 million for the acquisitions to date and expect to pay an additional $13 million within the next quarter. The remaining $14.4 million will be paid as the milestones are achieved. These acquisitions have been funded from our cash reserves.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Management’s Discussion and Analysis of Financial Condition and Results of Operation section should be read in conjunction with “Selected Consolidated Financial Data” and our condensed consolidated financial statements and results appearing elsewhere in this report. Throughout the Management’s Discussion section, we make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. You can often identify these and other forward looking statements by terms such as “becoming,” “may,” “will,” “should,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” or the negative of such words, or comparable terminology. These forward-looking statements include, but are not limited to, our expectations about revenue and various operating expenses. Although we believe that the expectations reflected in these forward-looking statements are reasonable, and we have based these expectations on our beliefs and assumptions, such expectations may prove to be incorrect. Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: increasing competition in the electronic design automation market; the continuing impact of the economic recession; effects that terrorist activities or events in the Middle East may have on Magma, its customers and industry; any delay of customer orders or failure of customers to renew licenses; weaker-than-anticipated sales of Magma’s products and services; weakness in the semiconductor or electronic systems industries; the ability to successfully manage Magma’s expanding operations; the ability to attract and retain the key management and technical personnel needed to operate Magma successfully; the ability to continue to deliver competitive products to customers to help them get their products to market; and changes in accounting rules.

Overview

We provide design and implementation software that enables chip designers to reduce the time it takes to design and produce complex integrated circuits used in the communications, computing, consumer electronics, networking and semiconductor industries. Our products are used in all major phases of the chip development cycle, from initial design through physical implementation.

An important technical foundation of our software products is our patented FixedTiming methodology, which allows our customers to reduce iterations that are often required in conventional integrated circuit design processes. Our single data model architecture is a key enabler for this methodology and for our ability to deliver automated signal integrity detection and correction. It contains logical and physical information about the design and is resident in core memory during execution, which makes it possible to analyze the design and make rapid tradeoff decisions during the physical design process.

Our software products enable chip designers to meet critical time-to-market objectives, improve chip performance and handle chip designs involving millions of components. Blast Create enables logic designers to visualize, evaluate and improve code quality, design constraints, testability and analysis. Blast Create, Blast Fusion and Blast Fusion APX combine into one integrated chip design flow what traditionally had been separate logic design and physical design processes. Our integrated flow significantly reduces timing closure iterations, allowing our customers to accelerate the time it takes to design and produce deep submicron integrated circuits. Blast Plan enables hierarchical planning and partitioning of a design into blocks that can be designed separately and later combined into a complex chip or system-on-a-chip. Blast Noise detects and corrects signal interference, or crosstalk, in physical designs. Blast Rail detects and corrects power distribution and optimization within physical design flow.

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We provide consulting, training and services to help our customers more rapidly adopt our technology. In the past, we have provided integrated circuit design services including assisting our customers in the utilization of our products for complex chip design challenges. However, beginning in December 2002, we have largely withdrawn from the sale of design services. We also provide post-contract support, or maintenance, for our products.

Acquisitions

Recently, we have acquired several companies and purchased technologies to enable us to expand our served available markets into sign-off quality tool sets for chip timing and parasitic extraction and in library model generation and development. These acquisitions were intended to support our leading technology position in the electronic design automation, or EDA, industry. These acquisitions are likely to increase our general and administrative expenses in the short term.

On July 1, 2003, we completed our acquisition of Aplus Design Technologies, Inc., which designs and develops physical synthesis and physical prototyping solutions for programmable devices. Under our agreement with Aplus, we may issue up to 1,079,420 shares of Magma common stock and will make up to $4.5 million in cash payments between the closing and fiscal year 2005, if all the earn-out milestones set forth in the agreement with Aplus are achieved.

On October 17, 2003, we acquired Silicon Metrics. Our wholly-owned subsidiary merged with and into Silicon Metrics, with Silicon Metrics continuing as the surviving corporation and a our wholly-owned subsidiary. We agreed to pay $18.0 million in cash to Silicon Metrics security holders, including approximately $2.6 million payable to participants in a Silicon Metrics bonus plan. In addition, we may be required to pay up to $14.0 million in contingent cash consideration pursuant to an earn-out schedule, a portion of which may become payable to participants in the Silicon Metrics bonus plan. The earn-outs will be based upon revenue contribution at September 30, 2004 and March 31, 2005. Pursuant to the terms of the agreement, we retained $2.6 million of the consideration in a segregated bank account to secure certain indemnification obligations of the Silicon Metrics stockholders and bonus plan participants. Silicon Metrics develops characterization and modeling software for chip design.

On October 20, 2003, we acquired Random Logic, which merged with and into our wholly-owned subsidiary, with Random Logic continuing as the our wholly-owned subsidiary. We paid $20.0 million in cash to Random Logic security holders, $5.0 million of which was withheld and placed in an escrow account to secure certain indemnification obligations of Random Logic’s shareholders.

On October 20, 2003, we entered into an agreement with Circuit Semantics to license all of its patents, with a 24-month option to acquire those patents and related rights. Under the Circuit Semantics agreement, Circuit Semantics granted us a royalty-free license to all of its patents and patent applications for $9.0 million in cash, which was paid in October 2003. In connection with the agreement with Circuit Semantics, we hired certain technology personnel from Circuit Semantics for our development team.

On November 6, 2003, we acquired PDAT, which merged with and into our wholly-owned subsidiary, with PDAT continuing as the surviving corporation and our wholly-owned subsidiary. On November 6, 2003, we paid $0.2 million in cash to PDAT security holders.

We were incorporated in Delaware in 1997. Our principal executive offices are located at 5460 Bayfront Plaza, Santa Clara, California 95054 and our telephone number is (408) 565-7500.

Critical Accounting Policies and Estimates

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. We consider the following accounting policies related to revenue recognition, allowance for doubtful accounts, investments, deferred taxes and valuation of long-lived assets to be critical policies due to the estimation processes involved in each.

Revenue Recognition

We recognize revenue in accordance with Statement of Position 97-2, as modified by SOP 98-9, which generally requires revenue earned on software arrangements involving multiple elements such as software products, upgrades, enhancements, maintenance, installation and training to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence that is specific to the vendor. If evidence of fair value does not exist for all elements of a license agreement and maintenance is the only undelivered element, then all revenue for the license arrangement is recognized over the term of the agreement. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred until the delivery of the element and the remaining portion of the license fee is recognized as revenue.

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License revenue

We derive license revenue primarily from our design and implementation software and, to a much lesser extent, from our analysis and verification products. We license our products under time-based and perpetual licenses.

We recognize license revenue after the execution of a license agreement and the delivery of the product to the customer, provided that there are no uncertainties surrounding the product acceptance, fees are fixed or determinable, collection is probable and there are no remaining obligations other than maintenance. For licenses where we have vendor-specific objective evidence of fair value, or VSOE, for maintenance, we recognize license revenue using the residual method. For these licenses, license revenue is recognized in the period in which the license agreement is executed assuming all other revenue recognition criteria are met. For licenses where we have no VSOE for maintenance, we recognize license revenue ratably over the maintenance period, or if extended payment terms exist, based on the lower of amounts due and payable or ratably over the contract period.

For transactions in which we bundle maintenance for the entire license term into a time-based license agreement, no VSOE of fair value exists for each element of the arrangement. For these agreements, where the only undelivered element is maintenance, we recognize revenue ratably over the contract term. If an arrangement involves extended payment terms—that is, where less than 100% of the license, services and initial post contract support is due in one year from the contract date—we recognize revenue to the extent of the lesser of the portion of the amount presently due and payable or the ratable portion of the entire fee.

For our perpetual licenses and some time-based license arrangements, we unbundle maintenance, by including maintenance for up to first year of the license term, with maintenance renewable by the customer at the rate stated in their agreements with us. In these unbundled licenses, the aggregate renewal period is greater than or equal to the initial maintenance period. The stated rate for maintenance renewal in these contracts is VSOE of the fair value of maintenance in both our unbundled time-based and perpetual licenses. In the fourth quarter of fiscal 2003, we changed our business practice for pricing of maintenance renewals from a fixed percentage of annual list price to a fixed percentage of the annual net license fee. We believe these new pricing policies better reflect the underlying economics of our software license agreements we enter into larger scale license arrangements with our customers, which include substantial discounts from our list prices. Where the only undelivered element is maintenance, we recognize license revenue using the residual method. If an arrangement involves extended payment terms, revenue recognized using the residual method is limited to amounts due and payable.

If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period. Amounts invoiced relating to arrangements where revenue cannot be recognized are reflected on our balance sheet as deferred revenue and recognized over time as the applicable revenue recognition criteria are satisfied.

Services revenue

We derive services revenue primarily from consulting and training for our software products and from maintenance fees for our products. Most of our license agreements include maintenance, generally for a one-year period, renewable annually. Services revenue from maintenance arrangements is recognized on a straight-line basis over the maintenance term. Because we have VSOE of fair value for consulting and training services, revenue is recognized as these services are performed or completed. Our consulting and training services are generally not essential to the functionality of the software. Our products are fully functional upon delivery of the product. Factors considered in determining whether the revenue should be accounted for separately include, but are not limited to: degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We regularly review the adequacy of our accounts receivable allowance after considering the size of the accounts receivable balance, each customer’s expected ability to pay and our collection history with each customer. We review significant invoices that are past due to determine if an allowance is appropriate using the factors described above. We also monitor our accounts receivable for concentration to any one customer, industry or geographic region.

To date our receivables have not had any particular concentrations that, if not collected, would have a significant impact on our operating income. The allowance for doubtful accounts represents our best estimate, but changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. If actual losses are significantly greater than the reserve

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we have established, that would increase our general and administrative expenses and reduce our reported net income. Conversely, if actual credit losses are significantly less than our reserve, this would eventually decrease our general and administrative expenses and increase our reported net income.

Investments

We invest in debt and equity of privately held technology companies for business and strategic purposes. These companies are typically in the early stage of development and are expected to incur substantial losses in the near-term. Therefore, these companies may never become publicly traded. Even if they do, an active trading market for their securities may never develop and we may never realize any return on these investments. Further, if these companies are not successful, we could incur charges related to write-downs or write-offs of these investments.

We also invest in companies that may be classified as variable interest entities. These companies would then be included in our consolidated statement of operations.

We review the assumptions underlying the operating performance and cash flow forecasts based on information requested from these privately held companies on at least a quarterly basis. Assessing each investment’s carrying value requires significant judgment by management. If we determine that an other-than-temporary decline in fair value exists in a strategic investment, we write-down the investment to its fair value and record the related expense in other income (expense) in our consolidated statement of operations.

During the second quarter of fiscal 2004, we entered into an agreement to purchase a $1.0 million convertible note that is convertible into preferred or common stock in a private company. We paid $250,000 in August 2003 and will pay $250,000 for each of the next three quarters. In addition, during the first half of fiscal 2004, we determined that the decline in value of certain strategic investments was other-than-temporary and recorded write-downs of these investments totaling $0.8 million. The carrying value of all strategic investments at September 30, 2003 was $1.3 million.

Deferred Tax Asset Valuation Allowance

We account for income taxes in accordance with SFAS 109, “Accounting for Income Taxes.” We assess the likelihood that our net deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. However, adjustments could be required in the future if we determine that the amount to be realized is greater or less than the amount we have recorded.

Valuation of Long-Lived Intangible Assets

As we acquire intangible assets through acquisitions, we will review long-lived assets for impairment in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or asset, a significant decrease in the benefits realized from the acquired business, difficulty and delays in integrating the business or a significant change in the operations of the acquired business or use of an asset.

Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially affect our reported financial results. More conservative assumptions of the anticipated future benefits from these businesses could result in greater impairment charges, which would decrease reported net income and result in lower asset carrying values on our balance sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges, which would result in higher reported net income and higher asset carrying values. At September 30, 2003, we had $10.3 million in capitalized software on our balance sheet. We anticipate that we will have significant goodwill and other purchase intangibles, including capitalized software in the future as a result of our recent acquisitions.

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Results of Operations

The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:

	Three Months Ended September 30,				Six Months Ended September 30,
	2003		2002		2003		2002
Revenue:
Licenses	88	%	83	%	89	%	78	%
Services	12		17		11		22
Total revenue	100		100		100		100
Cost of revenue	15		19		15		17
Gross profit	85		81		85		83
Operating expenses:
Research and development	24		25		22		27
Sales and marketing	32		39		32		36
General and administrative	9		12		10		12
Amortization of stock-based compensation	7		4		12		8
Total operating expenses	72		80		76		83
Operating income	13		1		9		0
Other income (expense), net	3		4		1		3
Net income before income taxes	16		5		10		3
Income taxes	(3	)	(1	)	(3	)	(1	)
Net income	13	%	4	%	7	%	2	%

Revenue

Revenue increased 45%, from $17.8 million for the three months ended September 30, 2002 to $25.8 million for the three months ended September 30, 2003, due to an increase in license revenue. Of the $25.8 million of revenue recognized during the quarter ended September 30, 2003, approximately 67% represents revenue recognized from orders signed before the second quarter of fiscal year 2004 and approximately 33% represents revenue recognized from new orders signed in the second quarter of fiscal 2004. Revenue increased 35%, from $35.9 million for the six months ended September 30, 2002 to $48.6 million for the six months ended September 30, 2003 due to sales to new customers and sales of additional licenses, and new products to our existing customers. Revenue from outside North America increased 155% for the three-month period ended September 30, 2003, and 118% for the six-month period ended September 30, 2003, compared with the three- and six-month periods ended September 30, 2002.

Our revenue consists of perpetual, bundled and unbundled time-based license agreements. Certain significant contracts with extended payment terms entered into in recent quarters provide for payments, which are weighted towards the latter part of the contract term. In accordance with our revenue recognition policy, if the payment terms are extended, the revenue from these contracts is recognized as amounts become due and payable. Revenue recognized under these arrangements will be higher in the latter part of the contract term. Our ability to recognize revenue in the future on contracts with extended payment terms will be subject to the customers’ continuing credit-worthiness. Although we plan to enter into both bundled and unbundled time-based license agreements and perpetual license agreements in the future, we expect to derive the majority of our revenue in the foreseeable future from unbundled time-based license agreements.

License revenue

License revenue increased 55%, from $14.7 million for the three months ended September 30, 2002 to $22.8 million for the three months ended September 30, 2003. License revenue increased 54%, from $28.1 million for the six months ended September 30, 2002 to $43.4 million for the six months ended September 30, 2003. The increases were primarily due to increased license revenue from our design and implementation software products. Specifically, our license revenue benefited from the introduction of Blast Fusion APX as well as from existing products, such as Blast Fusion, Blast Plan and Blast Noise and to a lesser extent from new products (Blast Create and Blast RTL). We expect license revenue to increase in absolute dollars, but to remain flat or slightly decrease as a percentage of total revenue.

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Services revenue

Services revenue decreased 3%, from $3.1 million for the three months ended September 30, 2002 to $3.0 million for the three months ended September 30, 2003. For the six months ended September 30, 2003, service revenue decreased 33% from $7.8 million for the six months ended September 30, 2002 to $5.3 million, primarily from fewer new customer design services engagements. We have withdrawn from the sale of design services, except when we pass those sales on to approved third party design centers. We expect service revenue to increase in absolute dollars, but to remain flat or slightly increase as a percentage of total revenue.

Cost of Revenue

Cost of revenue consists primarily of salary and related costs for engineers associated with technical services, including quality assurance, and associated with post-contract customer support and consulting services. Cost of revenue increased from $3.4 million, or 19% of total revenue, for the three months ended September 30, 2002, to $3.9 million, or 15% of total revenue, for the three months ended September 30, 2003. Cost of revenue increased from $6.2 million, or 17% of total revenue, for the six months ended September 30, 2002 to $7.1 million, or 15% of total revenue, for the six months ended September 30, 2003. These increases were primarily due to costs associated with additional support personnel required by our expanding customer base. Although we expect cost of revenue to increase in absolute dollars and that these costs will fluctuate as a percentage of total revenue, our objective is to reduce these costs as a percentage of total revenue.

Operating Expenses

Research and development

Research and development expense consists primarily of salaries, bonuses and benefits of engineering personnel, along with depreciation of engineering equipment, and outside engineering services from contractors and consultants. Research and development expense increased from $4.4 million, or 25% of total revenue, for the three months ended September 30, 2002 to $6.0 million, or 24% of total revenue, for the three months ended September 30, 2003. Research and development expenses increased from $9.8 million, or 27% of total revenue, for the six months ended September 30, 2002 to $11.0 million, or 22% of total revenue, for the six months ended September 30, 2003. The six-month increase was primarily due to increases in support services of $1.9 million, payroll related expenses of $0.4 million, and office-related expenses of $0.1 million and an equity investment expense of $0.2 million. These increases were partially offset by decreases in professional services of $1.2 million and depreciation expense of $0.2 million. Although we expect research and development expense to increase in absolute dollars and that these expenses will fluctuate as a percentage of total revenue, our objective is to reduce these expenses as a percentage of total revenue over time.

Sales and marketing

Sales and marketing expense consists primarily of salaries, sales commissions, bonuses, benefits and related costs of sales and marketing personnel, trade shows and other marketing activities. Sales and marketing expense increased from $6.9 million, or 39% of total revenue, for the three months ended September 30, 2002 to $8.3 million, or 32% of total revenue, for the three months ended September 30, 2003. Sales and marketing expenses increased from $12.9 million, or 36% of total revenue, for the six months ended September 30, 2002 to $15.4 million, or 32% of total revenue, for the six months ended September 30, 2003. The six-month increase of $2.5 million was primarily due to increases in net payroll related expenses of $4.3 million from additional personnel and commission expense and $0.5 million in travel expenses. These increases were partially offset by a decrease of $2.3 million in our support services. Although we expect sales and marketing expense to increase in absolute dollars and that these expenses will fluctuate as a percentage of total revenue, our objective is to reduce these expenses as a percentage of total revenue over time.

General and administrative

General and administrative expense consists primarily of salaries, bonuses, benefits and related costs of finance and administrative personnel and outside service expenses including legal, accounting and recruiting services. General and administrative expense increased from $2.1 million, or 12% of total revenue, for the three months ended September 30, 2002 to $2.4 million, or 9% of total revenue, for the three months ended September 30, 2003. General and administrative expenses increased from $4.3 million, or 12% of total revenue, for the six months ended September 30, 2002 to $4.8 million, or 10% of total revenue, for the six months ended September 30, 2003. The net six-month increase of $0.5 million was attributable to increases of $1.5 million in support service expenses, insurance expense of $0.2 million and office-related expenses of $0.4 million. These increases were offset by decreases in payroll related expense of $1.0 million and depreciation expense of $0.6 million. Although we expect general and administrative expense to increase in absolute dollars and that these expenses will fluctuate as a percentage of total revenue, our objective is to reduce these expenses as a percentage of total revenue over time.

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Amortization of stock-based compensation

Stock-based compensation expense consists of the amortization of deferred stock-based compensation resulting from the grant of stock options at exercise prices less than the fair value of the underlying common stock on the grant date. Options granted to officers and employees generally vest over four years, with 25% vesting after one year and the remainder ratably over the remaining 36 months. Amortization of stock-based compensation was $1.8 million, or 7% of total revenue, for the three months ended September 30, 2003 and $0.7 million, or 4% of total revenue, for the three months ended September 30, 2002. Amortization of stock-based compensation was $5.7 million, or 12% of total revenue, for the six months ended September 30, 2003 and $2.6 million, or 8% of total revenue, for the six months ended September 30, 2002. For the six months ended September 30, 2003, stock-based compensation included $2.8 million of expense related to the acquisition of VeraTest and $2.4 million related to a stock grant issued to our President and director, Roy Jewell.

Other Income (Expense), Net

Other income (expense), net was $0.8 million for the three months ended September 30, 2003 and $0.6 million for the three months ended September 30, 2002. For the six months ended September 30, 2003 and 2002, other income (expense) was, net $0.6 million and $1.0 million, respectively. For the three months ended September 30, 2003 and 2002, interest income was $0.6 million for both quarters. For the six months ended September 30, 2003 and 2002, interest income was $1.2 million and $1.0 million, respectively. Interest expense increased from ($1,000) for the three months ended September 30, 2002 to ($0.2) million for the three months ended September 30, 2003. For the six months ended September 2003 and 2002, interest expense was ($0.3) million and ($3,000), respectively. Interest expense for the six months ended September 30, 2003 included $0.4 million of amortization for the transaction fee related to our offering of $150 million principal amount of convertible subordinated notes. Other income (expense) for the three months ended September 30, 2003 and 2002 was $0.4 million and $0, respectively. For the six months ended September 30, 2003 and 2002 other income (expense) was ($0.3) million and $0. Other income (expense) included impairment charges of $0.8 million related to two of our strategic investments and $0.5 million for a foreign exchange gain for the six months ended September 30, 2003.

Income Taxes

From inception through September 30, 2003, we incurred a cumulative net loss for federal and state tax purposes. We are in a net deferred tax asset position, which has been fully reserved. We will continue to provide a valuation allowance for our net deferred tax asset until it becomes more likely than not that the net deferred tax asset will be realizable. For the six months ended September 30, 2003, the tax provision of $1.6 million included $0.6 million for foreign income taxes, $0.4 million for federal income taxes, and $0.6 million for state income taxes. For the six months ended September 30, 2002, the tax provision of $0.3 million included foreign income taxes of $0.2 million and state income taxes of $0.1 million.

Liquidity and Capital Resources

As of September 30, 2003, cash and cash equivalents were $97.2 million, and working capital was $100.5 million.

Net cash provided by operating activities was $9.3 million for the six months ended September 30, 2003, compared to net cash used of $0.2 million for the six months ended September 30, 2002. For the six months ended September 30, 2003, cash flow from operating activities included increases in deferred revenue of $3.2 million and in accrued expenses of $2.5 million. These increases were offset by decreases in accounts receivable of $3.2 million, in prepaid expenses of $3.5 million and in other assets of $1.7 million. For the six months ended September 30, 2002, cash flow from operating activities included an increase in cash from accounts receivable of $1.0 million and in accounts payable of $0.3 million. These increases were offset by decreases in cash from accrued expenses of $3.9 million and deferred revenue of $3.7 million. In addition, significant non-cash related adjustments for the six months ended September 30, 2003 and 2002 included depreciation and amortization of $2.6 million and $2.4 million, amortization of stock-based compensation of $5.7 million and $2.6 million and provisions for doubtful accounts of $0.2 million and $0.4 million, respectively.

Net cash used by investing activities was $92.7 million for the six months ended September 30, 2003, compared to net cash provided of $11.0 million for the six months ended September 30, 2002. Of the cash used by investing activities for the six months ended September 30, 2003, $94.0 million was used for the purchase of investments and $4.0 million was used for purchases of property and equipment, offset by cash provided by investing activities including $5.0 million in proceeds from sale of investments and $0.4 million provided from other assets. For the six months ended September 30, 2002, $13.5 million in cash was provided from proceeds from sales of short-term investments, offset by purchases of property and equipment of $2.0 million and purchases of other assets of $0.5 million.

Cash provided by financing activities was $116.2 million and $2.3 million for the six months ended September 30, 2003 and September 30, 2002, respectively. Cash provided by financing activities for the six months ended September 30, 2003 consisted of net

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proceeds from convertible subordinated notes of $145.2 million and cash received from exercises of stock options of $11.0 million. Partially offsetting those amounts, we repurchased 1,110,000 shares at $18 per share for an aggregate amount of $20.0 million. We also used $56.2 million for the purchase of a hedge instrument and sold a warrant for $35.9 million related to our issuance of convertible subordinated notes. For the six months ended September 30, 2002, the cash provided of $2.3 million was proceeds from the exercise of stock options.

On May 22, 2003, we completed an offering of our $150.0 million principal amount of Zero Coupon Convertible Subordinated Notes due May 15, 2008 to qualified buyers pursuant to Rule 144A under the Securities Act of 1933, resulting in net proceeds to Magma of approximately $145.2 million. The notes do not bear coupon interest and are convertible into shares of our common stock at an initial conversion price of $22.86 per share, for an aggregate of 6,561,680 shares. The notes are subordinated to Magma’s existing and future senior indebtedness and effectively subordinated to all indebtedness and other liabilities of our subsidiaries. Magma may not redeem the notes prior to their maturity date. We paid approximately $4.5 million in fees to the underwriters of the offering and approximately $0.3 million in other debt issuance costs. We are amortizing the transaction fees and issuance costs over the life of the notes using the interest-rate method. As of September 30, 2003, approximately $0.4 million of the transaction fees have been amortized. The shares issuable on the conversion of the notes are included in “fully diluted shares outstanding” under the as-if-converted method of accounting for purposes of calculating diluted earnings per share.

In order to minimize the dilutive effect from the issuance of the notes, we entered into additional transactions concurrent with the issuance of the notes, as follows:

• We repurchased approximately 1.1 million shares of our common stock at a price of $18.00 per share, or approximately $20.0 million, from one of the initial purchasers of the notes, and those shares were retired as of May 30, 2003.

• We and CSFB International entered into convertible bond hedge and warrant transactions with respect to our common stock, the exposure for which is held by CSFB International. Under the convertible bond hedge arrangement, CSFB International agreed to sell to us, for $22.86 per share, up to 6,561,680 shares of Magma common stock to cover our obligation to issue shares upon conversion of the notes. In addition, we issued CSFB International a warrant to purchase up to 6,561,680 shares of common stock for a purchase price of $31.50 per share. Purchases and sales under this arrangement may be made only upon expiration of the notes or their earlier conversion (to the extent thereof). Both transactions may be settled at our option either in cash or net shares, and will expire on the earlier of a conversion event or the maturity of the convertible debt on May 15, 2008. The transactions are expected to reduce the potential dilution from conversion of the notes. The net cost incurred in connection with these arrangements was approximately $20.3 million, which is presented in shareholder’s equity as a reduction of additional paid in capital, in accordance with the guidance in Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” That net cost consists of $56.2 million costs of the convertible bond hedge, offset in part by the $35.9 million proceeds from the issuance of the warrant.

As of September 30, 2003, our principal source of liquidity consisted of $97.2 million in cash and cash equivalents. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated operating and working capital expenditure requirements in the ordinary course of business for at least the next 12 months. If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may use cash or need to sell additional equity or debt securities. The sale of additional equity or convertible debt securities may result in more dilution to our existing stockholders. Financing arrangements may not be available to us or may not be available in amounts or on terms acceptable to us.

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The following summarizes our contractual obligations at September 30, 2003 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in millions):

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 Years		4-5 Years		After 5 Years
Operating lease obligations	$	12.4	$	1.5	$	3.5	$	3.8	$	3.6
Convertible subordinated note	$	150.0	$	—	$	—	$	150.0	$	—
Investment commitment	$	0.8	$	0.8	$	—	$	—	$	—

We recently acquired Silicon Metrics Corporation, Pleiades Design and Test Technologies, Inc., Random Logic Corporation, and licensed certain intellectual property from Circuit Semantics, Inc. The aggregate purchase price of these acquisitions is up to approximately $61 million, including $14.4 million in contingent deferred consideration. We have paid approximately $34 million for the acquisitions to date and expect to pay an additional $13 million within the next quarter. The remaining $14.4 million will be paid as the milestones are achieved. These acquisitions have been funded from our cash reserves.

Newly Adopted and Recently Issued Accounting Pronouncements

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The annual disclosure provisions are effective for fiscal years ending after December 15, 2002. We adopted the disclosure requirements of this standard in fiscal 2003 and the adoption of SFAS 148 did not have a material effect on our consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” For guarantees issued or modified after December 31, 2002, a liability shall be recognized for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements are effective for interim and annual financial statements for periods ending after December 15, 2002. In June 2003, the FASB issued a FASB Staff Position, which indicated that indemnification clauses in software agreements related to intellectual property infringement are subject to disclosure requirements of FIN 45, but not the initial recognition or measurement provisions. The adoption of FIN 45 did not have a material effect on our consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” an Interpretation of ARB No 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. The original effective date of FIN 46 was delayed to the first reporting period after December 15, 2003 (December 31, 2003 for us) for any variable interest entities or potential variable interest entities created before February 1, 2003. We are studying the impact of FIN 46 on our consolidated financial position, results of operations and cash flows.

FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline.

Our limited operating history makes it difficult to evaluate our business and prospects.

We were incorporated in April 1997 and introduced our first principal software product, Blast Fusion, in April 1999. Our business model is still emerging, and the revenue and income potential of our business and market is unproven. We have a limited history of generating revenue from our software products. As a result of our short operating history, we have limited financial data that can be used to evaluate our business. Our software products represent a new approach to the challenges presented in the electronic design automation market, which to date has been dominated by established companies with longer operating histories. Key markets within the electronic design automation industry may fail to adopt our proprietary technologies and software products. Any evaluation of our business and our prospects must be considered in light of our limited operating history and the risks and uncertainties often encountered by relatively young companies.

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We have a history of losses prior to fiscal 2003 and had an accumulated deficit of approximately $115.1 million as of September 30, 2003; if we do not increase profitability, the public trading price of our stock price would be likely to decline.

We had an accumulated deficit of approximately $115.1 million as of September 30, 2003. Although we achieved profitability in fiscal 2003, we incurred losses in prior years. If we incur new losses, or do not increase profitability at a level expected by securities analysts or investors, the market price of our common stock is likely to decline. If we incur net losses, we may not be able to maintain or increase our number of employees or our investment in capital equipment, sales, marketing, and research and development programs, and we may not be able to continue to operate.

Our quarterly results are difficult to predict, and if we miss quarterly financial expectations, our stock price could decline.

Our quarterly revenue and operating results are difficult to predict, and fluctuate from quarter to quarter. It is likely that our operating results in some periods will be below investor expectations. If this happens, the market price of our common stock is likely to decline. Fluctuations in our future quarterly operating results may be caused by many factors, including:

• size and timing of customer orders, which are received unevenly and unpredictably throughout a fiscal year;

• the mix of products licensed and types of license agreements;

• our ability to recognize revenue in a given quarter;

• timing of customer license payments;

• time-based license agreements with graduated payment schedules that reflect phased deployment of our software and lower relative payments in the first years;

• the relative mix of time-based licenses bundled with maintenance, unbundled time-based license agreements and perpetual license agreements, each of which has different revenue recognition practices;

• the relative mix of our license and services revenues;

• our ability to win new customers and retain existing customers;

• changes in our pricing and discounting practices and licensing terms and those of our competitors;

• changes in the level of our operating expenses, including increases in incentive compensation payments that may be associated with future revenue growth;

• changes in the interpretation of the authoritative literature under which we recognize revenue;

• the timing of product releases or upgrades by us or our competitors; and

• the integration, by us or our competitors, of newly-developed or acquired products.

Customer payment defaults may cause us to be unable to recognize revenue from backlog and may have a material adverse effect on our financial condition and results of operations.

As of September 30, 2003, we had approximately $230.0 million in backlog, which we define as non-cancelable contractual commitments by our customers, through purchase orders or contracts that have no contingencies other than our performance. We expect that we will ultimately be able to recognize this backlog as revenue. However, if a customer defaults and fails to pay amounts owed, we may not be able to recognize expected revenue from backlog. In the current economic environment it is possible that customers from whom we expect to derive revenue from backlog will default or that the level of defaults will increase. Any material payment default by our customers could reduce the amount of backlog we recognize as revenue and could have a material adverse effect on our financial condition and results of operations.

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Our lengthy and unpredictable sales cycle, and the large size of some orders, makes it difficult for us to forecast revenue and increases the magnitude of quarterly fluctuations, which could harm our stock price.

Customers for our software products typically commit significant resources to evaluate available software. The complexity of our products requires us to spend substantial time and effort to assist potential customers in evaluating our software and in benchmarking it against our competition. As the complexity of the products we sell increases, we expect the sales cycle to lengthen. In addition, potential customers may be limited in their current spending by existing time-based licenses with their legacy vendors. In these cases, customers delay a significant new commitment to our software until the term of the existing license has expired. Also, because our products require a significant investment of time and cost by our customers, we must target those individuals within the customer’s organization who are able to make these decisions on behalf of their companies. These individuals tend to be senior management in an organization, typically at the vice president level. We may face difficulty identifying and establishing contact with such individuals. Even after initial acceptance, the negotiation and documentation processes can be lengthy. Our sales cycle typically ranges between three and nine months, but can be longer. Any delay in completing sales in a particular quarter could cause our operating results to fall below expectations.

We rely on a small number of customers for a significant portion of our revenue, and our revenue could decline due to delays of customer orders or the failure of existing customers to renew licenses or if we are unable to maintain or develop relationships with current or potential customers.

Our business depends on sales to a small number of customers. In the six months ended September 30, 2003, we had four customers that each accounted for more than 10% of our revenue and that together accounted for approximately 53% of our revenue. In the six months ended September 30, 2002, we had two customers that each accounted for more than 10% of our revenue and that together accounted for approximately 26% of our revenue.

We expect that we will continue to depend upon a relatively small number of customers for a substantial portion of our revenue for the foreseeable future. If we fail to sell sufficient quantities of our products and services to one or more customers in any particular period, or if a large customer reduces purchases of our products or services, defers orders, or fails to renew licenses, our business and operating results will be harmed.

Most of our customers license our software under time-based licensing agreements, with terms that typically vary from 15 months to 48 months. Most of our licensing agreements automatically expire at the end of the term unless the customer renews the license with us or purchases a perpetual license. If our customers do not renew their licenses, we may not be able to maintain our current revenue or may not generate additional revenue. Some of our licensing agreements allow customers to terminate an agreement prior to its expiration under limited circumstances—for example, if our products do not meet specified performance requirements or goals. If these agreements are terminated prior to expiration or we are unable to collect under these agreements, our revenue may decline.

Some contracts with extended payment terms provide for payments which are weighted toward the later part of the contract term. Accordingly, as the payment terms are extended, the revenue from these contracts is not recognized evenly over the contract term, but is recognized as the lesser of the cumulative amounts due and payable or ratably for bundled agreements, and as amounts become due and payable for unbundled agreements, at each period end. Revenue recognized under these arrangements will be higher in the later part of the contract term, which puts our revenue recognition in the future at greater risk of the customer’s continuing credit-worthiness. In addition, some of our customers have extended payment terms, which creates additional credit risk.

Implementing rigorous internal control over financial reporting is difficult and time-consuming and if we are not able to ensure effective control, investor confidence may weaken and the trading price of our common stock may decline.

We have experienced difficulties in completing our quarterly and year-end financial closing process without adjustments proposed by our independent auditor. Adjustments have related to matters such as revenue recognition, accounts payable, accrued liabilities, prepaid commissions and strategic investments. Although we have taken steps to improve the design and implementation of internal control over financial reporting as it relates to our financial closing process, we cannot assure you that these steps will be successful. In addition, we may encounter unexpected difficulties with internal control over financial reporting. If our internal control system is not effective, we may encounter difficulties with the maintenance of records, recording of transactions in accordance with generally accepted accounting principles and our policies, or assurance about prevention or detection of unauthorized use of our assets. Failing to maintain an effective system of internal control could cause a loss of investor confidence in our reported results and harm our stock price.

We compete against companies that hold a large share of the electronic design automation market. If we cannot compete successfully, we will not gain market share.

We currently compete with companies that hold dominant shares in the electronic design automation market, such as Cadence and Synopsys. Each of these companies has a longer operating history and significantly greater financial, technical and marketing

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resources than we do, as well as greater name recognition and larger installed customer bases. Our competitors are better able to offer aggressive discounts on their products, a practice they often employ. Our competitors offer a more comprehensive range of products than we do; for example, we do not offer logic simulation, formal verification, full-feature custom layout editing, analog or mixed signal products, which can sometimes be an impediment to our winning a particular customer order. In addition, our industry has traditionally viewed acquisitions as an effective strategy for growth in products and market share and our competitors’ greater cash resources and higher market capitalization may give them a relative advantage over us in buying companies with promising new chip design products or companies that may be too large for us to acquire without a strain on our resources. Examples of acquisitions by our competitors include Synopsys’ acquisition of Avant! and Cadence’s acquisitions of Get2Chip, Silicon Perspective, Plato, Simplex, K2 Technologies, Verplex and Cadmos. Further consolidation in the electronic design automation market could result in an increasingly competitive environment. Competitive pressures may prevent us from gaining market share, require us to reduce the price of products and services or cause us to lose existing customers, which could harm our business. To execute our business strategy successfully, we must continue to increase our sales worldwide. If we fail to do so in a timely manner or at all, we may not be able to gain market share and our business and operating results could suffer.

Also, a variety of small companies continue to emerge, developing and introducing new products. Any of these companies could become a significant competitor in the future. We also compete with the internal chip design automation development groups of our existing and potential customers. Therefore, these customers may not require, or may be reluctant to purchase, products offered by independent vendors.

Our competitors may develop or acquire new products or technologies that have the potential to replace our existing or new product offerings. The introduction of these new or additional products by competitors may cause potential customers to defer purchases of our products. If we fail to compete successfully, we will not gain market share and our business will fail.

We may not be successful in integrating the operations of acquired companies and acquired technology.

We expect to continuously evaluate the possibility of accelerating our growth through acquisitions, as is customary in the electronic design automation industry. Achieving the anticipated benefits of past and possible future acquisitions will depend in part upon whether we can integrate the operations, products and technology of acquired companies with our operations, products and technology in a timely and cost-effective manner. The process of integrating with acquired companies and acquired technology is complex, expensive and time-consuming, and may cause an interruption of, or loss of momentum in, the product development and sales activities and operations of both companies. We cannot assure you that any part or all of the integration will be accomplished on a timely basis, or at all. Assimilating previously acquired companies such as Silicon Metrics Corporation, or any other companies we may seek to acquire in the future, involves a number of other risks, including, but not limited to:

• adverse effects on existing customer relationships, such as cancellation of orders or the loss of key customers;

• difficulties in integrating or an inability to retain the employees of the acquired company;

• difficulties in integrating the operations of the acquired company, such as information technology resources, manufacturing processes, and financial and operational data;

• difficulties in integrating the technologies of the acquired company into our products;

• potential incompatibility of business cultures;

• potential dilution to existing stockholders if we have to incur debt or issue equity securities to pay for any future acquisitions; and

• additional expenses associated with the amortization of intangible assets.

We may not be able to hire the number of qualified engineering personnel required for our business, particularly field application engineering personnel, which would harm our ability to grow.

We continue to experience difficulty in hiring and retaining skilled engineers with appropriate qualifications to support our growth strategy. Our success depends on our ability to identify, hire, train and retain qualified engineering personnel with experience in integrated circuit design. Specifically, we need to attract and retain field application engineers to work with our direct sales force to technically qualify new sales opportunities and perform design work to demonstrate our products’ capabilities to customers during the benchmark evaluation process. Competition for qualified engineers is intense, particularly in Silicon Valley where our headquarters are located. If we lose the services of a significant number of our engineers or we cannot hire additional engineers, we will be unable to increase our sales or implement or maintain our growth strategy.

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Because many of our current competitors have pre-existing relationships with our current and potential customers, we might not be able to gain market share, which could harm our operations.

Many of our competitors, including Cadence and Synopsys, have established relationships with our current and potential customers and can devote substantial resources aimed at preventing us from establishing or enhancing our customer relationships. These existing relationships can make it difficult for us to obtain additional customers due to the substantial investment that these potential customers have already made in their current design flows. If we are unable to gain market share due to these relationships with our potential customers, our operating results could be harmed.

Our operating results will be significantly harmed if chip designers do not adopt Blast Fusion and Blast Fusion APX.

Blast Fusion and Blast Fusion APX have accounted for a significant majority of our revenue since our inception and we believe that revenue from Blast Fusion and Blast Fusion APX and related products will account for most of our revenue for the foreseeable future. If integrated circuit designers do not adopt Blast Fusion and Blast Fusion APX, our operating results will be significantly harmed. We must continue market penetration of Blast Fusion and Blast Fusion APX to achieve our growth strategy and financial success.

If the industries into which we sell our products experience recession or other cyclical effects affecting our customers’ research and development budgets, our revenue would be likely to decline.

Demand for our products is driven by new integrated circuit design projects. The demand from semiconductor and systems companies is uncertain and difficult to predict. Slower growth in the semiconductor and systems industries, a reduced number of design starts, reduction of electronic design automation budgets or continued consolidation among our customers would harm our business and financial condition. We have experienced slower growth in revenue than we anticipated as a result of the prolonged downturn and decreased spending by our customers in the semiconductor and systems industries.

The primary customers for our products are companies in the communications, computing, consumer electronics, networking and semiconductor industries. Any significant downturn in our customers’ markets or in general economic conditions that results in the cutback of research and development budgets or the delay of software purchases would be likely to result in lower demand for our products and services and could harm our business. For example, the United States economy, including the semiconductor industry, is currently experiencing a slowdown, which has negatively impacted and may continue to impact our business and operating results. Terrorist attacks in the United States, the aftermath of war with Iraq and other worldwide events including in the Middle East have increased uncertainty in the United States economy. If the economy continues to decline as a result of the economic, political and social turmoil, existing customers may delay their implementation of our software products and prospective customers may decide not to adopt our software products, either of which could negatively impact our business and operating results.

In addition, the markets for semiconductor products are cyclical. In recent years, some Asian countries have experienced significant economic difficulties, including devaluation and instability, business failures and a depressed business environment. These difficulties triggered a significant downturn in the semiconductor market, resulting in reduced budgets for chip design tools, which, in turn, negatively impacted us. We have experienced delayed orders and slower deployment of our products under new orders as a result of reduced budgets for chip design tools. In addition, the electronics industry has historically been subject to seasonal and cyclical fluctuations in demand for its products, and this trend may continue in the future. These industry downturns have been, and may continue to be, characterized by diminished product demand, excess manufacturing capacity and subsequent erosion of average selling prices.

Difficulties in developing and achieving market acceptance of new products and delays in planned release dates of our software products and upgrades may harm our business.

To succeed, we will need to develop innovative new products. We may not have the financial resources necessary to fund all required future innovations. Also, any revenue that we receive from enhancements or new generations of our proprietary software products may be less than the costs of development. If we fail to develop and market new productsin a timely manner, our reputation and our business will suffer.

Our costs of customer engagement and support are high, so our gross margin may decrease if we incur higher-than-expected costs associated with providing support services in the future or if we reduce our prices.

Because of the complexity of our products, we typically incur high field application engineering support costs to engage new customers and assist them in their evaluations of our products. If we fail to manage our customer engagement and support costs, our operating results could suffer. In addition, our gross margin may decrease if we are unable to manage support costs associated with the mix of license and services revenue we generate or if we reduce prices in response to competitive pressure.

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Product defects could cause us to lose customers and revenue, or to incur unexpected expenses.

Our products depend on complex software, both internally developed and licensed from third parties. Our customers may use our products with other companies’ products, which also contain complex software. If our software does not meet our customers’ performance requirements, our customer relationships may suffer. Also, a limited number of our contracts include specified ongoing performance criteria. If our products fail to meet these criteria, it may lead to termination of these agreements and loss of future revenue. Complex software often contains errors. Any failure or poor performance of our software or the third-party software with which it is integrated could result in:

• delayed market acceptance of our software products;

• delays in product shipments;

• unexpected expenses and diversion of resources to identify the source of errors or to correct errors;

• damage to our reputation;

• delayed or lost revenue; and

• product liability claims.

Our product functions are often critical to our customers, especially because of the resources our customers expend on the design and fabrication of integrated circuits. Many of our licensing agreements contain provisions to provide a limited warranty, which provides the customer with a right of refund for the license fees if we are unable to correct errors reported during the warranty period. If our contractual limitations are unenforceable in a particular jurisdiction or if we are exposed to product liability claims that are not covered by insurance, a successful claim could harm our business. We currently do not carry product liability insurance.

Much of our business is international, which exposes us to risks inherent to doing business internationally that could harm our business. We also intend to expand our international operations. If our revenue from this expansion does not exceed the expenses associated with this expansion, our business and operating results could suffer.

We generated 48% of our total revenue from sales outside North America for the six months ended September 30, 2003, compared to 30% in the six months ended September 30, 2002. While most of our international sales to date have been denominated in U.S. dollars, our international operating expenses have been denominated in foreign currencies. As a result, a decrease in the value of the U.S. dollar relative to the foreign currencies could increase the relative costs of our overseas operations, which could reduce our operating margins.

The expansion of our international operations includes the maintenance of sales offices in Europe, the Middle East, and the Asia Pacific region. If our revenue from international operations does not exceed the expense of establishing and maintaining our international operations, our business could suffer. Additional risks we face in conducting business internationally include:

• difficulties and costs of staffing and managing international operations across different geographic areas;

• changes in currency exchange rates and controls;

• uncertainty regarding tax and regulatory requirements in multiple jurisdictions;

• the possible lack of financial and political stability in foreign countries, preventing overseas sales growth;

• the aftermath of war in Iraq;

• the effects of terrorist attacks in the United States and any related conflicts or similar events worldwide.

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Future changes in accounting standards, specifically changes affecting revenue recognition, could cause adverse unexpected revenue fluctuations.

Future changes in accounting standards for interpretations thereof, specifically those changes affecting software revenue recognition, could require us to change our methods of revenue recognition. These changes could result in deferral of revenue recognized in current periods to subsequent periods or in accelerated recognition of deferred revenue to current periods, each of which could cause shortfalls in meeting the expectations of investors and securities analysts. Our stock price could decline as a result of any shortfall. Future implementation of internal controls reporting and attestation requirements will impose additional financial and administrative obligations on us that could adversely affect our results.

Changes in effective tax rates could affect our results of operations.

Our future effective tax rates could be adversely affected by the following:

• earnings being lower than anticipated in countries where we are taxed at lower statutory rates as compared to the U.S. tax rate;

• an increase in expenses not deductible for tax purposes, including write-offs of acquired in-process technology;

• changes in the valuation of our deferred tax assets and liabilities; or

• changes in tax laws or interpretations of such tax laws.

Our success will depend on our ability to keep pace with the rapidly evolving technology standards of the semiconductor industry. If we are unable to keep pace with rapidly changing technology standards, our products could be rendered obsolete, which would cause our operating results to decline.

The semiconductor industry has made significant technological advances. In particular, recent advances in deep sub-micron technology have required electronic design automation companies to continuously develop or acquire new products and enhance existing products. The evolving nature of our industry could render our existing products and services obsolete. Our success will depend, in part, on our ability to:

• enhance our existing products and services;

• develop and introduce new products and services on a timely and cost-effective basis that will keep pace with technological developments and evolving industry standards;

• address the increasingly sophisticated needs of our customers; and

• acquire other companies that have complementary or innovative products.

If we are unable, for technical, legal, financial or other reasons, to respond in a timely manner to changing market conditions or customer requirements, our business and operating results could be seriously harmed.

Because competition for qualified personnel is intense in our industry, we may not be able to recruit necessary personnel, which could impact the development or sales of our products.

Our success will also depend on our ability to attract and retain senior management, sales, marketing and other key personnel. Because of the intense competition for such personnel, it is possible that we will fail to retain key technical and managerial personnel. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity to develop and market our products. This could harm the market’s perception of our business and our ability to achieve our business goals.

Our success is highly dependent on the technical, sales, marketing and managerial contributions of key individuals, and we may be unable to recruit and retain these personnel.

We depend on our senior executives, and our research and development, sales and marketing personnel, who are critical to our business. We do not have long-term employment agreements with our key employees, and we do not maintain any key person life insurance policies. If we lose the services of any of these key executives, our product development processes and sales efforts could be slowed. We may also incur increased operating expenses and be required to divert the attention of other senior executives to search for their replacements. The integration of our new executives or any new personnel could disrupt our ongoing operations.

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If we fail to maintain competitive stock option packages for our employees, or if our stock price declines materially for a protracted period of time, we might have difficulty retaining our employees and our business may be harmed.

In today’s competitive technology industry, employment decisions of highly skilled personnel are influenced by stock option packages, which offer incentives above traditional compensation only where there is a consistent, long-term upward trend over time of a company’s stock price. If our stock price declines due to market conditions, investors’ perceptions of the technology industry or managerial or performance problems we have, our stock option incentives may lose value to key employees, and we may lose these employees or be forced to grant additional options to retain them. This in turn could result in:

• immediate and substantial dilution to investors resulting from the grant of additional options necessary to retain employees; and

• potential compensation charges against the company, which could negatively impact our operating results.

In addition, if we were required to account for stock options as an operating expense, our net income would be reduced or net losses increased. Accordingly, our financial results would be adversely affected, particularly relative to companies that grant fewer stock options. If we reduce our level of stock option grants, our ability to recruit and retain employees may be adversely affected.

If our sales force compensation arrangements are designed poorly, we may lose sales personnel and resources.

Designing an effective incentive compensation structure for our sales force is critical to our success. We have experimented, and continue to experiment, with different systems of sales force compensation. If our incentives are not well designed, we may experience reduced revenue generation, and we may also lose the services of our more productive sales personnel, either of which would reduce our revenues or potential revenues.

Fluctuations in our growth place a strain on our management systems and resources, and if we fail to manage the pace of our growth our business could be harmed.

Periods of growth followed by efforts to realign costs when revenue growth is slower than anticipated have placed a strain on our management, administrative and financial resources. For example, in the third quarter of fiscal year 2003, we laid off 32 employees. Over time we have significantly expanded our operations in the United States and internationally, and we plan to continue to expand the geographic scope of our operations. To pace the growth of our operations with the growth in our revenue, we must continue to improve administrative, financial and operations systems, procedures and controls. Failure to improve our internal procedures and controls could result in a disruption of our operations and harm to our business. If we are unable to manage our growth the execution of our business plan could be delayed.

We may have difficulty assimilating technology, personnel and operations from acquisitions, and these difficulties may disrupt our business and divert management’s attention.

We have made acquisitions and we may continue to pursue acquisitions that we believe may complement our business. If we do acquire additional companies, the integration of the separate operations of our company and an acquisition partner may result in problems related to integration of technology and management teams, either of which could divert management’s attention from day-to-day operations. We may not realize all of the anticipated benefits of acquisitions, and we may not be able to retain key management, technical and sales personnel after an acquisition. Our products incorporate software licensed from third parties, and if we lose or are unable to maintain any of these software licenses, our product shipments could be delayed or reduced.

We use software, such as front-end language processing, license keying software and schematic viewing software that we license from third parties. We have also licensed the rights to some technologies from various universities, including the Technical University of Eindhoven, Delft University and the University of California, Berkeley. These third-party software licenses may not continue to be available on commercially reasonable terms, or at all. If we cannot maintain existing third-party technology licenses or enter into licenses for other existing or future technologies needed for our products, we could be required to cease or delay product shipments while we seek to develop alternative technologies.

If chip designers and manufacturers do not integrate our software into existing design flows, or if other software companies do not cooperate in working with us to interface our products with their design flows, demand for our products may decrease.

To implement our business strategy successfully, we must provide products that interface with the software of other electronic design automation software companies. Our competitors may not support our or our customers’ efforts to integrate our products into their existing design flows. We must develop cooperative relationships with competitors so that they will work with us to integrate our software into a customer’s design flow. Currently, our software is designed to interface with the existing software of Cadence,

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Synopsys and others. If we are unable to convince customers to adopt our software products instead of those of competitors offering a broader set of products, or if we are unable to convince other semiconductor companies to work with us to interface our software with theirs to meet the demands of chip designers and manufacturers, our business and operating results will suffer.

We may not obtain sufficient patent protection, which could harm our competitive position and increase our expenses.

Our success and ability to compete depends to a significant degree upon the protection of our software and other proprietary technology. We currently have a number of issued patents in the United States, but this number is relatively few in relation to our competitors.

These legal protections afford only limited protection for our technology. In addition, rights that may be granted under any patent application that may issue in the future may not provide competitive advantages to us. Further, patent protection in foreign jurisdictions where we may need this protection may be limited or unavailable. It is possible that:

• our pending U.S. and non-U.S. patents may not be issued;

• competitors may design around our present or future issued patents or may develop competing non-infringing technologies;

• present and future issued patents may not be sufficiently broad to protect our proprietary rights; and

• present and future issued patents could be successfully challenged for validity and enforceability.

We believe the patent portfolios of our competitors are far larger than ours, and this may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses.

We rely on trademark, copyright and trade secret laws and contractual restrictions to protect our proprietary rights, and if these rights are not sufficiently protected, it could harm our ability to compete and generate income.

To establish and protect our proprietary rights, we rely on a combination of trademark, copyright and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses. Our ability to compete and grow our business could suffer if these rights are not adequately protected. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software pursuant to agreements, which impose certain restrictions on the licensee’s ability to utilize the software. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements. Our proprietary rights may not be adequately protected because:

• laws and contractual restrictions in U.S. and foreign jurisdictions may not prevent misappropriation of our technologies or deter others from developing similar technologies;

• competitors may independently develop similar technologies and software code;

• for some of our trademarks, Federal U.S. trademark protection may be unavailable to us;

• our trademarks may not be protected or protectable in some foreign jurisdictions;

• the validity and scope of our U.S. and foreign trademarks could be successfully challenged; and

• policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of this unauthorized use.

The laws of some countries in which we market our products may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for it, which would harm our competitive position and market share.

We may face intellectual property infringement or other claims against us or our customers that could be costly to defend and result in our loss of significant rights.

Many of our contracts contain provisions in which we agree to indemnify our customers from third-party intellectual property infringement claims. Other parties may assert intellectual property infringement claims against us or our customers, and our products may infringe the intellectual property rights of third parties. We have also acquired or may hereafter acquire software as a result of our

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past or future acquisitions, and we may be subject to claims that such software infringes the intellectual property rights of third parties. If we become involved in litigation, we could lose our proprietary rights and incur substantial unexpected operating costs. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. If there is a successful claim of infringement, we may be required to develop non-infringing technology or enter into royalty or license agreements, which may not be available on acceptable terms, if at all.

Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business. Our products may infringe third-party patents that may relate to our products. Also, we may be unaware of filed patent applications that relate to our software products. We believe the patent portfolios of our competitors are far larger than ours, and this may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses.

We may also become involved in litigation unrelated to intellectual property infringement claims. For example, in August 2001, a complaint was filed against us alleging breach of contract, among other things. This litigation was recently settled. We may not be successful in defending other claims that may be made against us. Regardless of the outcome, litigation can result in substantial expense and could divert the efforts of our management and technical personnel.

Our directors, executive officers and principal stockholders own a substantial portion of our common stock and this concentration of ownership may allow them to elect most of our directors and could delay or prevent a change in control of Magma.

Our directors, executive officers and stockholders who currently own over 5% of our common stock beneficially own a substantial portion of our outstanding common stock. These stockholders, if they vote together, will be able to significantly influence all matters requiring stockholder approval. For example, they may be able to elect most of our directors, delay or prevent a transaction in which stockholders might receive a premium over the market price for their shares or prevent changes in control or management.

Our stock price may decline significantly because of stock market fluctuations that affect the prices of technology stocks. A decline in our stock price could result in securities class action litigation against us, that could divert management’s attention and harm our business.

The stock market has experienced significant price and volume fluctuations that have adversely affected the market prices of common stock of technology companies. These broad market fluctuations may reduce the market price of our common stock. In the past, securities class action litigation has often been brought against a company after periods of volatility in the market price of securities. We may in the future be a target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources, which could harm our ability to execute our business plan.

We may need additional capital in the future, but there is no assurance that funds would be available on acceptable terms.

In the future we may need to raise additional capital in order to achieve growth or other business objectives. This financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing stockholders. If adequate funds are not available or are not available on acceptable terms, our ability to expand, develop or enhance services or products, or respond to competitive pressures would be limited.

Our certificate of incorporation, bylaws and Delaware corporate law contain anti-takeover provisions which could delay or prevent a change in control even if the change in control would be beneficial to our stockholders. We could also adopt a stockholder rights plan, which could also delay or prevent a change in control.

Delaware law, as well as our certificate of incorporation and bylaws, contain anti-takeover provisions that could delay or prevent a change in control of our company, even if the change of control would be beneficial to the stockholders. These provisions could lower the price that future investors might be willing to pay for shares of our common stock. These anti-takeover provisions:

• authorize the Board of Directors without prior stockholder approval to create and issue preferred stock that can be issued increasing the number of outstanding shares and deter or prevent a takeover attempt;

• prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

• establish a classified Board of Directors requiring that not all members of the board be elected at one time;

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• prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

• limit the ability of stockholders to call special meetings of stockholders; and

• require advanced notice requirements for nominations for election to the Board of Directors and proposals that can be acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law and the terms of our stock option plans may discourage, delay or prevent a change in control of our company. That section generally prohibits a Delaware corporation from engaging in a business combination with an interested stockholder for three years after the date the stockholder became an interested stockholder. Also, our stock option plans include change-in-control provisions that allow us to grant options or stock purchase rights that will become vested immediately upon a change in control of us.

The board of directors also has the power to adopt a stockholder rights plan, which could delay or prevent a change in control even if the change in control appeared to be beneficial to stockholders. These plans, sometimes called “poison pills,” are sometimes criticized by institutional investors or their advisors and could affect our rating by such investors or advisors. If the board were to adopt such a plan it might have the effect of reducing the price that new investors are willing to pay for shares of our common stock.

We are subject to risks associated with changes in foreign currency exchange rates.

We transact some portions of our business in various foreign currencies. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to operating expenses in the United Kingdom, Europe and Japan, which are denominated in the respective local currencies. As of September 30, 2003, we had no hedging contracts outstanding. We do not currently use financial instruments to hedge operating expenses in the United Kingdom and Japan denominated in the respective local currency. We assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.

The convertible notes we issued in May 2003 are debt obligations that must be repaid in cash in May 2008 if they are not converted into our common stock at an earlier date, which is unlikely to occur if the price of our common stock does not exceed the conversion price.

In May 2003, we issued $150 million principal amount of our zero coupon convertible notes due May 2008. We will be required to repay that principal amount in full in May 2008 unless the holders of those notes elect to convert them into our common stock before the repayment date. The conversion price of the notes is $22.86 per share. If the price of our common stock does not rise above that level, conversion of the notes is unlikely and we would be required to repay the principal amount of the notes in cash. There have been previous quarters in which we have experienced shortfalls in revenue and earnings from levels expected by securities analysts and investors, which have had an immediate and significant adverse effect on the trading price of our common stock. In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our stock, regardless of our operating performance. Because the notes are convertible into shares of our common stock, volatility or depressed prices for our common stock could have a similar effect on the trading price of the notes.

Hedging transactions and other transactions may affect the value of our common stock and our convertible notes.

We entered into hedging arrangements with Credit Suisse First Boston International at the time we issued our convertible notes, with the objective of reducing the potential dilutive effect of issuing common stock upon conversion of the notes. These hedging arrangements are likely to have caused Credit Suisse First Boston International and others to take positions in our common stock in secondary market transactions or to enter into derivative transactions at or after the sale of the notes. Any market participants entering into hedging arrangements are likely to modify their hedge positions from time to time prior to conversion or maturity of the notes by purchasing and selling shares of our common stock or other securities, which may increase the volatility and reduce the market price of our common stock.

Our convertible notes are subordinated and there are no financial covenants in the indenture.

Our convertible notes are general unsecured obligations of Magma and are subordinated in right of payment to all of our existing and future senior indebtedness, which we may incur in the future. In the event of our bankruptcy, liquidation or reorganization, or upon acceleration of the notes due to an event of default under the indenture and in certain other events, our assets will be available to pay obligations on the notes only after all senior indebtedness has been paid. As a result, there may not be sufficient assets remaining to pay amounts due on any or all of the outstanding notes. In addition, we will not make any payments on the notes in the event of payment defaults or other specified defaults on our designated senior indebtedness.

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Neither we nor our subsidiaries are restricted under the indenture for the notes from incurring additional debt, including senior indebtedness. If we or our subsidiaries incur additional debt or other liabilities, our ability to pay our obligations on the notes could be adversely affected. We expect that we and our subsidiaries from time to time will incur additional indebtedness and other liabilities.

We may be unable to meet the requirements under the indenture to purchase our convertible notes upon a change in control.

Upon a change in control, as to which is defined in the indenture to include some cash acquisitions and private company mergers, note holders may require us to purchase all or a portion of the notes they hold. If a change in control were to occur, we might not have enough funds to pay the purchase price for all tendered notes. Future credit agreements or other agreements relating to our indebtedness might prohibit the redemption or repurchase of the notes and provide that a change in control constitutes an event of default. If a change in control occurs at a time when we are prohibited from purchasing the notes, we could seek the consent of our lenders to purchase the notes or could attempt to refinance this debt. If we do not obtain a consent, we could not purchase the notes. Our failure to purchase tendered notes would constitute an event of default under the indenture, which might constitute a default under the terms of our other debt. In such circumstances, or if a change in control would constitute an event of default under our senior indebtedness, the subordination provisions of the indenture would possibly limit or prohibit payments to note holders. Our obligation to offer to purchase the notes upon a change in control would not necessarily afford note holders protection in the event of a highly leveraged transaction, reorganization, merger or similar transaction involving us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term and long-term investments, consisting primarily of investment grade securities, substantially all of which mature within the next twenty-four months. A hypothetical 100 basis point decrease in interest rates would result in an approximate $1.9 million decline (less than 1%) in the fair value of our available-for-sale securities.

Market Risk

The fair value of our fixed rate long-term debt is sensitive to interest rate changes. Interest rate changes would result in increases or decreases in the fair value of our debt, due to differences between market interest rates and rates in effect at the inception of our debt obligation. Changes in the fair value of our fixed rate debt have no impact on our cash flows or consolidated financial statements.

Credit Risk

We completed an offering on May 22, 2003 of $150 million principal amount of convertible subordinated notes due May 15, 2008. Concurrent with the issuance of the convertible notes, we entered into convertible bond hedge and warrant transactions with respect to our common stock, the exposure for which is held by Credit Suisse First Boston International. Both the bond hedge and warrant transactions may be settled at our option either in cash or net shares and expire on May 15, 2008. The transactions are expected to reduce the potential dilution from conversion of the notes. Subject to the movement in the share price of our common stock, we could be exposed to credit risk in the settlement of these options in our favor. Based on a review of the possible net settlements and the credit strength of Credit Suisse First Boston International and its affiliates, we believe that we do not have a material exposure to credit risk arising from these option transactions.

Foreign Currency Exchange Risk

We transact some portions of our business in various foreign currencies. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to operating expenses in the United Kingdom and Japan, which are denominated in the respective local currency. As of September 30, 2003, we had no currency hedging contracts outstanding. We do not currently use financial instruments to hedge operating expenses in the United Kingdom and Japan denominated in the respective local currency. We assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Our chief executive officer and our chief financial officer, based on their evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, have concluded that our disclosure controls and procedures were effective for this purpose.

Internal Control over Financial Reporting

Regulations under the Securities and Exchange Act of 1934 require public companies, including our company, to evaluate any change in our “internal control over financial reporting,” which is defined as a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

In connection with their evaluation of our disclosure controls and procedures as of September 30, 2003, our chief executive officer and chief financial officer did not identify any change in our internal control over financial reporting during the period that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except that we have:

• continued to execute the plan and program to upgrade and further automate our financial reporting procedures which we initiated in the prior quarter. As a result, we have upgraded our software system for financial reporting, improved our financial closing process, and formalized financial reporting procedures; and

• hired an individual in finance and accounting that is responsible for corporate and international financial reporting to facilitate the implementation of our plan.

We intend to continue to enhance our financial controls and reporting procedures, by hiring additional accounting and finance personnel and further formalizing our financial reporting controls and procedures through the remainder of the fiscal year.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Magma’s quarterly report on Form 10-Q for the period ended June 30, 2003 provides information regarding a settlement agreement between Magma and Prolific, Inc.

From time to time, we are involved in other disputes that arise in the ordinary course of business. The number and significance of these disputes is increasing as our business expands and our company grows larger. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. As a result, these disputes could harm our business.

Item 2. Changes in Securities or Use of Proceeds

Recent Sales Of Unregistered Securities

During the quarter ended September 30, 2003, we issued an aggregate of 151,119 shares of our common stock in connection with the acquisition of Aplus Design Technologies, Inc., for a total of 472,247 shares issued to date in connection with that acquisition. We may issue up to 607,173 additional shares of our common stock upon the achievement of the earn-out milestones set forth in the Aplus acquisition agreement. The securities were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(2) and Regulation D thereof.

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

Magma’s Annual Meeting of Stockholders was held on August 29, 2003. There were three matters voted on at the Annual Meeting of Stockholders. A brief description of each of these matters, and the results of the votes thereon, are as follows:

1. Election of Directors.

Nominee	For	Withheld
Timothy J. Ng	24,858,828	2,603,885
Chet Silvestri	24,885,342	2,577,371

2. Amendment of the 2001 Stock Incentive Plan to change the vesting applicable to annual non-employee director grants.

For	Against	Abstain	Broker Non-Votes
17,426,645	10,022,215	13,853	—

3. Ratification of the appointment of PricewaterhouseCoopers LLP as the registrant’s independent accountants for the fiscal year ending March 31, 2004.

For	Against	Abstain	Broker Non-Votes
26,988,350	472,595	1,768	—

34

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.

Exhibit Number	Exhibit Description
2.1	Agreement and Plan of Merger and Reorganization, dated as of October 16, 2003, among the Company, Silicon Metrics Corporation, Silicon Correlation, Inc., and Vess Johnson and Austin Ventures V, L.P., as Stockholder Agents (incorporated by reference to the exhibit of the same number to the Company’s Form 8-K filed on October 31, 2003).
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to the exhibit of the same number to the Company’s Form 10-K for the year ended March 31, 2002 filed on June 28, 2002).
3.2	Certificate of Correction to Amended and Restated Certificate of Incorporation (incorporated by reference to the exhibit of the same number to the Company’s Form 10-K for the year ended March 31, 2002 filed on June 28, 2002).
3.3	Amended and Restated Bylaws (incorporated by reference to the exhibit of the same number to the Company’s Form 10-K for the year ended March 31, 2002 filed on June 28, 2002).
4.1	Form of Common Stock Certificate (incorporated by reference to the exhibit of the same number to Amendment No. 6 to the Company’s Registration Statement on Form S-1 (File No. 333-60838)).
4.2	Amended and Restated Investor’s Rights Agreement, dated July 31, 2001, by and among the Company’s and the parties who are signatories thereto (incorporated by reference to the exhibit of the same number to the Company’s Form 10-K for the year ended March 31, 2002 filed on June 28, 2002).
10.1	The Company’s 2001 Stock Incentive Plan, as amended through August 29, 2003.
10.2	Lease for corporate headquarters, dated June 19, 2003, between the Company and 3Com Corporation.
31.1	Rule 13a-14(a) Certification.
31.2	Rule 13a-14(a) Certification.
32.1	Certification pursuant to 18 U.S.C. Section 1350.
32.2	Certification pursuant to 18 U.S.C. Section 1350.

(b) Reports on Form 8-K.

On July 14, 2003, Magma filed an Amendment to Form 8-K, for the sole purpose of filing the letter dated July 11, 2003, from KPMG to the Securities and Exchange Commission, relating to Magma’s Item 4 disclosure in the Form 8-K filed June 27, 2003.

On July 31, 2003, Magma furnished a current report on Form 8-K to provide under Item 12 Magma’s press release and conference call transcript in connection with its results of operation and fiscal condition for its fiscal quarter ended June 30, 2003. This Form 8-K is not filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated into this or any other filing of the Company.

On August 15, 2003, Magma filed a current report on Form 8-K to provide under Item 5 a press release regarding Magma’s financial results for the quarter ended June 30, 2003.

35

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MAGMA DESIGN AUTOMATION, INC.
Dated: November 14, 2003	By /s/ Gregory C. Walker
	Gregory C. Walker
	Senior Vice President—Finance and Chief Financial Officer
	(Principal Financial and Accounting Officer and Duly Authorized Signatory)

36

EXHIBIT INDEX

TO

MAGMA DESIGN AUTOMATION, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2003

Exhibit Number	Exhibit Description
2.1	Agreement and Plan of Merger and Reorganization, dated as of October 16, 2003, among the Company, Silicon Metrics Corporation, Silicon Correlation, Inc., and Vess Johnson and Austin Ventures V, L.P., as Stockholder Agents (incorporated by reference to the exhibit of the same number to the Company’s Form 8-K filed on October 31, 2003).
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to the exhibit of the same number to the Company’s Form 10-K for the year ended March 31, 2002 filed on June 28, 2002).
3.2	Certificate of Correction to Amended and Restated Certificate of Incorporation (incorporated by reference to the exhibit of the same number to the Company’s Form 10-K for the year ended March 31, 2002 filed on June 28, 2002).
3.3	Amended and Restated Bylaws (incorporated by reference to the exhibit of the same number to the Company’s Form 10-K for the year ended March 31, 2002 filed on June 28, 2002).
4.1	Form of Common Stock Certificate (incorporated by reference to the exhibit of the same number to Amendment No. 6 to the Company’s Registration Statement on Form S-1 (File No. 333-60838)).
4.2	Amended and Restated Investor’s Rights Agreement, dated July 31, 2001, by and among the Company’s and the parties who are signatories thereto (incorporated by reference to the exhibit of the same number to the Company’s Form 10-K for the year ended March 31, 2002 filed on June 28, 2002).
10.1	The Company’s 2001 Stock Incentive Plan, as amended through August 29, 2003.
10.2	Lease for corporate headquarters, dated June 19, 2003, between the Company and 3Com Corporation.
31.1	Rule 13a-14(a) Certification.
31.2	Rule 13a-14(a) Certification.
32.1	Certification pursuant to 18 U.S.C. Section 1350.
32.2	Certification pursuant to 18 U.S.C. Section 1350.

37

EX-10.1

Exhibit 10.1

MAGMA DESIGN AUTOMATION, INC.

2001 STOCK INCENTIVE PLAN

(Adopted by the Board on May 4, 2001, and Amended as approved by the stockholders at the Annual Meeting of Stockholders on August 29, 2003)

TABLE OF CONTENTS

		Page
SECTION 1. ESTABLISHMENT AND PURPOSE		1
SECTION 2. DEFINITIONS		1
(a)	Affiliate”	1
(b)	“Award”	1
(c)	“Board of Directors”	1
(d)	“Change in Control”	1
(e)	“Code”	3
(f)	“Committee”	3
(g)	“Company”	3
(h)	“Consultant”	3
(i)	“Employee”	3
(j)	“Exchange Act”	3
(k)	“Exercise Price”	3
(l)	“Fair Market Value”	3
(m)	“ISO”	4
(n)	“Nonstatutory Option” or “NSO”	4
(o)	“Offeree”	4
(p)	“Option”	4
(q)	“Optionee”	4
(r)	“Outside Director”	4
(s)	“Parent”	4
(t)	“Participant”	4
(u)	“Plan”	4
(v)	“Purchase Price”	4
(w)	“Restricted Share”	4
(x)	“Restricted Share Agreement”	5
(y)	“SAR”	5
(z)	“SAR Agreement”	5
(aa)	“Service”	5
(bb)	“Share”	5
(cc)	“Stock”	5
(dd)	“Stock Option Agreement”	5
(ee)	“Stock Purchase Agreement”	5
(ff)	“Stock Unit”	5
(gg)	“Stock Unit Agreement”	5
(hh)	“Subsidiary”	5
(ii)	“Total and Permanent Disability”	5
SECTION 3. ADMINISTRATION		5
(a)	Committee Composition	5
(b)	Committee for Non-Officer Grants	6

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(c)	Committee Procedures	6
(d)	Committee Responsibilities	6
SECTION 4. ELIGIBILITY		7
(a)	General Rule	7
(b)	Outside Directors	7
(c)	Ten–Percent Stockholders	10
(d)	Attribution Rules	10
(e)	Outstanding Stock	10
SECTION 5. STOCK SUBJECT TO PLAN		10
(a)	Basic Limitation	10
(b)	Annual Increase in Shares	10
(c)	Additional Shares	11
(d)	Dividend Equivalents	11
SECTION 6. RESTRICTED SHARES		11
(a)	Restricted Stock Agreement	11
(b)	Payment for Awards	11
(c)	Vesting	11
(d)	Voting and Dividend Rights	11
SECTION 7. OTHER TERMS AND CONDITIONS OF AWARDS OR SALES		12
(a)	Duration of Offers and Nontransferability of Rights	12
(b)	Withholding Taxes	12
(c)	Restrictions on Transfer of Shares	12
SECTION 8. TERMS AND CONDITIONS OF OPTIONS		12
(a)	Stock Option Agreement	12
(b)	Number of Shares	12
(c)	Exercise Price	12
(d)	Withholding Taxes	13
(e)	Exercisability and Term	13
(f)	Nontransferability	13
(g)	Exercise of Options Upon Termination of Service	13
(h)	Effect of Change in Control	13
(i)	Leaves of Absence	14
(j)	No Rights as a Stockholder	14
(k)	Modification, Extension and Renewal of Options	14
(l)	Restrictions on Transfer of Shares	14
(m)	Buyout Provisions	14
SECTION 9. PAYMENT FOR SHARES		14
(a)	General Rule	14
(b)	Surrender of Stock	14
(c)	Services Rendered	15
(d)	Cashless Exercise	15

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(e)	Exercise/Pledge	15
(f)	Promissory Note	15
(g)	Other Forms of Payment	15
SECTION 10. STOCK APPRECIATION RIGHTS		15
(a)	SAR Agreement	15
(b)	Number of Shares	15
(c)	Exercise Price	16
(d)	Exercisability and Term	16
(e)	Effect of Change in Control	16
(f)	Exercise of SARs	16
(g)	Special Holding Period	16
(h)	Special Exercise Window	16
(i)	Modification or Assumption of SARs	17
SECTION 11. STOCK UNITS.		17
(a)	Stock Unit Agreement	17
(b)	Payment for Awards	17
(c)	Vesting Conditions	17
(d)	Voting and Dividend Rights	17
(e)	Form and Time of Settlement of Stock Units	17
(f)	Death of Recipient	18
(g)	Creditors’ Rights	18
SECTION 12. ADJUSTMENT OF SHARES		18
(a)	Adjustments	18
(b)	Dissolution or Liquidation	19
(c)	Reorganizations	19
(d)	Reservation of Rights	19
SECTION 13. DEFERRAL OF AWARDS		19
SECTION 14. AWARDS UNDER OTHER PLANS		20
SECTION 15. PAYMENT OF DIRECTOR’S FEES IN SECURITIES.		20
(a)	Effective Date	20
(b)	Elections to Receive NSOs, Restricted Shares or Stock Units	20
(c)	Number and Terms of NSOs, Restricted Shares or Stock Units	20
SECTION 16. LEGAL AND REGULATORY REQUIREMENTS		20
SECTION 17. WITHHOLDING TAXES		21
(a)	General	21
(b)	Share Withholding	21
SECTION 18. LIMITATION ON PARACHUTE PAYMENTS		21
(a)	Scope of Limitation	21
(b)	Basic Rule	21

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(c)	Reduction of Payments	21
(d)	Overpayments and Underpayments	22
(e)	Related Corporations	22
SECTION 19. NO EMPLOYMENT RIGHTS		22
SECTION 20. DURATION AND AMENDMENTS		22
(a)	Term of the Plan	22
(b)	Right to Amend or Terminate the Plan	22
(c)	Effect of Amendment or Termination	23
SECTION 21. EXECUTION		23

-iv-

MAGMA DESIGN AUTOMATION, INC.

2001 STOCK INCENTIVE PLAN

SECTION 1. ESTABLISHMENT AND PURPOSE.

The Plan was adopted by the Board of Directors on May 4, 2001. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options (which may constitute incentive stock options or nonstatutory stock options) or stock appreciation rights.

SECTION 2. DEFINITIONS.

(a) “ Affiliate” shall mean any entity other than a Subsidiary, if the Company and/or one of more Subsidiaries own not less than 50% of such entity.

(b) “ Award” shall mean any award of an Option, a SAR, a Restricted Share or a Stock Unit under the Plan.

(c) “ Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time.

(d) “ Change in Control” shall mean the occurrence of any of the following events:

(i) A change in the composition of the Board of Directors occurs, as a result of which fewer than two-thirds of the incumbent directors are directors who either:

(A) Had been directors of the Company on the “look-back date” (as defined below) (the “original directors”); or

(B) Were elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority of the aggregate of the original directors who were still in office at the time of the election or nomination and the directors whose election or nomination was previously so approved (the “continuing directors”); or

(ii) Any “person” (as defined below) who by the acquisition or aggregation of securities, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the

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Company’s then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the “Base Capital Stock”); except that any change in the relative beneficial ownership of the Company’s securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person’s ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person’s beneficial ownership of any securities of the Company;

(iii) The consummation of a merger or consolidation of the Corporation with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity;

(iv) The sale, transfer or other disposition of all or substantially all of the Company’s assets;

(v) Both:

(A) Any “person” (as defined below) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company’s Base Capital Stock; except that any change in the relative beneficial ownership of the Company’s securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person’s ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person’s beneficial ownership of any securities of the Company; and

(B) The beneficial ownership by such person of securities representing such percentage has not been approved by a majority of the continuing directors.

For purposes of subsection (d)(i) above, the term “look-back” date shall mean the later of (1) May 4, 2001 or (2) the date 24 months prior to the date of the event that may constitute a Change in Control.

For purposes of subsections (d)(ii) and (v) above, the term “person” shall have the same meaning as when used in Sections 13(d) and 14(d) of the Exchange Act but shall exclude (1) a trustee or other fiduciary holding securities under an employee benefit plan maintained by the Company or a Parent or Subsidiary and (2) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the Stock.

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Any other provision of this Section 2(d) notwithstanding, a transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

(e) “ Code” shall mean the Internal Revenue Code of 1986, as amended.

(f) “ Committee” shall mean the committee designated by the Board of Directors, which is authorized to administer the Plan, as described in Section 3 hereof.

(g) “ Company” shall mean MAGMA DESIGN AUTOMATION, INC., a Delaware corporation.

(h) “ Consultant” shall mean a consultant or advisor who provides bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor or a member of the board of directors of a Parent or a Subsidiary who is not an Employee. Service as a Consultant shall be considered Service for all purposes of the Plan.

(i) “ Employee” shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary.

(j) “ Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(k) “ Exercise Price” shall mean, in the case of an Option, the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. “Exercise Price,” in the case of a SAR, shall mean an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common Share in determining the amount payable upon exercise of such SAR.

(l) “ Fair Market Value” with respect to a Share, shall mean the market price of one Share of Stock, determined by the Committee as follows:

(i) If the Stock was traded over-the-counter on the date in question but was not traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last transaction price quoted for such date by the OTC Bulletin Board or, if not so quoted, shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which the Stock is quoted or, if the Stock is not quoted on any such system, by the “Pink Sheets” published by the National Quotation Bureau, Inc.;

(ii) If the Stock was traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last reported sale price quoted for such date by The Nasdaq Stock Market;

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(iii) If the Stock was traded on a United States stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported for such date by the applicable composite-transactions report; and

(iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate.

In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons.

(m) “ ISO” shall mean an employee incentive stock option described in Section 422 of the Code.

(n) “ Nonstatutory Option” or “NSO” shall mean an employee stock option that is not an ISO.

(o) “ Offeree” shall mean an individual to whom the Committee has offered the right to acquire Shares under the Plan (other than upon exercise of an Option).

(p) “ Option” shall mean an ISO or Nonstatutory Option granted under the Plan and entitling the holder to purchase Shares.

(q) “ Optionee” shall mean an individual or estate who holds an Option or SAR.

(r) “ Outside Director” shall mean a member of the Board of Directors who is not a common-law employee of the Company, a Parent or a Subsidiary. Service as an Outside Director shall be considered Service for all purposes of the Plan, except as provided in the second sentence of Section 4(a).

(s) “ Parent” shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be a Parent commencing as of such date.

(t) “ Participant” shall mean an individual or estate who holds an Award.

(u) “ Plan” shall mean this 2001 Stock Incentive Plan of MAGMA DESIGN AUTOMATION, INC., as amended from time to time.

(v) “ Purchase Price” shall mean the consideration for which one Share may be acquired under the Plan (other than upon exercise of an Option), as specified by the Committee.

(w) “ Restricted Share” shall mean a Share awarded under the Plan.

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(x) “ Restricted Share Agreement” shall mean the agreement between the Company and the recipient of a Restricted Share which contains the terms, conditions and restrictions pertaining to such Restricted Shares.

(y) “ SAR” shall mean a stock appreciation right granted under the Plan.

(z) “ SAR Agreement” shall mean the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR.

(aa) “ Service” shall mean service as an Employee, Consultant or Outside Director.

(bb) “ Share” shall mean one share of Stock, as adjusted in accordance with Section 9 (if applicable).

(cc) “ Stock” shall mean the Common Stock of the Company.

(dd) “ Stock Option Agreement” shall mean the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his Option.

(ee) “ Stock Purchase Agreement” shall mean the agreement between the Company and an Offeree who acquires Shares under the Plan that contains the terms, conditions and restrictions pertaining to the acquisition of such Shares.

(ff) “ Stock Unit” shall mean a bookkeeping entry representing the equivalent of one Share, as awarded under the Plan.

(gg) “ Stock Unit Agreement” shall mean the agreement between the Company and the recipient of a Stock Unit which contains the terms, conditions and restrictions pertaining to such Stock Unit.

(hh) “ Subsidiary” shall mean any corporation, if the Company and/or one or more other Subsidiaries own not less than 50% of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

(ii) “ Total and Permanent Disability” shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted, or can be expected to last, for a continuous period of not less than 12 months.

SECTION 3. ADMINISTRATION.

(a) Committee Composition. The Plan shall be administered by the Committee. The Committee shall consist of two or more directors of the Company, who shall be appointed by the Board. In addition, the composition of the Committee shall satisfy

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(i) such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and

(ii) such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under Section 162(m)(4)(C) of the Code.

(b) Committee for Non-Officer Grants. The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not satisfy the requirements of Section 3(a), who may administer the Plan with respect to Employees who are not considered officers or directors of the Company under Section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and may determine all terms of such grants. Within the limitations of the preceding sentence, any reference in the Plan to the Committee shall include such committee or committees appointed pursuant to the preceding sentence.

(c) Committee Procedures. The Board of Directors shall designate one of the members of the Committee as chairman. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee.

(d) Committee Responsibilities. Subject to the provisions of the Plan, the Committee shall have full authority and discretion to take the following actions:

(i) To interpret the Plan and to apply its provisions;

(ii) To adopt, amend or rescind rules, procedures and forms relating to the Plan;

(iii) To authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan;

(iv) To determine when Shares are to be awarded or offered for sale and when Options are to be granted under the Plan;

(v) To select the Offerees and Optionees;

(vi) To determine the number of Shares to be offered to each Offeree or to be made subject to each Option;

(vii) To prescribe the terms and conditions of each award or sale of Shares, including (without limitation) the Purchase Price, the vesting of the award (including accelerating the vesting of awards) and to specify the provisions of the Stock Purchase Agreement relating to such award or sale;

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(viii) To prescribe the terms and conditions of each Option, including (without limitation) the Exercise Price, the vesting or duration of the Option (including accelerating the vesting of the Option), to determine whether such Option is to be classified as an ISO or as a Nonstatutory Option, and to specify the provisions of the Stock Option Agreement relating to such Option;

(ix) To amend any outstanding Stock Purchase Agreement or Stock Option Agreement, subject to applicable legal restrictions and to the consent of the Offeree or Optionee who entered into such agreement;

(x) To prescribe the consideration for the grant of each Option or other right under the Plan and to determine the sufficiency of such consideration;

(xi) To determine the disposition of each Option or other right under the Plan in the event of an Optionee’s or Offeree’s divorce or dissolution of marriage;

(xii) To determine whether Options or other rights under the Plan will be granted in replacement of other grants under an incentive or other compensation plan of an acquired business;

(xiii) To correct any defect, supply any omission, or reconcile any inconsistency in the Plan, any Stock Option Agreement or any Stock Purchase Agreement; and

(xiv) To take any other actions deemed necessary or advisable for the administration of the Plan.

Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of or the granting of Options or other rights under the Plan to persons subject to Section 16 of the Exchange Act. All decisions, interpretations and other actions of the Committee shall be final and binding on all Offerees, all Optionees, and all persons deriving their rights from an Offeree or Optionee. No member of the Committee shall be liable for any action that he has taken or has failed to take in good faith with respect to the Plan, any Option, or any right to acquire Shares under the Plan.

SECTION 4. ELIGIBILITY

.

(a) General Rule. Only Employees shall be eligible for the grant of ISOs. Only Employees, Consultants and Outside Directors shall be eligible for the grant of Restricted Shares, Stock Units, NSOs or SARs, and grants to Outside Directors shall comply with the provisions of Section 4(b).

(b) Outside Directors. Any other provision of the Plan notwithstanding, the participation of Outside Directors in the Plan shall be subject to the following restrictions:

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(i) Outside Directors shall only be eligible for the grant of Restricted Shares, Stock Units, Nonstatutory Options and SARs.

(ii) Each Outside Director who first joins the Board of Directors after the date of adoption of the Plan shall receive a Nonstatutory Option, subject to approval of the Plan by the Company’s stockholders, to purchase fifty thousand (50,000) Shares (subject to adjustment under Section 12) on the first business day after his or her election to the Board of Directors.

(iii) On the first business day following the conclusion of each regular annual meeting of the Company’s stockholders after such Outside Director’s appointment or election to the Board of Directors, commencing with the annual meeting occurring after the adoption of the Plan, each Outside Director who will continue serving as a member of the Board of Directors thereafter shall receive an Option to purchase twenty thousand (20,000) Shares, subject to adjustment under Section 12. Each Outside Director who is not initially elected at a regular annual meeting of the Company’s stockholders shall receive an Option to purchase a pro rata portion of twenty thousand (20,000) Shares within ten business days of his or her election based on the number of full months remaining from date of election until the next regular annual meeting of the Company’s stockholders divided by 12. Any fractional shares resulting from such calculation shall be rounded up to the nearest whole number.

(iv) The Exercise Price of all Nonstatutory Options granted to an Outside Director under this Section 4(b) shall be equal to 100% of the Fair Market Value of a Share on the date of grant, payable in one of the forms described in Section 9(a), (b) and (d).

(v)

(A) The vesting schedule for the Shares subject to each Option granted under Section 4(b)(ii) shall be as follows. Twenty-five percent (25%) of the Shares subject to each Option granted under Section 4(b)(ii) shall become exercisable on the first anniversary of the date of grant. The balance of the Shares subject to each Option (i.e., the remaining seventy-five percent (75%)) granted under Section 4(b)(ii) shall become exercisable monthly over a three-year period beginning on the date which is one month after the first anniversary of the date of grant. Accordingly, the balance of the Shares shall vest, from and after the date, which is one month after the first anniversary of the date of grant, at a monthly rate of 2.08333% of the total number of Shares subject to such Options.

(B) The vesting schedule for the Shares subject to each Option granted under Section 4(b)(iii) shall be as follows. One hundred percent (100%) of the Shares subject to each Option granted under Section 4(b)(iii) shall become exercisable on the day immediately prior to the

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annual meeting of stockholders in the year immediately following the year of grant.

(C) Notwithstanding the foregoing, each Option shall become exercisable in full (100%) in the event that a Change in Control occurs with respect to the Company.

(vi) Subject to Sections 4(b)(vii) and (viii), all Nonstatutory Options granted to an Outside Director under this Section 4(b) shall terminate on the tenth anniversary of the date of grant of such Options.

(vii) If an Optionee’s Service terminates for any reason other than death, then his or her Options shall expire on the earliest of the following occasions:

(A) The expiration date determined pursuant to Section 4(b)(vi) above;

(B) The date six months after the termination of the Optionee’s Service, if the termination occurs because of his or her Total and Permanent Disability; or

(C) The date three months after the termination of the Optionee’s Service for any reason other than Total and Permanent Disability.

The Optionee may exercise all or part of his or her Options at any time before the expiration of such Options under the preceding sentence, but only to the extent that such Options had become exercisable before his or her Service terminated. The balance of such Options shall lapse when the Optionee’s Service terminates. In the event that the Optionee dies after the termination of his or her Service but before the expiration of his or her Options, all or part of such Options may be exercised at any time prior to their expiration by the executors or administrators of the Optionee’s estate or by any person who has acquired such Options directly from him or her by bequest, inheritance or beneficiary designation under the Plan, but only to the extent that such Options had become exercisable before his or her Service terminated.

(viii) If an Optionee dies while he or she is in Service, then his or her Options shall expire on the earlier of the following dates:

(A) The expiration date determined pursuant to Section 4(b)(vi) above; or

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(B) The date six months after his or her death.

All or part of the Optionee’s Options may be exercised at any time before the expiration of such Options under the preceding sentence by the executors or administrators of his or her estate or by any person who has acquired such Options directly from him or her by bequest, inheritance or beneficiary designation under the Plan.

(ix) No Option shall be transferable by the Optionee other than by will, by written beneficiary designation or by the laws of descent and distribution. An Option may be exercised during the lifetime of the Optionee only by the Optionee or by the Optionee’s guardian or legal representative. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process.

(c) Ten-Percent Stockholders. An Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, a Parent or Subsidiary shall not be eligible for the grant of an ISO unless such grant satisfies the requirements of Section 422(c)(6) of the Code.

(d) Attribution Rules. For purposes of Section 4(d) above, in determining stock ownership, an Employee shall be deemed to own the stock owned, directly or indirectly, by or for such Employee’s brothers, sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its stockholders, partners or beneficiaries.

(e) Outstanding Stock. For purposes of Section 4(d) above, “outstanding stock” shall include all stock actually issued and outstanding immediately after the grant. “Outstanding stock” shall not include shares authorized for issuance under outstanding options held by the Employee or by any other person.

SECTION 5. STOCK SUBJECT TO PLAN

(a) Basic Limitation. Shares offered under the Plan shall be authorized but unissued Shares or treasury Shares. The maximum aggregate number of Options, SARs, Stock Units and Restricted Shares awarded under the Plan shall not exceed Two Million (2,000,000) Shares, plus the additional Shares described in Sections (b) and (c). The limitation of this Section 5(a) shall be subject to adjustment pursuant to Section 12.

(b) Annual Increase in Shares. As of January 1 of each year, commencing with the year 2002, the aggregate number of Options, SARs, Stock Units and Restricted Shares that may be awarded under the Plan shall automatically increase by a number equal to the lesser of (i) Six Million (6,000,000) shares, (ii) six percent (6%) of the fully diluted outstanding shares of Stock of the Company on such date or (iii) a lesser amount determined by the Board. The aggregate number of Shares that may be issued under the Plan shall at all times be subject to adjustment pursuant to Section 12. The number of Shares that are subject to Options or other rights outstanding at any time under the Plan shall not exceed the number of Shares which then remain

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available for issuance under the Plan. The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan.

(c) Additional Shares. If Restricted Shares or Shares issued upon the exercise of Options are forfeited, then such Shares shall again become available for Awards under the Plan. If Stock Units, Options or SARs are forfeited or terminate for any other reason before being exercised, then the corresponding Shares shall again become available for Awards under the Plan. If Stock Units are settled, then only the number of Shares (if any) actually issued in settlement of such Stock Units shall reduce the number available under Section 5(a) and the balance shall again become available for Awards under the Plan. If SARs are exercised, then only the number of Shares (if any) actually issued in settlement of such SARs shall reduce the number available in Section 5(a) and the balance shall again become available for Awards under the Plan. The foregoing notwithstanding, the aggregate number of Shares that may be issued under the Plan upon the exercise of ISOs shall not be increased when Restricted Shares or other Shares are forfeited.

(d) Dividend Equivalents. Any dividend equivalents paid or credited under the Plan shall not be applied against the number of Restricted Shares, Stock Units, Options or SARs available for Awards, whether or not such dividend equivalents are converted into Stock Units.

SECTION 6. RESTRICTED SHARES.

(a) Restricted Stock Agreement. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Stock Agreement between the recipient and the Company. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements entered into under the Plan need not be identical.

(b) Payment for Awards. Subject to the following sentence, Restricted Shares may be sold or awarded under the Plan for such consideration as the Committee may determine, including (without limitation) cash, cash equivalents, full-recourse promissory notes, past services and future services. To the extent that an Award consists of newly issued Restricted Shares, the Award recipient shall furnish consideration with a value not less than the par value of such Restricted Shares in the form of cash, cash equivalents, or past services rendered to the Company (or a Parent or Subsidiary), as the Committee may determine.

(c) Vesting. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock Agreement. A Restricted Stock Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events. The Committee may determine, at the time of granting Restricted Shares of thereafter, that all or part of such Restricted Shares shall become vested in the event that a Change in Control occurs with respect to the Company.

(d) Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other stockholders. A Restricted Stock Agreement, however, may require that the holders of Restricted Shares invest

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any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid.

SECTION 7. OTHER TERMS AND CONDITIONS OF AWARDS OR SALES.

(a) Duration of Offers and Nontransferability of Rights. Any right to acquire Shares under the Plan (other than an Option) shall automatically expire if not exercised by the Offeree 30 days after the grant of such right was communicated to him by the Committee. Such right shall not be transferable and shall be exercisable only by the Offeree to whom such right was granted.

(b) Withholding Taxes. As a condition to the purchase of Shares, the Offeree shall make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with such purchase.

(c) Restrictions on Transfer of Shares. Any Shares awarded or sold under the Plan shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Purchase Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares.

SECTION 8. TERMS AND CONDITIONS OF OPTIONS.

(a) Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee’s other compensation. A Stock Option Agreement may provide that a new Option will be granted automatically to the Optionee when he or she exercises a prior Option and pays the Exercise Price in a form described in Section 9(b).

(b) Number of Shares. Each Stock Option Agreement shall specify the number of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 12. Options granted to an Optionee in a single fiscal year of the Company shall not cover more than One Million (1,000,000) Shares, subject to adjustment in accordance with Section 12.

(c) Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price of an ISO shall not be less than 100% of the Fair Market Value of a Share on the date of grant, except as otherwise provided in Section 4(d), and the Exercise Price of an NSO shall not be less than the par value of the Shares subject to such NSO. Subject to the foregoing in this Section 8(c), the Exercise Price under any Option shall be determined by the Committee at its sole discretion. The Exercise Price shall be payable in one of the forms described in Section 9.

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(d) Withholding Taxes. As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with such exercise. The Optionee shall also make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option.

(e) Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10 years from the date of grant (five years for Employees described in Section 4(d)). A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability, or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. Subject to the foregoing in this Section 8(e), the Committee at its sole discretion shall determine when all or any installment of an Option is to become exercisable and when an Option is to expire.

(f) Nontransferability. During an Optionee’s lifetime, his or her Option(s) shall be exercisable only by the Optionee and shall not be transferable. In the event of an Optionee’s death, his or her Option(s) shall not be transferable other than by will or by the laws of descent and distribution.

(g) Exercise of Options Upon Termination of Service. Each Stock Option Agreement shall set forth the extent to which the Optionee shall have the right to exercise the Option following termination of the Optionee’s Service with the Company and its Subsidiaries, and the right to exercise the Option of any executors or administrators of the Optionee’s estate or any person who has acquired such Option(s) directly from the Optionee by bequest or inheritance. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.

(h) Effect of Change in Control. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become exercisable as to all or part of the Shares subject to such Option in the event that a Change in Control occurs with respect to the Company, subject to the following limitations:

(i) In the case of an ISO, the acceleration of exercisability shall not occur without the Optionee’s written consent.

(ii) If the Company and the other party to the transaction constituting a Change in Control agree that such transaction is to be treated as a “pooling of interests” for financial reporting purposes, and if such transaction in fact is so treated, then the acceleration of exercisability shall not occur to the extent that the Company’s independent accountants and such other party’s independent

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accountants separately determine in good faith that such acceleration would preclude the use of “pooling of interests” accounting.

(i) Leaves of Absence. An Employee’s Service shall cease when such Employee ceases to be actively employed by, or a consultant or adviser to, the Company (or any subsidiary) as determined in the sole discretion of the Board of Directors. For purposes of Options, Service does not terminate when an Employee goes on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. However, for purposes of determining whether an Option is entitled to ISO status, an Employee’s Service will be treated as terminating 90 days after such Employee went on leave, unless such Employee’s right to return to active work is guaranteed by law or by a contract. Service terminates in any event when the approved leave ends, unless such Employee immediately returns to active work. The Company determines which leaves count toward Service, and when Service terminates for all purposes under the Plan.

(j) No Rights as a Stockholder. An Optionee, or a transferee of an Optionee, shall have no rights as a stockholder with respect to any Shares covered by his Option until the date of the issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided in Section 12.

(k) Modification, Extension and Renewal of Options. Within the limitations of the Plan, the Committee may modify, extend or renew outstanding options or may accept the cancellation of outstanding options (to the extent not previously exercised), whether or not granted hereunder, in return for the grant of new Options for the same or a different number of Shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option.

(l) Restrictions on Transfer of Shares. Any Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares.

(m) Buyout Provisions. The Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish.

SECTION 9. PAYMENT FOR SHARES.

(a) General Rule. The entire Exercise Price of Shares issued under the Plan shall be payable in lawful money of the United States of America at the time when such Shares are purchased, except as provided in Sections 9(b) through 9(g) below.

(b) Surrender of Stock. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by surrendering, or attesting to the ownership of, Shares

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which have already been owned by the Optionee or his representative for more than 12 months. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes.

(c) Services Rendered. At the discretion of the Committee, Shares may be awarded under the Plan in consideration of services rendered to the Company or a Subsidiary prior to the award. If Shares are awarded without the payment of a Purchase Price in cash, the Committee shall make a determination (at the time of the award) of the value of the services rendered by the Offeree and the sufficiency of the consideration to meet the requirements of Section 6(c).

(d) Cashless Exercise. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price.

(e) Exercise/Pledge. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker or lender to pledge Shares, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of the aggregate Exercise Price.

(f) Promissory Note. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivering (on a form prescribed by the Company) a full-recourse promissory note. However, the par value of the Common Shares being purchased under the Plan, if newly issued, shall be paid in cash or cash equivalents.

(g) Other Forms of Payment. To the extent that a Stock Option Agreement so provides, payment may be made in any other form that is consistent with applicable laws, regulations and rules.

SECTION 10. STOCK APPRECIATION RIGHTS.

(a) SAR Agreement. Each grant of a SAR under the Plan shall be evidenced by a SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee’s other compensation.

(b) Number of Shares. Each SAR Agreement shall specify the number of Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Section 12. SARs granted to any Optionee in a single calendar year shall in no event pertain to more than One Million (1,000,000) Shares. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Section 12.

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(c) Exercise Price. Each SAR Agreement shall specify the Exercise Price. A SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding.

(d) Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. A SAR Agreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s service. SARs may be awarded in combination with Options, and such an Award may provide that the SARs will not be exercisable unless the related Options are forfeited. A SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. A SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control.

(e) Effect of Change in Control. The Committee may determine, at the time of granting a SAR or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such SAR in the event that a Change in Control occurs with respect to the Company, subject to the following sentence. If the Company and the other party to the transaction constituting a Change in Control agree that such transaction is to be treated as a “pooling of interests” for financial reporting purposes, and if such transaction in fact is so treated, then the acceleration of exercisability shall not occur to the extent that the Company’s independent accountants and such other party’s independent accountants separately determine in good faith that such acceleration would preclude the use of “pooling of interests” accounting.

(f) Exercise of SARs. If, on the date when a SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. Upon exercise of a SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Shares, (b) cash or (c) a combination of Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Shares subject to the SARs exceeds the Exercise Price.

(g) Special Holding Period. To the extent required by Section 16 of the Exchange Act or any rule thereunder, an SAR shall not be exercised for cash unless both it and the related Option have been outstanding for more than six months.

(h) Special Exercise Window. To the extent required by Section 16 of the Exchange Act or any rule thereunder, an SAR may only be exercised for cash during a period which (a) begins on the third business day following a date when the Company’s quarterly summary statement of sales and earnings is released to the public and (b) ends on the twelfth business day following such date. This Section 10(h) shall not apply if the exercise occurs automatically on the date when the related Option expires, and the Committee may determine that it shall not apply to limited SARs that are exercisable only in the event of a Change in Control.

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(i) Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of a SAR shall, without the consent of the Optionee, may alter or impair his or her rights or obligations under such SAR.

SECTION 11. STOCK UNITS.

(a) Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the recipient and the Company. Such Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the recipient’s other compensation.

(b) Payment for Awards. To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of the Award recipients.

(c) Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement. A Stock Unit Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events. The Committee may determine, at the time of granting Stock Units or thereafter, that all or part of such Stock Units shall become vested in the event that a Change in Control occurs with respect to the Company, except as provided in the next following sentence. If the Company and the other party to the transaction constituting a Change in Control agree that such transaction is to be treated as a “pooling of interests” for financial reporting purposes, and if such transaction in fact is so treated, then the acceleration of vesting shall not occur to the extent that the Company’s independent accountants and such other party’s independent accountants separately determine in good faith that such acceleration would preclude the use of “pooling of interests” accounting.

(d) Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions (including without limitation, any forfeiture conditions) as the Stock Units to which they attach.

(e) Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Shares or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on

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the average Fair Market Value of Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Section 12.

(f) Death of Recipient. Any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient’s death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient’s death shall be distributed to the recipient’s estate.

(g) Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Agreement.

SECTION 12. ADJUSTMENT OF SHARES.

(a) Adjustments. In the event of a subdivision of the outstanding Stock, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the price of Shares, a combination or consolidation of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of:

(i) The number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Section 5;

(ii) The limitations set forth in Sections 4(c), 8(b) and 10(b);

(iii) The number of NSOs to be granted to Outside Directors under Section 4(b);

(iv) The number of Shares covered by each outstanding Option and SAR;

(v) The Exercise Price under each outstanding Option and SAR; or

(vi) The number of Stock Units included in any prior Award which has not yet been settled.

Except as provided in this Section 12, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any

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subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class.

(b) Dissolution or Liquidation. To the extent not previously exercised or settled, Options, SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Company.

(c) Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Awards shall be subject to the agreement of merger or reorganization. Such agreement shall provide for:

(i) The continuation of the outstanding Awards by the Company, if the Company is a surviving corporation;

(ii) The assumption of the outstanding Awards by the surviving corporation or its parent or subsidiary;

(iii) The substitution by the surviving corporation or its parent or subsidiary of its own awards for the outstanding Awards;

(iv) Full exercisability or vesting and accelerated expiration of the outstanding Awards; or

(v) Settlement of the full value of the outstanding Awards in cash or cash equivalents followed by cancellation of such Awards.

(d) Reservation of Rights. Except as provided in this Section 12, an Optionee or Offeree shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets.

SECTION 13. DEFERRAL OF AWARDS.

The Committee (in its sole discretion) may permit or require a Participant to:

a) Have cash that otherwise would be paid to such Participant as a result of the exercise of a SAR or the settlement of Stock Units credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company’s books;

b) Have Shares that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR converted into an equal number of Stock Units; or

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c) Have Shares that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR or the settlement of Stock Units converted into amounts credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company’s books. Such amounts shall be determined by reference to the Fair Market Value of such Shares as of the date when they otherwise would have been delivered to such Participant.

A deferred compensation account established under this Section 13 may be credited with interest or other forms of investment return, as determined by the Committee. A Participant for whom such an account is established shall have no rights other than those of a general creditor of the Company. Such an account shall represent an unfunded and unsecured obligation of the Company and shall be subject to the terms and conditions of the applicable agreement between such Participant and the Company. If the deferral or conversion of Awards is permitted or required, the Committee (in its sole discretion) may establish rules, procedures and forms pertaining to such Awards, including (without limitation) the settlement of deferred compensation accounts established under this Section 13.

SECTION 14. AWARDS UNDER OTHER PLANS.

The Company may grant awards under other plans or programs. Such awards may be settled in the form of Shares issued under this Plan. Such Shares shall be treated for all purposes under the Plan like Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Shares available under Section 5.

SECTION 15. PAYMENT OF DIRECTOR’S FEES IN SECURITIES.

(a) Effective Date. No provision of this Section 15 shall be effective unless and until the Board has determined to implement such provision.

(b) Elections to Receive NSOs, Restricted Shares or Stock Units. An Outside Director may elect to receive his or her annual retainer payments and/or meeting fees from the Company in the form of cash, NSOs, Restricted Shares or Stock Units, or a combination thereof, as determined by the Board. Such NSOs, Restricted Shares and Stock Units shall be issued under the Plan. An election under this Section 15 shall be filed with the Company on the prescribed form.

(c) Number and Terms of NSOs, Restricted Shares or Stock Units. The number of NSOs, Restricted Shares or Stock Units to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the Board. The terms of such NSOs, Restricted Shares or Stock Units shall also be determined by the Board.

SECTION 16. LEGAL AND REGULATORY REQUIREMENTS.

Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations and the regulations of any stock exchange on

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which the Company’s securities may then be listed, and the Company has obtained the approval or favorable ruling from any governmental agency which the Company determines is necessary or advisable.

SECTION 17. WITHHOLDING TAXES.

(a) General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Shares or make any cash payment under the Plan until such obligations are satisfied.

(b) Share Withholding. The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Shares that he or she previously acquired. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. In no event may a Participant have Shares withheld that would otherwise be issued to him or her in excess of the number necessary to satisfy the legally required minimum tax withholding.

SECTION 18. LIMITATION ON PARACHUTE PAYMENTS.

(a) Scope of Limitation. This Section 18 shall apply to an Award unless the Committee, at the time of making an Award under the Plan or at any time thereafter, specifies in writing that such Award shall not be subject to this Section 18. If this Section 18 applies to an Award, it shall supersede any contrary provision of the Plan or of any Award granted under the Plan.

(b) Basic Rule. In the event that the independent auditors most recently selected by the Board (the “Auditors”) determine that any payment or transfer by the Company under the Plan to or for the benefit of a Participant (a “Payment”) would be nondeductible by the Company for federal income tax purposes because of the provisions concerning “excess parachute payments” in Section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section 18, the “Reduced Amount” shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code.

(c) Reduction of Payments. If the Auditors determine that any Payment would be nondeductible by the Company because of Section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall

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notify the Participant promptly of such election. For purposes of this Section 18, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Auditors under this Section 18 shall be binding upon the Company and the Participant and shall be made within 60 days of the date when a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan.

(d) Overpayments and Underpayments. As a result of uncertainty in the application of Section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company that should not have been made (an “Overpayment”) or that additional Payments that will not have been made by the Company could have been made (an “Underpayment”), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant that the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant which he or she shall repay to the Company, together with interest at the applicable federal rate provided in Section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount subject to taxation under Section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in Section 7872(f)(2) of the Code.

(e) Related Corporations. For purposes of this Section 18, the term “Company” shall include affiliated corporations to the extent determined by the Auditors in accordance with Section 280G(d)(5) of the Code.

SECTION 19. NO EMPLOYMENT RIGHTS.

No provision of the Plan, nor any right or Option granted under the Plan, shall be construed to give any person any right to become, to be treated as, or to remain an Employee. The Company and its Subsidiaries reserve the right to terminate any person’s Service at any time and for any reason, with or without notice.

SECTION 20. DURATION AND AMENDMENTS.

(a) Term of the Plan. The Plan, as set forth herein, shall terminate automatically on May 4, 2011 and may be terminated on any earlier date pursuant to Subsection (b) below.

(b) Right to Amend or Terminate the Plan. The Board of Directors may amend the Plan at any time and from time to time. Rights and obligations under any Option granted before amendment of the Plan shall not be materially impaired by such amendment, except with consent of the person to whom the Option was granted. An amendment of the Plan shall be subject to the

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approval of the Company’s stockholders only to the extent required by applicable laws, regulations or rules.

(c) Effect of Amendment or Termination. No Shares shall be issued or sold under the Plan after the termination thereof, except upon exercise of an Option granted prior to such termination. The termination of the Plan, or any amendment thereof, shall not affect any Share previously issued or any Option previously granted under the Plan.

SECTION 21. EXECUTION.

To record the adoption of the Plan by the Board of Directors effective as of May 4, 2001, the Company has caused its authorized officer to execute the same.

MAGMA DESIGN AUTOMATION, INC.
By:	/s/    RAJEEV MADHAVAN
Title:

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EX-10.2

Exhibit 10.2

OFFICE LEASE

5460 BAYFRONT PLAZA,

SANTA CLARA, CALIFORNIA

3COM CORPORATION

and

MAGMA DESIGN AUTOMATION, INC.

5460 BAYFRONT PLAZA OFFICE LEASE	1
ARTICLE 1 PREMISES, BUILDING, PROJECT, AND COMMON AREAS	3
ARTICLE 2 LEASE TERM	4
ARTICLE 3 BASE RENT; ABATED BASE RENT	5
ARTICLE 4 ADDITIONAL RENT	5
ARTICLE 5 USE OF PREMISES	9
ARTICLE 6 SERVICES AND UTILITIES	10
ARTICLE 7 REPAIRS	11
ARTICLE 8 ADDITIONS AND ALTERATIONS	11
ARTICLE 9 COVENANT AGAINST LIENS	13
ARTICLE 10 INSURANCE	13
ARTICLE 11 DAMAGE AND DESTRUCTION	16
ARTICLE 12 NON-WAIVER	17
ARTICLE 13 CONDEMNATION	18
ARTICLE 14 ASSIGNMENT AND SUBLETTING	18
ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND REMOVAL OF TRADE FIXTURES	21
ARTICLE 16 HOLDING OVER	22
ARTICLE 17 ESTOPPEL CERTIFICATES	22
ARTICLE 18 SUBORDINATION	22
ARTICLE 19 DEFAULTS: REMEDIES	23
ARTICLE 20 COVENANT OF QUIET ENJOYMENT	25
ARTICLE 21 SECURITY DEPOSIT	25
ARTICLE 22 TELECOMMUNICATIONS EQUIPMENT	26
ARTICLE 23 SIGNS	27
ARTICLE 24 COMPLIANCE WITH LAW	28

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INDEX

(continued)

	Page
ARTICLE 25 LATE CHARGES	29
ARTICLE 26 LANDLORD’S RIGHT TO CURE DEFAULT: PAYMENTS BY TENANT	29
ARTICLE 27 ENTRY BY LANDLORD	30
ARTICLE 28 TENANT PARKING	30
ARTICLE 29 RIGHT TO USE PERSONAL PROPERTY	31
ARTICLE 30 MISCELLANEOUS PROVISIONS	31

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5460 BAYFRONT PLAZA

SANTA CLARA, CALIFORNIA

OFFICE LEASE

This Office Lease (the “Lease”), dated as of the date set forth in Section 1 of the Summary of Basic Lease Information (the “Summary”), below, is made by and between 3Com Corporation, a California corporation (“Landlord”) and Magma Design Automation, Inc., a Delaware corporation (“Tenant”).

SUMMARY OF BASIC LEASE INFORMATION

TERMS OF LEASE	DESCRIPTION
1. Effective Date:	June 19, 2003
2. Premises
2.1 Building:	That certain four (4)-story building located at 5460 Bayfront Plaza, Santa Clara, California containing approximately one hundred twenty nine thousand seven hundred thirty four (129,734) square feet of space, and commonly referred to in the Project as “Building 6.”
2.2 Premises:	The entire Building consisting of approximately 129,734 square feet of space (“the Premises”).
2.3 Project:	The Building is part of that certain building complex (the “Project”) consisting of six (6) buildings comprising approximately 876,359 square feet of space and other improvements as set forth in Section 1.2 below.
3. Lease Term (Article 2):
3.1 Length of Lease Term:	Seven (7) years, subject to extension under Section 2.2 for one (1) Extended Term of five (5) years.
3.2 Lease Commencement Date:	August 1, 2003
3.3 Lease Expiration Date:	July 31, 2010, subject to extension under Section 2.2 for one (1) Extended Term of five (5) years.
4. Base Rent (Article 3):

Months	Monthly Installment of Base Rent
1 through 8	$           0.00
9 through 18	$110,000.00
19 through 24	$129,950.00
25 through 36	$150,491.44
37 through 48	$154,383.46
49 through 60	$158,275.48
61 through 72	$162,167.50
73 through 84	$166,059.52

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5. Tenant’s Share (Article 4):	14.80%.
6. Permitted Use (Article 5):	Tenant shall use the Premises for general office, including research and development, sales, training and electronics labs and any other non-industrial, non-retail uses permitted under Applicable Laws (as defined in Article 24).
7. Security Deposit (Article 21):	Upon the execution hereof, Tenant shall deliver to Landlord a Security Deposit in the amount of One Hundred Fifty Thousand Dollars ($150,000) in the form of a letter of credit, as more particularly set forth in Section 21.2.
8. Parking Ratio (Article 28):	Approximately three and three tenths (3.3) unreserved parking spaces for every 1,000 square feet of the Premises.
9. Address of Tenant (Section 30.16):	See Section 30.16 of the Lease.
10. Address of Landlord (Section 30.16):	See Section 30.16 of the Lease.
11. Broker(s) (Section 30.22):	Landlord – Cushman & Wakefield of California, Inc. Tenant – Insignia/ESG, Inc.
12. Tenant Improvements	See Tenant Work Letter attached as Exhibit B.

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ARTICLE 1 - PREMISES, BUILDING, PROJECT, AND COMMON AREAS

1.1 The Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises set forth in Section 2.2 of the Summary. The Premises consist of the entire building set forth in Section 2.1 of the Summary (the “Building”), in the location as shown on Exhibit A, attached hereto. The parties hereto agree that the lease of the Premises is upon and subject to the terms, covenants and conditions (the “TCCs”) herein set forth, and Landlord and Tenant covenant as a material part of the consideration for this Lease to keep and perform each and all of such terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. Tenant agrees that Landlord shall not be obligated to provide or pay for any improvement work or services related to the improvement of the Premises. Landlord shall deliver possession of the Premises to Tenant within three (3) business days after the Effective Date and Tenant shall accept the Premises in their “AS IS” condition. Notwithstanding the foregoing, Landlord represents and warrants to Tenant that, to the best of its knowledge, the Building’s electrical, plumbing, heating and ventilation systems are in good working condition and repair as of the Effective Date, and Tenant shall have a period of forty five (45) days after the Effective Date to deliver a “punch list” of any such items which are not in good working order. If Tenant timely delivers a punch list to Landlord, Landlord shall promptly repair such components of the Premises at its sole expense. Except as expressly set forth in the preceding sentence, Tenant agrees that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises or with respect to the present or future suitability of the Premises for the conduct of Tenant’s business or the uses proposed by Tenant. Tenant hereby accepts the Premises and the Project in their existing condition, subject to all Applicable Laws governing and regulating the use of the Premises, and any covenants or restrictions of record, and accepts this Lease subject to all of the foregoing and to all matters disclosed in this Lease.

1.2 The Building and The Project. The Building is part of a complex of buildings consisting of six (6) buildings and other improvements. The term “Project,” as used in this Lease, shall mean (i) the Building (as defined in Section 1.3 below), (ii) the land (which is improved with landscaping, parking areas and other improvements) upon which the Building and the Common Areas are located as shown on the Project Site Plan, and (iii) all other buildings and improvements located adjacent to the Building and the land upon which such adjacent buildings are located.

1.3 Common Areas. Tenant shall have the non-exclusive right to use in common with Landlord and other tenants in the Project, subject to the rules and regulations attached hereto as Exhibit C attached hereto, those portions of the Project which are provided, from time to time, for use in common by Landlord, Tenant and any other tenants of the Project (such areas, together with such other portions of the Project designated by Landlord, in its discretion, include without limitation the exterior parking areas, drive lanes, sidewalks and passageways, landscaping, and certain common amenities such as the Fitness Center defined in Section 1.4, which areas are collectively referred to herein as the “Common Areas”). Landlord reserves the right to close temporarily, make alterations or additions to, or change the location of elements of the Project and the Common Areas, including, without limitation, the right to (a) make changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways; (b) to close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; and (c) to do and perform such other acts and make such other changes in, to or with respect to the Project and Common Areas as Landlord may deem to be appropriate; provided, however, that Landlord’s exercise of such rights shall not materially, adversely interfere with Tenant’s use and occupancy of the Premises.

1.4 Fitness Center. Tenant’s employees shall be entitled to use the fitness center (“Fitness Center”) located in the Project provided Tenant’s employees must pay all charges customarily charged

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by Landlord from time to time for the use of the Fitness Center. Landlord shall have the right to require that Tenant’s employees sign customary waivers of claims and comply with all safety and other procedures applicable to use of the fitness center. In addition, as part of Operating Expenses (as defined in Article 4. below), Tenant shall pay Landlord Additional Rent for the Fitness Center at the monthly rate of $1.00 per square foot, plus increases of $0.03 per square foot per Lease Year, at all times during the Lease Term (the “Fitness Center Cost”), and all expenses incurred by Landlord in operating the Fitness Center shall be included in Operating Expenses (as defined in Section 4.2.3. below). The Fitness Center and foyer is approximately twelve thousand five hundred square feet (12,500) and Tenant’s Share for the purposes of determining the Fitness Center Cost is one thousand eight hundred fifty square feet (1,850).

1.5 Right of First Offer. Landlord hereby grants to the Tenant named in this Lease (including any “Acquirer”, as that term is defined in Section 14.8 below) a one-time right of first offer to lease one or more of Buildings 1, 2 and/or 3 of the Project (each building individually or collectively, the “First Offer Space”). The First Offer Space shall mean all (but not less than all) of each of Building 1, Building 2 and Building 3. If at any time during the Lease Term Landlord intends to offer some or all of the First Offer Space for lease to third parties, and provided Tenant is not then in default of any of its obligations under this Lease, Landlord shall first give written notice to Tenant of the rental rate, term (including any extension options), the identity of which Building(s) is(are) being offered to Tenant, and other material terms upon which Landlord is willing to lease the First Offer Space to Tenant. Landlord’s notice shall constitute an offer to lease the First Offer Space to Tenant on the terms and conditions contained in said notice. Tenant shall have ten (10) days after receipt of Landlord’s notice in which to accept such offer by providing written notice to Landlord in which Tenant shall agree to lease such First Offer Space from Landlord at the rental rate and upon the other terms and conditions contained in said notice. If Tenant accepts such offer within the ten (10) days, Tenant shall, within five (5) days after receipt thereof, execute and return to Landlord a new lease (or, if Landlord deems it appropriate, an amendment to this Lease) prepared by Landlord on the standard form of lease then used by Landlord, which lease incorporates the material terms and conditions set forth in said notice. Promptly after Tenant executes and delivers the same to Landlord, Landlord shall execute said lease and thereafter the lease shall be deemed effective. The Right of First Offer is a one-time right, and if Tenant fails to accept Landlord’s offer to lease within the ten (10) days, or thereafter fails to timely execute the Lease, then all of the rights of Tenant to lease the First Offer Space designated in Landlord’s notice at that time and for all times in the future under this paragraph shall terminate with respect to such First Offer Space (but not with respect to any First Offer Space not previously offered to Tenant pursuant to this Section 1.5), and Landlord shall have no further obligation under this paragraph to notify Tenant of any other proposed lease of said First Offer Space; provided, however, that if, within ninety (90) days after Landlord’s notice to Tenant, Landlord offers to lease such First Offer Space to any third party for less than seventy five percent (75%) of the base rent offered to Tenant for such First Offer Space, then Landlord shall submit an additional written offer to Tenant with respect only to such First Offer Space and Tenant shall be afforded the opportunity to lease such space as provided in this Section 1.5. Once Tenant’s rights under this Section 1.5 have expired with respect to any First Offer Space, Landlord shall thereafter have the unconditional right to lease such First Offer Space to third parties, or to accept offers from third parties to lease said First Offer Space on any terms and without further obligation to Tenant. Unless expressly approved in a written consent of Landlord to any assignment of sublease under Article 14, below, the right of first offer under this Section 1.5 is granted for Tenant’s (and any Acquirer’s) personal benefit and may not be assigned or transferred.

ARTICLE 2 - LEASE TERM

2.1 Lease Term. The TCCs of this Lease shall be effective as of the date set forth in Section 1 of the Summary (the “Effective Date”). The term of this Lease (the “Lease Term”) is set forth in Section 3.1 of the Summary and shall commence on the date set forth in Section 3.2 of the Summary

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(the “Lease Commencement Date”), and shall terminate on the date set forth in Section 3.3 of the Summary (the “Lease Expiration Date”) unless this Lease is sooner terminated as hereinafter provided or unless the Lease Term is extended pursuant to Section 30.33. below (and in the event of any exercise of Tenant’s option thereunder, such Extended Term shall be deemed included within the “Lease Term”). For purposes of this Lease, the term “Lease Year” shall mean each consecutive twelve (12) month period during the Lease Term occurring after the Lease Commencement Date; provided, however, that the first Lease Year shall also include any partial month after the Lease Commencement Date. At any time during the Lease Term, Landlord may deliver to Tenant a written notice to confirm such dates, which Tenant, if accurate, shall execute and return to Landlord within five (5) days of receipt thereof.

2.2 Option to Extend. Provided Tenant has not been in default under this Lease beyond any applicable notice and cure period at the time it exercises the option or at commencement of the Extended Term, Tenant shall have the right and option to extend this lease (“Option to Extend”) for one (1) additional option period of five (5) years (the “Extended Term”) upon the same terms and conditions herein set forth except that the Base Rent shall be adjusted to “Fair Market Value” as defined in and determined in accordance with the terms and conditions of Exhibit E, attached hereto, as of the commencement of the Extended Term, subject to increases of three percent (3%) for each subsequent Lease Year during the Extended Term. To exercise the Option to Extend, Tenant must give Landlord notice in writing sent so as to be received at least twelve (12) months but not more than eighteen (18) months prior to the expiration of the initial Lease Term. At Landlord’s election, Tenant’s exercise of its Option to Extend shall be void and of no effect if Tenant is in default under this Lease beyond any applicable notice and cure period on the date it exercises its Option(s) to Extend or on the expiration of the initial Lease Term. Notwithstanding anything to the contrary, in no event shall Tenant be entitled to exercise an Option to Extend if Tenant has assigned the Lease to a Transferee other than pursuant to Section 14.8. below, or if at the time of Tenant’s exercise the Premises are subject to subleases totaling more than fifty percent (50%) of the square feet of the Premises (other than subleases pursuant to Section 14.8. below).

ARTICLE 3 - BASE RENT; ABATED BASE RENT

Tenant shall pay, without prior notice or demand, to Landlord or Landlord’s agent at the management office of the Project, or, at Landlord’s option, at such other place as Landlord may from time to time designate in writing, in currency of the United States of America, base rent (“Base Rent”) in monthly installments as set forth in Section 4 of the Summary, in advance on or before the first day of each and every calendar month during the Lease Term, without any setoff or deduction whatsoever. The Base Rent for the first full month of the Lease Term which occurs after the expiration of the Free Rent Period (as defined below) shall be paid at the time of Tenant’s execution of this Lease and credited to such calendar month after the expiration of the Free Rent Period. Base Rent for any partial month shall accrue on a daily basis for the period from the date such payment is due to the end of such calendar month or to the end of the Lease Term at a rate per day which is equal to 1/365 of the applicable annual Base Rent and all other payments or adjustments required to be made under the TCCs of this Lease that require proration on a time basis shall be prorated on the same basis. Notwithstanding the foregoing, Tenant shall not be responsible for the payment of Base Rent for months one (1) through eight (8) of the Lease Term (“Free Rent Period”); provided, however, Tenant shall be responsible for the performance and observance of all other terms and conditions of this Lease during the Free Rent Period, including payment of all Additional Rent as provided in Article 4.

ARTICLE 4 - ADDITIONAL RENT

4.1 General Terms. In addition to paying the Base Rent specified in Article 3 of this Lease, Tenant shall pay “Tenant’s Share” of the annual “Direct Expenses,” as those terms are defined in this

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Article 4, together with the Fitness Center Cost. Such payments, together with any and all other amounts payable by Tenant to Landlord pursuant to the TCCs of this Lease, are hereinafter collectively referred to as “Additional Rent,” and the Base Rent and the Additional Rent are herein collectively referred to as “Rent.” All amounts due under this Article 4 as Additional Rent shall be payable for the same periods and in the same manner as the Base Rent. Without limitation on other obligations of Tenant which survive the expiration of the Lease Term, the obligations of Tenant to pay the Additional Rent provided for in this Article 4 shall survive the expiration of the Lease Term.

4.2 Definitions of Key Terms Relating to Additional Rent. As used in this Article 4, the following terms shall have the meanings hereinafter set forth:

4.2.1 “Direct Expenses” means “Operating Expenses” and “Tax Expenses”.

4.2.2 “Expense Year” shall mean each calendar year in which any portion of the Lease Term falls, through and including the calendar year in which the Lease Term expires, provided that Landlord, upon notice to Tenant, may change the Expense Year from time to time to any other twelve (12) consecutive month period, and, in the event of any such change, Tenant’s Share of Direct Expenses shall be equitably adjusted for any affected Expense Year.

4.2.3 “Operating Expenses” shall mean, except as otherwise provided in this Section 4.2.4 or otherwise in this Lease, all expenses, costs and amounts of every kind and nature which Landlord pays or accrues during any Expense Year because of or in connection with the ownership, management, maintenance, security, repair, replacement, restoration or operation of the Project, or any portion thereof, subject to the allocation thereof as set forth in Section 4.3, below. Without limiting the generality of the foregoing, Operating Expenses shall specifically include any and all of the following: (i) the cost of supplying all utilities, the cost of operating, repairing, maintaining, and renovating the utility, telephone, mechanical, sanitary, storm drainage, and elevator systems, the cost of maintenance and service contracts in connection therewith and payments under any equipment rental agreements; (ii) the cost of all insurance carried by Landlord in connection with the Project; (iii) the cost of landscaping, relamping, and all supplies, tools, equipment and materials used in the operation, repair and maintenance of the exterior of the Project; (iv) costs incurred in connection with the parking areas servicing the Project; (v) fees and other costs, including management fees (not to exceed three percent (3%) of gross receipts), consulting fees, legal fees and accounting fees, of all contractors and consultants in connection with the management, operation, maintenance and repair of the Project; (vi) wages, salaries and other compensation and benefits, including taxes levied thereon, of all persons directly engaged in the operation, maintenance and security of the Project; (vii) excepting the items provided at Landlord’s sole cost under Section 7.1, any costs incurred by Landlord in the operation, repair, and maintenance of all systems and equipment and components thereof of the Building; (viii) repairs or replacements and other costs incurred in connection with the Project that are capital in nature under generally accepted accounting principles; provided, however, that any such capital expense shall be amortized over its useful life as reasonably determined by Landlord; (ix) costs, fees, charges or assessments imposed by, or resulting from any mandate imposed on Landlord by, any federal, state or local government for fire and police protection, trash removal, community services, or other services which do not constitute “Tax Expenses” as that term is defined in Section 4.2.4, below; and (x) payments under any easement, license, operating agreement, declaration, restrictive covenant, or instrument pertaining to the sharing of costs by the Project.

Notwithstanding anything in this Section 4.2.4 to the contrary, for purposes of this Lease, Operating Expenses shall not, however, include the following: (1) marketing costs, costs of leasing commissions, renovations, attorneys’ fees and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants or other occupants of the Project; (2) any

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expense resulting from the gross negligence of Landlord, its agents, contractors or employees; (3) interest, principal, points and fees on debts or amortization on any mortgage or mortgages or any other debt instrument encumbering the Building or the Project; (4) the original costs of constructing the Building and the Project; (5) expenses to the extent Landlord will be reimbursed by another source (not including Direct Expense reimbursements by tenants), including without limitation replacement of any items covered by warranties; (6) costs incurred to benefit (or resulting from) a specific tenant or items and services selectively supplied to any tenant other than Tenant (e.g., excess utilities); (7) expenses for the defense of Landlord’s title to the Project; (8) expenses at Landlord’s sole cost under Section 7.1; (9) charitable or political contributions; (10) expenses incurred to comply with governmental regulations (including without limitation all Environmental Laws (as defined in Section 28.29) and the Americans with Disabilities Act), court order, decree or judgment in effect prior to the Effective Date, except to the extent any noncompliance results from Tenant’s use and occupancy of the Premises; (11) any expenses incurred in repair, restoration or other work necessitated by fire or other casualty (except to the extent Tenant is required to pay such expenses as part of Article 11 hereunder; and (12) costs to maintain Landlord’s existence as a corporation or other legal entity.

4.2.4 “Tax Expenses” means all real property taxes and general, special and district assessments and other governmental impositions, fees, levies and charges of whatever kind, nature or origin, imposed on, or by reason of the ownership or use of, the Project, including: governmental charges, fees or assessments for transit or traffic mitigation (including area-wide traffic improvement assessments and transportation system management fees), housing, police, fire or other governmental service or purported benefits to the Project, including assessments, taxes, fees, levies and charges imposed by governmental agencies for such purposes as street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services; personal property taxes assessed on the personal property of Landlord used in the operation of the Project; service payments in lieu of taxes; any tax, fee or excise on the use or occupancy of any part of the Project, or on rent for the Project or for space in the Project; and any other fees, taxes or assessments of any kind or nature whatsoever levied or assessed in addition to, in lieu of or in substitution for existing or additional real or personal property taxes on the Project or the personal property described above; any increases in the foregoing caused by changes in assessed valuation, tax rate or other factors or circumstances; and the reasonable cost of contesting by appropriate proceedings the amount or validity of any taxes, assessments or charges described above, provided that such costs shall be allocated to operating costs for the Project during the year so contested; but excluding income taxes measured by the net income of Landlord or the owner of any interest in the Building or the Project, franchise, capital stock, gift, estate or inheritance taxes or any federal, state or local documentary transfer taxes imposed in connection with recording a deed transferring an interest in the Project or any portion thereof or interest therein. Notwithstanding the foregoing, to the extent any increase in Tax Expenses results from a reassessment arising from the Landlord’s first sale of all or any portion of the Project, such increase shall be limited to cumulative annual increases of twenty-five percent (25%) over the tax rates applicable to the Project for the tax year commencing July 1, 2003 and ending June 30, 2004 (as increased during the Lease Term to the extent permitted under California law absent any change in ownership). For example, if (i) the Tenant’s Share of Tax Expenses is $100 based on the 2003-2004 tax rates, (ii) such Tax Expense has been increased by the maximum 2% after June 30, 2004, and (iii) the first sale of all or a portion of the Project in late 2004 results in an increase of Tenant’s Share of Tax Expenses to $200, then the increase in Tenant’s Share of Tax Expenses for such Expense Year shall be limited to $102 x 125%, or $127.50, then subsequently increased by 25% for the next Expense Year to $159.38, and so on until Tenant’s Tax Expense increase equals Tenant’s Share of Tax Expenses otherwise payable hereunder. Taxes paid directly by Tenant under Section 4.5, below, shall be excluded from Tax Expenses.

4.2.5 “Tenant’s Share” for the Premises shall mean the percentage set forth in Section 6 of the Summary.

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4.3 Allocation of Direct Expenses. The parties acknowledge that the Building is a part of a multi-building project and that the costs and expenses incurred in connection with the Project (i.e. the Direct Expenses) will be shared between the tenants and occupants of the Building and the tenants and occupants of the other buildings in the Project. Accordingly, as set forth in Section 4.2 above, Direct Expenses shall be determined for the Project as a whole, and Tenant shall be responsible for paying Tenant’s Share of the Direct Expenses.

4.4 Calculation and Payment of Additional Rent.

4.4.1 Statement of Estimated Direct Expenses. Within 120 days after the beginning of each Expense Year, Landlord will provide Tenant with a written expense estimate statement (the “Estimate Statement”) which shall set forth Landlord’s reasonable estimate of the total amount of Direct Expenses for the then-current Expense Year and the estimated monthly amount of Tenant’s Share of Direct Expenses for such Expense Year. Tenant shall pay the monthly amount stated in the Estimate Statement as Additional Rent at the same times and in the same manner as Base Rent is payable under Article 3. Landlord will use commercially reasonable efforts to provide a revised Estimate Statement after each Expense Year, to be delivered with the Statement provided in Section 4.4.2, below. The failure of Landlord to furnish an Estimate Statement for any Expense Year shall not preclude Landlord from enforcing its rights to collect any Direct Expenses under this Article 4, nor shall Landlord be prohibited from revising any Estimate Statement theretofore delivered to the extent necessary. Until a new Estimate Statement is furnished (which Landlord shall have the right to deliver to Tenant at any time), Tenant shall continue to pay monthly, with the monthly Base Rent installments, the monthly amount of the Estimated Direct Expenses in Landlord’s most recent Estimate Statement.

4.4.2 Statement of Actual Direct Expenses and Payment by Tenant. Landlord shall use reasonable efforts to provide Tenant, within 120 days following the end of each Expense Year, with a statement (the “Statement”) showing the actual Direct Expenses for such Expense Year and comparing the actual Tenant’s Share of Direct Expenses incurred or accrued for such preceding Expense Year to Tenant’s estimated payments made pursuant to Section 4.4.1. If there has been any underpayment by Tenant, Tenant shall pay such underpayment within fifteen (15) days after receipt of the Statement, and if there has been any overpayment by Tenant, Landlord shall pay such overpaid amount to Tenant at the time the Statement is delivered or provide an appropriate credit against future Direct Expenses (but only if Landlord requests such credit in writing). Tenant shall also be responsible for Tenant’s Share of Direct Expenses levied by any governmental authority or by any public utility companies at any time following the Lease Expiration Date which are attributable to any Expense Year (provided that Landlord delivers Tenant a bill (a “Supplemental Statement”) for such amounts within one (1) year following Landlord’s receipt of the bill therefor). The failure of Landlord to timely furnish the Statement for any Expense Year shall not prejudice Landlord or Tenant from enforcing its rights under this Article 4. If Tenant provides a written request to Landlord within thirty (30) days after receipt of the Statement, Tenant may, at its expense during business hours, review Landlord’s books and records concerning Direct Expenses and shall promptly thereafter provide its written analysis of Direct Expenses to Landlord. Tenant may engage a certified public accountant to audit Landlord’s records, but shall not engage any auditor whose compensation is based on the scope or value of any discrepancies claimed by the auditor. If Tenant’s review discloses any overpayment by Tenant, Landlord shall refund such amounts within fifteen (15) days after receipt of Tenant’s calculations, absent a bona fide dispute by Landlord; if Tenant’s review discloses any underpayment by Tenant, Tenant shall pay such amounts at the time it provides its calculations to Landlord. Any dispute between Landlord and Tenant concerning any item of Direct Expenses shall not relieve Tenant of liability for or delay payment of all other Direct Expenses. The provisions of this Section 4.4.1 shall survive the expiration or earlier termination of the Lease Term.

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4.5 Taxes and Other Charges for Which Tenant Is Directly Responsible.

4.5.1 Tenant shall be liable for and shall pay before delinquency taxes levied against Tenant’s equipment, furniture, fixtures and any other personal property of any sublessee, assignee or invitee located in or about the Premises. If any such taxes on Tenant’s equipment, furniture, fixtures and any other personal property are levied against Landlord or Landlord’s property or if the assessed value of Landlord’s property is increased by the inclusion therein of a value placed upon such equipment, furniture, fixtures or any other personal property and if Landlord pays any properly assessed taxes based upon such increased assessment, which Landlord shall have the right to do upon fifteen (15) days prior written notice to Tenant, including reasonably satisfactory backup documentation evidencing such expenses, Tenant shall repay to Landlord the taxes so levied against Landlord or the proportion of such taxes resulting from such increase in the assessment, as the case may be, within fifteen (15) days after Landlord’s written notice of such taxes.

4.5.2 If any Alterations in the Premises, whether installed and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which tenant improvements conforming to Landlord’s standard tenant improvements in other space in the Building leased to or offered to lease to other tenants, which improvements are substantially similar to those in the Premises as of the Lease Commencement Date (the “Building Standard”), are assessed, then the Tax Expenses levied against Landlord or the property by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of Section 4.5.1, above.

ARTICLE 5

USE OF PREMISES

5.1 Permitted Use. Tenant shall use the Premises solely for the Permitted Use set forth in Section 7 of the Summary and Tenant shall not use or permit the Premises or the Project to be used for any other purpose or purposes whatsoever without the prior written consent of Landlord, which may be withheld in Landlord’s sole discretion.

5.2 Prohibited Uses. The uses prohibited under this Lease shall include, without limitation, use of the Premises or a portion thereof for (i) offices of any agency or bureau of the United States or any state or political subdivision thereof; (ii) offices or agencies of any foreign governmental or political subdivision thereof; (iii) offices of any health care professionals or service organization; (iv) schools or other training facilities which are not ancillary to corporate, executive or professional office use; (v) retail uses; or (vi) commercial broadcast radio or television stations. Tenant shall not allow occupancy density of use of the Premises which is greater than the density permitted under Applicable Laws (as defined in Article 24 below). Tenant further covenants and agrees that Tenant shall not use, or suffer or permit any person or persons to use, the Premises or any part thereof for any use or purpose contrary to the provisions of the Rules and Regulations set forth in Exhibit C, attached hereto, and any reasonable modifications thereto provided to Tenant in writing by Landlord, or in violation of the laws of the United States of America, the State of California, or the ordinances, regulations or requirements of the local municipal or county governing body or other lawful authorities having jurisdiction over the Project) including, without limitation, any such laws, ordinances, regulations or requirements relating to hazardous materials or substances, as those terms are defined by Applicable Laws now or hereafter in effect. Tenant shall not do or permit anything to be done in or about the Premises which will in any material way interfere with the rights of other tenants or occupants of the Building, or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall comply with all recorded covenants, conditions, and restrictions now or hereafter affecting the Project.

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5.3 CC&Rs. Tenant shall comply with all recorded covenants, conditions, and restrictions ( “CC&Rs”) currently affecting the Project. Additionally, Tenant acknowledges that the Project may be subject to future CC&Rs which Landlord, in Landlord’s reasonable discretion, deems reasonably necessary, and Tenant agrees that this Lease shall be subject and subordinate to such CC&Rs. Landlord shall have the right to require Tenant to execute and acknowledge, within fifteen (15) business days of a request by Landlord, a “Recognition of Covenants, Conditions, and Restriction,” agreeing to and acknowledging the CC&Rs, provided such CC&Rs do not materially adversely affect Tenant’s use or occupancy of the Premises.

ARTICLE 6 - SERVICES AND UTILITIES

6.1 Services Provided By Landlord. Landlord shall maintain the Building Structure, the Common Areas and the Project, provide ingress and egress to the Building, and shall maintain the Building Structure in a condition and repair consistent with that of Comparable Buildings (as defined below). As used in this Lease, the term “Comparable Buildings” means buildings which are comparable to the Building in terms of age, quality of construction, level of service and amenities, size and appearance and located in a comparable geographical area, as reasonably determined by Landlord.

6.2 Services Provided by Tenant. At all times during the Lease Term, Tenant shall contract directly with utility providers, at its sole expense, for all utilities (including without limitation, electricity, gas and water) attributable to its use of the entire Building. Such utility use shall include, without limitation, electricity and gas use for lighting, incidental use and “HVAC,” as that term is defined below. All such utility payments shall be paid directly by Tenant prior to the date on which the same are due to the utility provider. Tenant shall also provide at its expense any and all trash removal, janitorial, security and regular roof and HVAC inspection and maintenance services to the extent necessary to maintain the Building in a manner consistent with Comparable Buildings. Tenant agrees and acknowledges that the utility costs to be paid directly by Tenant which are attributable to the Building may also include certain utility costs such as electricity and water associated with certain elements of the Common Areas located immediately adjacent to the Building. Tenant shall cooperate fully with Landlord at all times and abide by all regulations and requirements that Landlord may reasonably prescribe for the proper functioning and protection of the HVAC, electrical, mechanical and plumbing systems and maintenance and inspection of the roof covering for the Building. If Landlord reasonably determines that Tenant has not fulfilled its obligations under this Section 6.2, upon fifteen (15) days prior written notice to Tenant, Landlord may, but need not, provide such services, and Tenant shall pay Landlord the cost thereof within fifteen (15) days after Landlord’s written demand.

6.3 Interruption of Use. Tenant agrees that Landlord shall not be liable for damages, by abatement of Rent or otherwise, for failure to furnish or delay in furnishing any service (including telephone and telecommunication services), or for any diminution in the quality or quantity thereof, when such failure or delay or diminution is occasioned, in whole or in part, by breakage, repairs, replacements, or improvements, by any strike, lockout or other labor trouble, by inability to secure electricity, gas, water, or other fuel at the Building or Project after reasonable effort to do so, by any riot or other dangerous condition, emergency, accident or casualty whatsoever, by act or default of Tenant or other parties, or by any other cause; and such failures or delays or diminution shall never be deemed to constitute an eviction or disturbance of Tenant’s use and possession of the Premises or relieve Tenant from paying Rent or performing any of its obligations under this Lease. Furthermore, Landlord shall not be liable under any circumstances for a loss of, or injury to, property or for injury to, or consequential damages to Tenant’s business, through or in connection with or incidental to a failure to furnish any of the services or utilities as set forth in this Article 6. Tenant hereby waives any benefits of any applicable existing or future Applicable Laws, including the provisions of California Civil Code Section 1932(1), permitting the termination of this Lease due to such interruption, failure or inability to provide services

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for any limited duration. Landlord may comply with voluntary controls or guidelines promulgated by any governmental entity relating to the use or conservation of energy, water, gas, light or electricity or the reduction of automobile or other emissions without creating any liability of Landlord to Tenant under this Lease, provided that (i) the Premises are not thereby rendered untenantable, and (ii) the same does not materially adversely interfere with Tenant’s Permitted Use of the Premises.

ARTICLE 7 - REPAIRS

7.1 Landlord’s Obligations. Landlord shall maintain in operating order and keep in good repair and condition the structural portions of the Building, consisting of the foundation, floor/ceiling slabs, roof structure, columns, beams and load bearing walls (collectively, “Building Structure”) at Landlord’s sole cost and expense, consistent with Comparable Buildings; provided, however, that Tenant shall be required to reimburse Landlord for such costs to the extent any repairs to the Building Structure are required due to Tenant’s breach of this lease or the negligent act or omission of Tenant, its agents, employees and contractors (collectively the “Tenant Parties”). Landlord shall also maintain and repair all Common Areas on the Project and include the cost thereof in Operating Expenses. Landlord shall undertake reasonable efforts to perform all maintenance, repairs and replacements pursuant to this Section 7.1 promptly after Landlord learns of the need for such maintenance, repairs and replacements, but in any event within thirty (30) days after Tenant provides written notice to Landlord of the need for such maintenance, repairs and replacements; provided, however, that in cases of emergency (i.e., circumstances which, if not addressed promptly, could result in material damage to persons and property), Landlord shall perform any maintenance, repairs and replacements as soon as reasonably practicable after it learns of the need for such maintenance, repairs and replacements. Tenant hereby waives any and all rights under and benefits of subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code or under any similar law, statute, or ordinance now or hereafter in effect.

7.2 Tenant’s Obligations. Tenant, at its sole cost and expense, shall maintain in operating order and keep in good repair and condition, consistent with Comparable Buildings, all other components of the Building which are not Landlord’s responsibility under Section 7.1, including without limitation the elevator cabs and equipment (including elevator shafts), the Base Building (as defined in Article 8, below) mechanical, electrical, life safety, plumbing, sprinkler systems and HVAC systems which were not constructed by Tenant Parties (collectively, the “Building Systems”), all Tenant Improvements and Alterations installed in the Premises, and all of Tenant’s and Landlord’s personal property in the Premises. In addition, except as provided in Section 7.1, Tenant shall, at its expense and pursuant to the TCCs of this Lease, promptly and adequately repair all damage to the Premises and replace or repair all damaged, broken, or worn fixtures and appurtenances (but such obligation shall not extend to the Building Structure), excepting ordinary wear and tear; provided however, that at Landlord’s option, if Tenant fails to make such repairs and replacements, and upon fifteen (15) days prior written notice to Tenant, Landlord may, but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost to make such repairs, alterations, improvements or additions to the Premises’ or to the Project or to any equipment located in the Premises, as Landlord shall reasonably deem necessary, within fifteen (15) days after Landlord’s written demand.

ARTICLE 8 - ADDITIONS AND ALTERATIONS

8.1 Landlord’s Consent to Alterations. Tenant may not make any improvements, alterations, additions or changes to the Building Systems, the Building Structure or any mechanical, plumbing or HVAC facilities or systems which affect the Building Structure, Building Systems or exterior appearance of the Building (collectively, the “Alterations”) without first procuring the prior written consent of Landlord to such Alterations, which consent shall be requested by Tenant not less than ten (10) days prior to the commencement thereof, and which consent shall not be unreasonably withheld

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by Landlord; provided, however, that it shall be deemed reasonable for Landlord to withhold its consent to any Alteration which materially or adversely affects the Building Structure, Building Systems or exterior appearance of the Building, and Landlord may condition its approval by requiring specific contractors and/or engineers to perform work on portions of the Building Systems or Building Structure. The construction of any and all Alterations, including the initial improvements to the Premises shall be governed by the TCCs of the Tenant Work Letter attached hereto as Exhibit B in addition to the TCCs of this Article 8.

8.2 Manner of Construction. Tenant shall utilize only competent contractors, subcontractors, materials, mechanics and materialmen reasonably approved by Landlord for the construction of any Alterations. Upon Landlord’s request (unless Landlord waived, at the time of Landlord’s approval of any Alterations pursuant to the provisions of Section 8.5, below, its right to make such request), Tenant shall, at Tenant’s expense, remove such Alterations upon the expiration or any early termination of the Lease Term. If such Alterations will involve the use of or disturb hazardous materials or substances existing in the Premises, Tenant shall comply with Landlord’s rules and regulations concerning, and all Applicable Laws pertaining to Hazardous Materials (as defined in Section 30.30). Tenant shall construct such Alterations and perform such repairs in a good and workmanlike manner, in conformance with any and all applicable federal, state, county or municipal laws, rules and regulations and pursuant to a valid building permit, issued by the City of Santa Clara, all in conformance with Landlord’s construction rules and regulations. In the event Tenant performs any Alterations in the Premises which require or give rise to governmentally required changes to the “Base Building,” as that term is defined below, then Tenant shall, at its expense, make such changes to the Base Building. The “Base Building” shall include the structural portions of the Building, and the public restrooms and the systems and equipment located in the internal core of the Building. In performing the work of any such Alterations, Tenant shall have the work performed in such manner so as not to obstruct access to the Project or any portion thereof, by any other tenant of the Project, and so as not to obstruct the business of Landlord or other tenants in the Project. Tenant shall not use (and upon notice from Landlord shall cease using) contractors, services, workmen, labor, materials or equipment that, in Landlord’s reasonable judgment, would disturb labor harmony with the workforce or trades engaged in performing other work, labor or services in or about the Building or the Common Areas. In addition to Tenant’s obligations under Article 9 of this Lease, upon completion of any Alterations which affect the Building Systems and Building Structures, Tenant agrees to cause a notice of completion to be recorded in the office of the Recorder of the County of Santa Clara in accordance with Section 3093 of the Civil Code of the State of California or any successor statute, and Tenant shall deliver to Landlord a reproducible copy of the “as built” drawings of all Alterations as well as all permits, approvals and other documents issued by any governmental agency in connection with the Alterations.

8.3 Payment for Improvements. Tenant shall comply with all Applicable Laws relating to final lien releases and waivers in connection with Tenant’s payment to contractors for any Alterations. Tenant shall reimburse Landlord for Landlord’s reasonable out-of-pocket costs and expenses reasonably incurred in connection with Landlord’s review of any Alterations.

8.4 Construction Insurance. In addition to the requirements of Article 10 of this Lease, in the event that Tenant makes any Alterations, prior to the commencement of such Alterations, Tenant shall provide Landlord with evidence that Tenant carries “Builder’s All Risk” insurance in an amount reasonably related to the value of such Alterations, it being understood and agreed that all of such Alterations shall be insured by Tenant pursuant to Article 10 of this Lease immediately upon completion thereof. In addition, Landlord may, to the extent the same is reasonable given Tenant’s net worth and the magnitude of the Alterations, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of such Alterations and naming Landlord as a co-obligee.

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8.5 Landlord’s Property. On or before the expiration or earlier termination of this Lease, Tenant shall remove all fixtures and/or equipment installed by Tenant and repair any damage to the Premises and Building caused by such removal and returns the affected portion of the Premises to a building standard tenant improved condition as determined by Landlord. Furthermore, Landlord may, by written notice to Tenant prior to the end of the Lease Term, or given following any earlier termination of this Lease, require Tenant, at Tenant’s expense, to remove any Alterations or improvements in the Premises and to repair any damage to the Premises and Building caused by such removal (reasonable wear and tear excepted) and return the affected portion of the Premises to a building standard tenant improved condition as determined by Landlord; provided, however, if, in connection with any request for Landlord’s approval for particular Alterations, (1) Tenant requests Landlord’s decision with regard to the removal of such Alterations, and (2) Landlord agrees in writing to waive the removal requirement at the time it approves such Alterations, then Tenant shall not be required to so remove such Alterations, in which case all such Alterations (together with any fixtures and equipment Landlord does not require Tenant to remove) shall become Landlord’s property; and provided further, that Tenant shall not be required to remove any Alterations installed by Tenant as part of its initial tenant improvements in and to the Premises installed during calendar year 2003. If Tenant fails to complete such removal and/or to repair any damage caused by the removal of any Alterations or improvements in the Premises, then at Landlord’s option, either (A) Tenant shall be deemed to be holding over in the Premises and Rent shall continue to accrue in accordance with the TCCs of Article 16, below, until such work shall be completed, or (B) Landlord may perform such removal and repair work and charge the cost thereof to Tenant. Tenant hereby protects, defends, indemnifies and holds Landlord harmless from any liability, cost, obligation, expense or claim of lien in any manner relating to the installation, placement, removal or financing of any such Alterations, improvements, fixtures and/or equipment in, on or about the Premises, which obligations of Tenant shall survive the expiration or earlier termination of this Lease for one (1) year following such expiration or earlier termination. At all times during the Term of this Lease, Tenant shall be entitled to remove, and Landlord shall have no interest in, Tenant’s trade fixtures and equipment.

ARTICLE 9 - COVENANT AGAINST LIENS

Tenant shall keep the Project and Premises free from any liens or encumbrances arising out of the work performed, materials furnished or obligations incurred by or on behalf of Tenant, and shall protect, defend, indemnify and hold Landlord harmless from and against any claims, liabilities, judgments or costs (including, without limitation, reasonable attorneys’ fees and costs) arising out of same or in connection therewith. Tenant shall give Landlord notice at least ten (10) business days prior to the commencement of any such work on the Premises (or such additional time as may be necessary under Applicable Laws or as required by another provision in this Lease) to afford Landlord the opportunity of posting and recording appropriate notices of non-responsibility. Tenant shall remove any such lien or encumbrance by bond or otherwise within fifteen (15) days after notice by Landlord, and if Tenant shall fail to do so, Landlord may pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof, and Tenant shall repay such amounts as Additional Rent within fifteen (15) days after Landlord’s written demand, without limitation as to other remedies available to Landlord under this Lease. Nothing contained in this Lease shall authorize Tenant to do any act which shall subject Landlord’s title to the Building or Premises to any liens or encumbrances whether claimed by operation of law or express or implied contract.

ARTICLE 10 - INSURANCE

10.1 Indemnification and Waiver.

10.1.1 Except to the extent caused by the negligence or willful misconduct of Landlord or any Landlord Related Parties (defined below), Tenant and its successors shall indemnify, defend and

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hold Landlord, its trustees, members, principals, beneficiaries, partners, officers, directors, employees, lender(s) and agents (“Landlord Related Parties”) harmless from and against all liabilities, obligations, damages, penalties, claims, actions, costs, charges and expenses, including, without limitation, reasonable attorneys’ fees and other professional fees (if and to the extent permitted by Applicable Law), which may be imposed upon, incurred by or asserted against Landlord or any of the Landlord Related Parties and arising out of or in connection with any damage or injury occurring in the Premises, a breach of this Lease by the Tenant or its successors, or any negligent acts or omissions (including violations of Applicable Laws) of Tenant, the Tenant Related Parties (defined below) or any of Tenant’s transferees, successors, contractors or licensees.

10.1.2 Except to the extent caused by the negligence or willful misconduct of Tenant or any Tenant Related Parties (defined below), Landlord and its successors shall indemnify, defend and hold Tenant and its officers and directors (“Tenant Related Parties”) harmless from and against all liabilities, obligations, damages, penalties, claims, actions, costs, charges and expenses, including, without limitation, reasonable attorneys’ fees and other professional fees (if and to the extent permitted by Applicable Law), which may be imposed upon, incurred by or asserted against Tenant or any of the Tenant Related Parties and arising out of or in connection with a breach of this Lease by Landlord or its successors, the negligent acts or omissions (including violations of Applicable Law) of Landlord, the Landlord Related Parties, any of Landlord’s contractors or the Landlord’s successors.

10.1.3 Except to the extent covered by Landlord’s insurance carried hereunder (or to the extent any loss would have been covered had the insurance required by this Lease been carried) and except to the extent of any gross negligence or willful misconduct of Landlord or any Landlord Related Parties, Landlord and the Landlord Related Parties shall not be liable for, and Tenant waives, all claims for loss or damage to Tenant’s business or loss, theft or damage to Tenant’s property or the property of any person claiming by, through or under Tenant resulting from: (1) wind or weather; (2) the failure of any sprinkler, heating or air-conditioning equipment, any electric wiring or any gas, water or steam pipes; (3) the backing up of any sewer pipe or downspout; (4) the bursting, leaking or running of any tank, water closet, drain or other pipe; (5) water, snow or ice upon or coming through the roof, skylight, stairs, doorways, windows, walks or any other place upon or near the Building; (6) any act or omission of any party other than Landlord or Landlord Related Parties; and (7) any causes not reasonably within the control of Landlord. Tenant shall insure itself against such losses under Section 10.3.2 below.

The provisions of this Section 10.1 shall survive the expiration or sooner termination of this Lease with respect to any claims or liability arising in connection with any event occurring prior to such expiration or termination.

10.2 Tenant’s Compliance With Landlord’s Fire and Casualty Insurance. Tenant shall, at Tenant’s expense, comply with all insurance company requirements pertaining to the use of the Premises which is not a general office use. If Tenant’s conduct or use of the Premises causes any increase in the premium for such insurance policies then Tenant shall reimburse Landlord for any such increase to the extent caused by Tenant’s use of the Premises which is not a general office use. Tenant, at Tenant’s expense, shall comply with all rules, orders, regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body.

10.3 Tenant’s Insurance. Tenant shall maintain the following coverages in the following amounts.

10.3.1 Commercial General Liability Insurance covering the insured against claims of bodily injury, personal injury and property damage (including loss of use thereof) arising out of Tenant’s operations, and contractual liabilities (covering the performance by Tenant of its indemnity agreements)

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including a Broad Form endorsement covering the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements set forth in Section 10.1 of this Lease, for limits of liability not less than:

Bodily Injury and Property Damage	$5,000,000 each occurrence
Liability	$5,000,000 annual aggregate
Personal Injury Liability	$5,000,000 each occurrence
	$5,000,000 annual aggregate
	0% Insured’s participation

10.3.2 Physical Damage Insurance covering the “Tenant Improvements,” as that term is defined in Section 2.1 of the Tenant Work Letter (excluding the Base Building) (the “Original Improvements”), and (ii) all other Alterations to the Premises. Such insurance shall be written on an “all risks” of physical loss or damage basis, for the full replacement cost value (subject to reasonable deductible amounts) new without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance and shall include coverage for damage or other loss caused by fire or other peril including, but not limited to, vandalism and malicious mischief, theft, water damage of any type, including sprinkler leakage, bursting or stoppage of pipes, and explosion, and providing business interruption coverage for a period of one year.

10.3.3 Worker’s Compensation and Employer’s Liability or other similar insurance pursuant to all applicable state and local statutes and regulations.

10.4 Form of Policies. The minimum limits of policies of insurance required of Tenant under this Lease shall in no event limit the liability of Tenant under this Lease. Such insurance shall (i) name Landlord, Landlord’s lender and Landlord’s managing agent, if any, as an additional insured; (ii) specifically cover the liability assumed by Tenant under this Lease, including, but not limited to, Tenant’s obligations under Section 10.1 of this Lease; (iii) be issued by an insurance company having a rating of not less than A-, VII in Best’s Insurance Guide and licensed to do business in the State of California; (iv) be primary insurance as to all claims thereunder and provide that any insurance carried by Landlord is excess and is non-contributing with any insurance requirement of Tenant; and (v) provide that said insurance shall not be canceled or coverage changed unless ten (10) days’ prior written notice shall have been given to Landlord. Tenant shall deliver said policy or policies or certificates thereof to Landlord on or before the Lease Commencement Date and at least thirty (30) days before the expiration dates thereof. In the event Tenant shall fail to procure such insurance, or to deliver such policies or certificate, Landlord may, at its option, procure such policies for the account of Tenant, and the cost thereof shall be paid to Landlord within five (5) business days after delivery to Tenant of bills therefor.

10.5 Subrogation. Landlord and Tenant intend that their respective property loss risks shall be borne by reasonable insurance carriers to the extent above provided, and Landlord and Tenant hereby agree to look solely to, and seek recovery only from, their respective insurance carriers in the event of a property loss to the extent that such coverage is agreed to be provided hereunder. The parties each hereby waive all rights and claims against each other for such losses, and waive all rights of subrogation of their respective insurers. The parties agree that their respective insurance policies are now, or shall be, endorsed such that the waiver of subrogation shall not affect the right of the insured to recover thereunder, so long as no material additional premium is charged therefor.

10.6 Landlord’s Insurance. Landlord shall insure the Building (including the Building Structure and Building Systems) and the Project during the Lease Term against loss or damage due to fire and other casualties covered within the classification of fire and extended coverage, vandalism coverage

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and malicious mischief, sprinkler leakage, water damage and special extended coverage. Such coverage shall be in such amounts, from such companies, and on such other TCCs, as Landlord may from time to time reasonably determine, provided that such coverage (i) shall be for full replacement of the Building and the Project in compliance with all then existing Applicable Laws; (ii) at Landlord’s option may provide for rent continuation insurance of up to twelve (12) months rent; and (iii) be with companies and have policies meeting the criteria set forth in Section 10.4(iii) in this Lease. Additionally, at the sole option of Landlord, such insurance coverage may include the risks of earthquakes and/or flood damage and additional hazards, a rental loss endorsement and one or more loss payee endorsements in favor of the holders of any mortgages or deeds of trust encumbering the interest of Landlord in the Building or the ground or underlying lessors of the Building, or any portion thereof. In addition, Landlord shall maintain a Commercial General Liability Insurance policy covering the insured against claims of bodily injury and personal injury, for limits of liability not initially less man $5,000,000 each occurrence and $5,000,000 annual aggregate for each of bodily injury and personal injury. Notwithstanding the foregoing TCCs of this Section 10.6, the coverage and amounts of insurance carried by Landlord in connection with the Building shall at a minimum be comparable to the coverage and amounts of insurance which are carried by reasonably prudent landlords of Comparable Buildings, and Worker’s Compensation and Employee’s Liability coverage as required by Applicable Laws. Upon inquiry by Tenant, from time to time, Landlord shall inform Tenant of all such insurance carried by Landlord.

ARTICLE 11 - DAMAGE AND DESTRUCTION

11.1 Repair of Damage by Landlord. Tenant shall promptly notify Landlord of any damage to, or affecting, the Premises resulting from fire or any other casualty. If the Premises, the Project or any Common Areas serving or providing access to the Premises shall be damaged by fire or other casualty, Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment or other matters beyond Landlord’s reasonable control, and subject to all other TCCs of this Article 11, restore the Base Building and such Common Areas. Such restoration shall be to substantially the same condition of the Base Building and the Common Areas prior to the casualty, except for modifications required by zoning and building codes and other laws; provided, however, that Landlord’s restoration obligation shall be limited to the actual amount of insurance proceeds obtained by Landlord for such casualty. Upon the occurrence of any damage to the Premises, upon notice (the “Landlord Repair Notice”) to Tenant from Landlord, Tenant shall return the Premises to their original condition prior to such casualty at Tenant’s sole cost and expense. Following delivery of a Landlord Repair Notice, prior to the commencement of construction, Tenant shall submit to Landlord, for Landlord’s review and approval, all plans, specifications and working drawings relating thereto, and Landlord shall select (with Tenant’s reasonable approval) the contractors to perform such improvement work. Landlord shall not be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant’s business resulting in any way from such damage or the repair thereof; provided however, that if such fire or other casualty shall have damaged the Premises or Common Areas necessary to Tenant’s occupancy, Landlord shall allow Tenant a proportionate abatement of Rent to the extent the Premises and/or Common Areas are unavailable for Tenant’s use and occupancy regardless of whether Landlord is reimbursed from the proceeds of rental interruption insurance purchased or required to be purchased by Landlord as part of Operating Expenses, during the time and to the extent the Premises are unfit for occupancy for the purposes permitted under this Lease, and not occupied by Tenant as a result thereof; provided, further, however, that if the damage or destruction is due to the negligence or intentional misconduct of Tenant, Tenant shall be responsible for any applicable deductible (which shall be payable to Landlord upon demand).

11.2 Landlord’s Option to Repair. Notwithstanding the TCCs of Section 11.1 of this Lease, Landlord may elect not to rebuild and/or restore the Premises, Building and/or Project, and instead terminate this Lease (or the applicable portion thereof), by notifying Tenant in writing of such termination within sixty (60) days after the date of discovery of the damage, such notice to include a termination date

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giving Tenant sixty (60) days to vacate the Premises, but Landlord may so elect only if the Building or Project shall be damaged by fire or other casualty or cause, if one or more of the following conditions is present: (i) in Landlord’s reasonable judgment, repairs cannot reasonably be completed within twelve (12) months after the date of discovery of the damage (when such repairs are made without the payment of overtime or other premiums); (ii) the damage is not fully covered by Landlord’s insurance policies (provided Landlord is deemed to have carried (except with regard to any applicable deductibles) one hundred percent (100%) replacement cost fire/casualty insurance); or (iii) the damage occurs during the last nine (9) months of the Lease Term. If Landlord does not elect to terminate this Lease pursuant to Landlord’s termination right as provided above, and if the repairs to be made by Landlord are not actually completed within twelve (12) months of the date of discovery of the damage, Tenant shall have the right to terminate this Lease during the first five (5) business days of each calendar month following the end of such period until such time as the repairs to be made by Landlord are complete, by notice to Landlord (the “Damage Termination Notice”), effective as of a date set forth in the Damage Termination Notice (the “Damage Termination Date”), which Damage Termination Date shall not be less than five (5) business days following Landlord’s receipt of the Damage Termination Notice. Notwithstanding the foregoing, if Tenant delivers a Damage Termination Notice to Landlord, then Landlord shall have the right to suspend the occurrence of the Damage Termination Date for a period of thirty (30) days after the Damage Termination Date set forth in the Damage Termination Notice by delivering to Tenant, within five (5) business days of Landlord’s receipt of the Damage Termination Notice, a certificate of Landlord’s contractor responsible for the repair of the damage certifying that it is such contractor’s good faith judgment that the repairs to be made by Landlord shall be substantially completed within thirty (30) days after the Damage Termination Date. If such repairs shall be substantially completed prior to the expiration of such thirty-day period, then the Damage Termination Notice shall be of no force or effect, but if such repairs shall not be substantially completed within such thirty-day period, then this Lease shall termination upon the expiration of such thirty-day period.

11.3 Waiver of Statutory Provisions. The provisions of this Lease, including this Article 11, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, the Building or the Project, and any statute or regulation of the State of California, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code and any other existing or future Applicable Laws, with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises, the Building or the Project.

ARTICLE 12 - NON-WAIVER

No provision of this Lease shall be deemed waived by either party hereto unless expressly waived in a writing signed thereby. The waiver by either party hereto of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord’s knowledge of such preceding breach at the time of acceptance of such Rent. No acceptance of a lesser amount than the Rent herein stipulated shall be deemed a waiver of Landlord’s right to receive the full amount due, nor shall any endorsement or statement on any check or payment or any letter accompanying such check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the full amount due. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Lease Term or of Tenant’s right of possession hereunder, or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given Tenant prior to the receipt of such

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monies, it being agreed that after the service of notice or the commencement of a suit, or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment.

ARTICLE 13 - CONDEMNATION

If the Premises or any portion thereof are taken under the power of eminent domain, or sold under the threat of the exercise of said power (collectively, “condemnation”), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than thirty three and one-third percent (33 1/3%) of the floor area of the Premises, or more than thirty three and one-third percent (33 1/3%) of that portion of the Project designated as parking for the Building, is taken by condemnation, then either Landlord or Tenant, within ten (10) days after the condemning authority shall have taken possession, may elect to terminate this Lease as of the date the condemning authority takes such possession by written notice given to the other party. If neither Landlord and Tenant so elects to terminate this Lease, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. No reduction of Rent shall occur if the only area taken is that which does not have the Premises located thereon and there is no material and adverse effect on Tenant’s ability to operate in the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the sole property of Landlord, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Tenant shall be entitled to any separate award for loss of or damage to Tenant’s trade fixtures and removable personal property, loss of good will, the unamortized book value or cost (whichever is less) of the Alterations made to the Premises by Tenant at Tenant’s sole cost and expense and relocation costs. In the event that this Lease is not terminated by reason of such condemnation and as permitted by applicable law, Landlord shall to the extent of severance damages received by Landlord in connection with such condemnation, repair any damage to the Premises caused by such condemnation, except to the extent that Tenant has been reimbursed for such amounts by the condemning authority. Tenant shall pay any amount in excess of such severance damage required to complete such repair. Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of The California Code of Civil Procedure.

ARTICLE 14 - ASSIGNMENT AND SUBLETTING

14.1 Transfers. Tenant shall not, without the prior written consent (except as otherwise provided in Section 14.8 below) of Landlord, which consent will not be unreasonably withheld, conditioned or delayed, assign, mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise transfer, this Lease or any interest hereunder, permit any assignment, or other transfer of this Lease or any interest hereunder by operation of law, sublet the Premises or any part thereof, or enter into any license or concession agreements or otherwise permit the occupancy or use of the Premises or any part thereof by any persons other than Tenant and its employees and contractors (all of the foregoing are hereinafter sometimes referred to collectively as “Transfers” and any person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a “Transferee”). If Tenant desires Landlord’s consent to any Transfer, Tenant shall notify Landlord in writing, which notice (the “Transfer Notice”) shall include (i) the proposed effective date of the Transfer, which shall not be less than thirty (30) days nor more than one hundred eighty (180) days after the date of delivery of the Transfer Notice, (ii) a description of the portion of the Premises to be transferred (the “Subject Space”), (iii) all of the TCCs of the proposed Transfer and the consideration therefor, including calculation of the “Transfer Premium,” as that term is defined in Section 14.3 below, in connection with such Transfer, the name and address of the proposed Transferee, and a copy of all existing executed and/or proposed documentation

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pertaining to the proposed Transfer, including all existing operative documents to be executed to evidence such Transfer or the agreements incidental or related to such Transfer, (iv) to the extent reasonably necessary for Landlord to make its consent determination, current financial statements of the proposed Transferee certified by an officer, partner or owner thereof, business credit and personal references and history of the proposed Transferee and any other information required by Landlord which will enable Landlord to determine the financial responsibility, character, and reputation of the proposed Transferee, nature of such Transferee’s business and proposed use of the Subject Space and (v) an executed estoppel certificate from Tenant. Any Transfer made without Landlord’s prior written consent shall, at Landlord’s option, be null, void and of no effect, and shall, at Landlord’s option, constitute a default by Tenant under this Lease. Whether or not Landlord consents to any proposed Transfer, Tenant shall reimburse Landlord for all reasonable and actual out-of-pocket third-party costs and expenses incurred by Landlord in reviewing of a proposed Transfer within fifteen (15) days after Landlord’s written demand.

14.2 Landlord’s Consent. Landlord shall not unreasonably withhold its consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in the Transfer Notice. Without limitation as to other reasonable grounds for withholding consent, the parties hereby agree that it shall be reasonable under this Lease and under any Applicable Laws for Landlord to withhold consent to any proposed Transfer where one or more of the following apply:

14.2.1 The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building or the Project;

14.2.2 The Transferee intends to use the Subject Space for purposes which are not permitted under this Lease;

14.2.3 The Transferee is either a governmental agency or instrumentality thereof;

14.2.4 Tenant is or has been in default beyond any applicable notice and cure period under this Lease prior to the date of the Transfer; or

14.2.5 The Transferee’s financial worth and/or financial stability is less than the greater of Tenant’s financial net worth and/or financial stability as of the Effective Date or at the time of the request for consent.

If Landlord consents to any Transfer pursuant to the TCCs of this Section 14.2, Tenant may within one (1) month after Landlord’s consent, but not later than the expiration of said one-month period, enter into such Transfer of the Premises or portion thereof, upon substantially the same terms and conditions as are set form in the Transfer Notice furnished by Tenant to Landlord pursuant to Section 14.1 of this Lease, provided that if there are any material changes in the terms and conditions from those specified in the Transfer Notice (i) such that Landlord would initially have been entitled to refuse its consent to such Transfer under this Section 14.2, or (ii) which would cause the proposed Transfer to be materially more favorable to the Transferee than the terms set forth in Tenant’s original Transfer Notice, Tenant shall again submit the Transfer to Landlord for its approval and other action under this Article 14. Tenant shall indemnify, defend and hold harmless Landlord from any and all liability, losses, claims, damages, costs, expenses, causes of action and proceedings involving any third party or parties (including without limitation Tenant’s proposed subtenant or assignee) who claim they were damaged by Landlord’s alleged wrongful withholding or conditioning of Landlord’s consent.

14.3 Transfer Premium. If Landlord consents to a Transfer, as a condition thereto which the parties hereby agree is reasonable, Tenant shall pay to Landlord fifty percent (50%) of any “Transfer Premium,” as that term is defined in this Section 14.3, received by Tenant from such Transferee.

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“Transfer Premium” shall mean all rent, additional rent or other consideration payable by such Transferee in connection with the Transfer in excess of the Rent and Additional Rent payable by Tenant under this Lease during the term of the Transfer on a per Square Foot basis if less than all of the Premises is transferred, after deducting all expenses incurred by Tenant (i) in making any changes, alterations and improvements to the Premises in connection with the Transfer, and (ii) any brokerage commissions and reasonable attorneys fees in connection with the Transfer. “Transfer Premium” shall also include, but not be limited to, bonus money or other cash consideration paid by Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to Transferee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to Transferee in connection with such Transfer.

14.4 Intentionally Deleted.

14.5 Effect of Transfer. If Landlord consents to a Transfer, (i) the TCCs of this Lease shall in no way be deemed to have been waived or modified, (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to Landlord, promptly after execution, an original executed copy of all documentation pertaining to the Transfer, and (iv) no Transfer relating to this Lease or agreement entered into with respect thereto, whether with or without Landlord’s consent, shall relieve Tenant from any liability under this Lease. Landlord or its authorized representatives shall have the right at all reasonable times and upon reasonable prior notice to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found understated, Tenant shall, within thirty (30) days after demand, pay the deficiency, and if understated by more than five percent (5%), Tenant shall pay Landlord ‘s costs of such audit.

14.6 Change of Control. The term Transfer, as used in this Article 14, includes the following: (i) if Tenant is a partnership or a limited liability company, the transfer, voluntary or involuntary, either by a single transaction or in a series of transactions, of a Controlling Interest in Tenant, or the dissolution of Tenant, whether voluntary or involuntary; (ii) if Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant involving an acquisition of a Controlling Interest in Tenant, or the transfer, voluntary or involuntary, either by a single transaction or in a series of transactions, of a Controlling Interest in Tenant (except that a Transfer shall not include any such transfer of a Controlling Interest in Tenant occurring at a time when the stock of Tenant is publicly traded on a nationally recognized stock exchange or over the counter), or the sale, by a single transaction or series of transactions within any one (1) year period of all or substantially all of Tenant’s assets (except in connection with an initial public offering of the stock of Tenant on a nationally recognized stock exchange or over the counter); (iii) if Tenant is a trust, the transfer, voluntarily or involuntarily, of either a Controlling Interest in the trustee of such trust or more than fifty percent (50%) of the trust’s assets; and (iv) if Tenant is any other form of entity a transfer, voluntary or involuntary, either by a single transaction or in a series of transactions, of a controlling interest in Tenant. As used herein, the term “Controlling Interest” means (a) in the case of a partnership, limited liability company or other business entity, the ownership of partnership interests, membership interests or other indicia of ownership constituting more than fifty percent (50%) of the ownership interests in Tenant (provided that in the case of a limited partnership or manager controlled limited liability company, it also means the ownership of more than fifty percent (50%) of the ownership interests in the general partner or manager of Tenant), and (b) in the case of a corporation, the ownership and/or the right to vote stock constituting more than fifty percent (50%) of the voting stock of Tenant.

14.7 Occurrence of Default. Any Transfer hereunder shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any Transfer, Landlord shall have the right to: (i) treat such Transfer as cancelled and repossess the Subject Space by any lawful

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means, or (ii) require that such Transferee attorn to and recognize Landlord as its landlord under any such Transfer. If Tenant shall be in default under this Lease, Landlord is hereby authorized to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant’s obligations under this Lease) until such default is cured. Such Transferee shall rely on any representation by Landlord that Tenant is in default hereunder, without any need for confirmation thereof by Tenant. Upon any assignment, the assignee shall assume in writing all obligations and covenants of Tenant thereafter to be performed or observed under this Lease. No collection or acceptance of rent by Landlord from any Transferee shall be deemed a waiver of any provision of this Article 14 or the approval of any Transferee or a release of Tenant from any obligation under this Lease, whether theretofore or thereafter accruing. In no event shall Landlord’s enforcement of any provision of this Lease against any Transferee be deemed a waiver of Landlord’s right to enforce any term of this Lease against Tenant or any other person.

14.8 Non-Transfers. Notwithstanding anything to the contrary contained in this Article 14, an assignment of this Lease or subletting of all or a portion of the Premises to any entity which acquires all or substantially all of the assets of Tenant, or which acquires Tenant by merger of Tenant with such entity or a subsidiary thereof, or by purchase of shares of Tenant’s stock (in each such case, an “Acquiror”), or any assignment by virtue of a merger involving an acquisition of a Controlling Interest in Tenant, shall not be deemed a Transfer under this Article 14, provided that at least five (5) business days prior to such assignment or sublease (i) Tenant provides Landlord with reasonable evidence that any such entity maintains a net worth, calculated in accordance with generally accepted accounting principals, consistently applied, which exceeds the Tenant’s financial net worth and/or financial stability as of the Effective Date or as of the effective date of such transaction, whichever is greater; and (ii) Tenant notifies Landlord of any such assignment or sublease, and such assignment or sublease is not a subterfuge by Tenant to avoid its obligations under this Lease. In the event an assignment or sublease to an Acquiror is made pursuant to the TCCs of this Section 14.8, Tenant shall be relieved of its obligations under this Lease to the extent the same become the TCCs of such Acquiror pursuant to such assignment or sublease. As used in this Section 14.8, “control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person or entity, whether by ownership of voting securities, by contract or otherwise.

ARTICLE 15 - SURRENDER OF PREMISES

15.1 Surrender of Premises. No act or thing done by Landlord or any agent or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord of a surrender of the Premises unless such intent is specifically acknowledged in writing by Landlord. The delivery of keys to the Premises to Landlord or any agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease. The voluntary or other surrender of this Lease by Tenant, whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and at the option of Landlord shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises or terminate any or all such subtenants or subtenancies.

15.2 Removal of Tenant Property by Tenant. Upon the expiration of the Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject to the provisions of this Article 15, quit and surrender possession of the Premises to Landlord in as good order and condition as when Tenant took possession and as thereafter improved by Tenant, reasonable wear and tear or repairs which are specifically made the responsibility of Landlord hereunder excepted. Upon such expiration or termination, Tenant shall, at its sole expense, remove or cause to be removed from the Premises all Alterations, fixtures and equipment pursuant to Article 8, all debris and rubbish, and such items of furniture, equipment, business and trade fixtures, free-standing cabinet work, movable partitions and other articles of personal property owned by Tenant or installed or placed by Tenant at its expense in the

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Premises, and Tenant shall repair at its own expense all damage to the Building to the extent resulting from such removal.

ARTICLE 16 - HOLDING OVER

If Tenant holds over after the expiration of the Lease Term or earlier termination thereof, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not, except as set forth below, constitute a renewal hereof or an extension for any further term, and in such case Rent shall be payable at a monthly rate equal to the product of (i) the Rent applicable during the last rental period of the Lease Term under this Lease, and (ii) one hundred fifty percent (150%). Such month-to-month tenancy shall be subject to every other applicable TCCs contained herein. For purposes of this Article 16, a holding over shall include Tenant’s remaining in the Premises after the expiration or earlier termination of the Lease Term, as required pursuant to the TCCs of Article 8, above, to remove any Alterations and/or restore any Building Standard Tenant Improvements. Nothing contained in this Article 16 shall be construed as consent by Landlord to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of this Article 16 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. Except as otherwise specifically provided for in this Article 16 with regard to a Permitted Holdover Term, if Tenant fails to surrender the Premises upon the termination or expiration of this Lease (or upon the expiration of the Permitted Holdover Term, if any), in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys’ fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any reasonable claims made by any succeeding tenant founded upon such failure to surrender and any lost profits to Landlord resulting therefrom.

ARTICLE 17 - ESTOPPEL CERTIFICATES

Within ten (10) business days following a request in writing by Landlord Tenant, shall execute, acknowledge and deliver to Landlord an estoppel certificate, which, as submitted by Landlord, shall be substantially in a commercially reasonable, mutually agreeable form, indicating therein any exceptions thereto that may exist at that time, and shall also contain any other information reasonably requested by Landlord or Landlord’s mortgagee or prospective mortgagee. Any such certificate may be relied upon by any prospective mortgagee or purchaser of all or any portion of the Project.

ARTICLE 18 - SUBORDINATION

This Lease shall be subject and subordinate to all present and future ground or underlying leases of the Building or Project and to the lien of any mortgage, trust deed or other encumbrances now or hereafter in force against the Building or Project or any part thereof, if any, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or hereafter to be made upon the security of such mortgages or trust deeds, unless the holders of such mortgages, trust deeds or other encumbrances, or the Landlords under such ground lease or underlying leases, require in writing that this Lease be superior thereto. Landlord’s delivery to Tenant of a commercially reasonable subordination, non-disturbance and attornment agreement (the “Nondisturbance Agreement”) in favor of Tenant from any ground lessor, mortgage holders or lien holders of Landlord who obtain a mortgage, deed of trust, ground lease or other encumbrance after the Effective Date shall be in consideration of, and a condition precedent to, Tenant’s agreement to be bound by the TCCs of this Article 18 and Section 1.11 hereof. Subject to the terms of any applicable Nondisturbance Agreement, Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any such mortgage or deed in lieu thereof

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(or if any ground lease is terminated), to attorn, without any deductions or set-offs whatsoever, to the lienholder or purchaser or any successors thereto upon any such foreclosure sale or deed in lieu thereof (or to the ground Landlord), if so requested to do so by such purchaser or lienholder or ground Landlord, and to recognize such purchaser or lienholder or ground Landlord as the Landlord under this Lease, provided such lienholder or purchaser or ground Landlord shall agree to accept this Lease and not disturb Tenant’s occupancy, so long as Tenant is not in default of this Lease. Landlord’s interest herein may be assigned as security at any time to any lienholder. Tenant shall, within ten (10) business days of request by Landlord, execute such further instruments or assurances as Landlord may reasonably deem necessary to evidence or confirm the subordination or superiority of this Lease to any such mortgages, trust deeds, ground leases or underlying leases in accordance with the TCCs of this Article 18. Subject to the terms of any applicable Nondisturbance Agreement, Tenant waives the provisions of any current or future statute, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale. In the event of the enforcement by the holder of any mortgage, trust deed or other encumbrance, any person succeeding to the interests of Landlord as a result of such enforcement shall not be bound by any payment of Rent for more than one (1) month in advance.

ARTICLE 19 - DEFAULTS: REMEDIES

19.1 Events of Default. The occurrence of any of the following shall constitute a default of this Lease by Tenant:

19.1.1 Any failure by Tenant to pay any Rent or any other charge required to be paid under this Lease, or any part thereof, when due unless such failure is cured within five (5) days after written notice from Landlord that such payment was not received when due; or

19.1.2 Any failure by Tenant to observe or perform any other provision, covenant or condition of this Lease to be observed or performed by Tenant where such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; provided that if the nature of such default is such that the same cannot reasonably be cured within a thirty (30) day period, Tenant shall not be deemed to be in default if it diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure such default; or

19.1.3 Abandonment of all of the Premises by Tenant; or

19.1.4 The failure by Tenant to observe or perform according to the provisions of Articles 5, 14, 17 or 18 of this Lease where such failure continues for more than fifteen (15) days after notice from Landlord.

The notice periods provided herein are in lieu of, and not in addition to, any notice periods required by Applicable Laws.

19.2 Remedies Upon Default. Upon the occurrence of any event of default by Tenant, Landlord shall have, in addition to any other remedies available to Landlord at law or in equity (all of which remedies shall be distinct, separate and cumulative), the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever.

19.2.1 Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises

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and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant the following:

(i) The worth at the time of any unpaid rent which has been earned at the time of such termination; plus

(ii) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus

(iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus

(iv) At Landlord’s election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by Applicable Laws.

The term “rent” as used in this Section 19.2 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the TCCs of this Lease, whether to Landlord or to others. As used in Paragraphs 19.2.1(i) and (ii), above, the “worth at the time of award” shall be computed by allowing interest at the rate set forth in Article 25 of this Lease, but in no case greater than the maximum amount of such interest permitted by law. As used in Paragraph 19.2.1(iii) above, the “worth at the time of award” shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).

19.2.2 Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee’s breach and abandonment and recover rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due.

19.2.3 Landlord shall at all times have the rights and remedies (which shall be cumulative with each other and cumulative and in addition to those rights and remedies available under Sections 19.2.1 and 19.2.2, above, or any law or other provision of this Lease), without prior demand or notice except as required by Applicable Law, to seek any declaratory, injunctive or other equitable relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any provision hereof.

19.3 Subleases. Whether or not Landlord elects to terminate this Lease on account of any default by Tenant, as set forth in this Article 19, Landlord shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlord’s sole discretion, succeed to Tenant’s interest in such subleases, licenses, concessions or arrangements. In the event of Landlord’s election to succeed to Tenant’s interest in any such subleases, licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or interest in the rent or other consideration receivable thereunder.

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19.4 Efforts to Relet. No re-entry or repossession, repairs, maintenance, changes, alterations and additions, reletting, appointment of a receiver to protect Landlord’s interests hereunder, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenant’s right to possession, or to accept a surrender of the Premises, nor shall same operate to release Tenant in whole or in part from any of Tenant’s obligations hereunder, unless express written notice of such intention is sent by Landlord to Tenant. Tenant hereby irrevocably waives any right otherwise available under any law to redeem or reinstate this Lease.

19.5 Landlord Default. Notwithstanding anything to the contrary set form in this Lease, Landlord shall be in default in the performance of any obligation required to be performed by Landlord pursuant to this Lease if Landlord fails to perform such obligation within thirty (30) days after the receipt of notice from Tenant specifying in detail Landlord’s failure to perform; provided, however, if the nature of Landlord’s obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be in default under this Lease if it shall commence such performance within such thirty (30) day period and thereafter diligently pursues the same to completion. As a material part of the consideration for this Lease, Tenant hereby waives any benefits of any applicable existing or future Applicable Laws, including the provisions of California Civil Code Sections 1932(1), 1941 and 1942, that allows a tenant to make repairs at its landlord’s expense.

ARTICLE 20 - COVENANT OF QUIET ENJOYMENT

Landlord covenants that Tenant shall, during the Lease Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, provisions and agreements hereof without interference by any persons lawfully claiming by or through Landlord. The foregoing covenant is in lieu of any other covenant express or implied.

ARTICLE 21 - SECURITY DEPOSIT

21.1 Security Deposit. Concurrent with Tenant’s execution of this Lease, Tenant shall deposit with Landlord a security deposit (the “Security Deposit”) in the form of an irrevocable standby letter of credit (“Letter of Credit”) in the amount set forth in Section 7 of the Summary. The Security Deposit shall secure the performance by Tenant of all of Tenant’s obligations under this Lease. If any event shall occur that constitutes a default by Tenant, or if any event shall occur that, with the passage of time, the giving of notice or both, otherwise would constitute a default under any provisions of this Lease, including, but not limited to, the provisions relating to the payment of Rent, the removal of property and the repair of resultant damage, Landlord may, without notice to Tenant, but shall not be required to draw upon all or a portion of the Letter of Credit for the payment of any Rent or any other sum in default and Tenant shall, upon demand therefor, restore the Letter of Credit to its original amount. Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code, or any successor statute.

21.2 Letter of Credit Terms. The Letter of Credit shall (i) name Landlord as its sole beneficiary; (ii) expressly permit multiple or partial draws up to the stated amount of the Letter of Credit; (iii) be issued by a bank that is acceptable to Landlord, insured by the FDIC, and having a local office in Santa Clara County, California that will negotiate the Letter of Credit; (iv) expressly provide that it is transferable to Landlord or to Landlord’s assignee without charge; and (v) provide that Landlord may draw on the Letter of Credit in whole or in part by submitting to the issuing bank a statement signed only by Landlord that Landlord is entitled to draw the Letter of Credit pursuant to the terms and conditions of this Lease; provided, however, that in any event the Letter of Credit shall be in a form reasonably acceptable to Landlord. Tenant shall pay all expenses incurred by Tenant in maintaining the Letter of Credit. The Letter of Credit shall not be mortgaged, assigned or encumbered in any manner whatsoever by Tenant without written prior consent of Landlord. If the bank from which Tenant has obtained the

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Letter of Credit shall become insolvent, become the subject of receivership, conservatorship, reorganization or closure action by federal or state banking authorities, or if any holding company owning or controlling more than fifty percent (50%) of the ownership interests in such bank shall become insolvent, file a petition in bankruptcy or similar proceeding, make an assignment for the benefit of its creditors, consent to the appointment of a receiver or conservator or of the whole or any substantial part of its property, or file a petition or answer seeking reorganization or arrangement under the Federal bankruptcy laws or any other Applicable Laws or statute of the United States or any state thereof, then Tenant shall obtain a replacement Letter of Credit in accordance with all of the terms of this Article 21 within ten (10) days of such act from another bank that meets the requirements of this Section 21.2 and which bank is satisfactory to Landlord. The Letter of Credit shall remain in effect at all times during the Lease Term and shall have a term of not less than the Lease Term plus one hundred twenty (120) days after expiration thereof. If Tenant has an option to extend the Lease Term, Tenant shall obtain a renewal of the Letter of Credit or replacement thereof which complies with all of the provisions of this Article 21 and deliver such Letter of Credit to Landlord prior to commencement of the extended Lease Term. The term of the replacement Letter of Credit shall be for the period of the extended Lease Term, plus ninety (90) days. If Tenant shall fail to provide such replacement Letter of Credit to Landlord prior to commencement of the extended Lease Term, Landlord may draw upon the existing Letter of Credit in full or in part, in Landlord’s sole discretion, and hold the proceeds thereof as part of the Cash Deposit or apply them in accordance with the terms of this Article 21.

ARTICLE 22 - TELECOMMUNICATIONS EQUIPMENT

At any time during the Lease Term, subject to the TCCs of this Article 22 and Article 8 of this Lease, Tenant may install, at Tenant’s sole cost and expense, but without the payment of any Rent or a license or similar fee or charge, a satellite or microwave dish or other communications, HVAC or other equipment servicing the business conducted by Tenant from within the Premises (all such equipment, including non-telecommunication equipment is, for the sake of convenience, defined collectively as the “Telecommunications Equipment”) upon the roof of the Building, for Tenant’s personal use and not for any other commercial purpose. The physical appearance and the size of the Telecommunications Equipment shall be subject to Landlord’s reasonable approval, the location of any such installation of the Telecommunications Equipment shall be designated by Tenant subject to Landlord’s reasonable approval and Landlord may require Tenant to install screening around such Telecommunications Equipment, at Tenant’s sole cost and expense, as reasonably designated by Landlord. Tenant shall maintain such Telecommunications Equipment at Tenant’s sole cost and expense. In the event Tenant elects to exercise its right to install the Telecommunication Equipment, then Tenant shall give Landlord prior notice thereof. Tenant shall reimburse to Landlord the actual costs reasonably incurred by Landlord in approving such Telecommunications Equipment. Tenant shall remove such Telecommunications Equipment upon the expiration or earlier termination of this Lease and shall return the affected portion of the rooftop and the Building to the condition the rooftop and the Building would have been in had no such Telecommunications Equipment been installed (reasonable wear and tear accepted). Such Telecommunications Equipment shall be installed pursuant to plans and specifications approved by Landlord, which approval will not be unreasonably withheld, conditioned, or delayed. Such Telecommunications Equipment shall, in all instances, comply with applicable governmental laws, codes, rules and regulations. Except for the “Approved Landlord Use,” as that term is set forth hereinbelow, Tenant’s rooftop rights with regard to the Telecommunications Equipment shall be exclusive and complete; provided, however, such exclusive and complete use of the rooftop shall be personal to the Tenant, and no other parties may use the Telecommunications Equipment without Landlord’s prior written consent in Landlord’s sold and absolute discretion. “Approved Landlord Use,” for purposes of this Article 22, shall mean Landlord’s personal use of the rooftop in conjunction with its standard (internal) rooftop uses; provided, however, in no event shall the Approved Landlord Use (i) include any re-selling or leasing of any rooftop space to an unaffiliated third party, (ii) be used as a profit center for

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Landlord, or (iii) materially interfere with (or preclude the installation of) Tenant’s Telecommunications Equipment.

ARTICLE 23 - SIGNS

23.1 Within Tenant’s Premises. Tenant, at its sole cost and expense, may install identification signage anywhere within the Premises including in the elevator lobby and corridors of the Premises, provided that such signs must not be visible from the exterior of the Building. The lobby and corridor signage rights within the Building shall be exclusive to Tenant.

23.2 Prohibited Signage and Other Items. Except as otherwise provided in this Article 23, Tenant may not install any signs on the exterior or roof of the Project or the Common Areas without Landlord’s prior written consent. In addition, any signs, window coverings, or blinds (even if the same are located behind the Landlord-approved window coverings for the Building) within the Premises, or other items visible from the exterior of the Premises or Building, shall be subject to the prior written approval of Landlord, which shall not be unreasonably withheld, conditioned or delayed; provided, however, Landlord may require that a uniform exterior appearance of the Building be maintained. Any signs, notices, logos, pictures, names or advertisements which are installed and that have not been separately approved by Landlord may be removed without notice by Landlord at the sole expense of Tenant.

23.3 Tenant’s Signage.

23.3.1 Tenant’s Signage Rights. For purposes of this Lease, “Tenant’s Signage” shall mean (i) the “Premises Signage”, and (ii) either the “Building 5 Signage,” or the “Parking Structure One Building Signage,” as those terms are defined in Sections 23.3.1.1 and 23.3.1.2, below, as the case may be. Tenant’s rights under this Article 23 shall bind any purchaser successor in ownership of Building 5 or the Parking Structure even if such purchaser or successor does not become the “Landlord” hereunder; provided, however, that Tenant’s Signage under romanette (ii), above, is personal to the undersigned Tenant (and any Acquiror(s) pursuant to Section 14.8).

23.3.1.1 Premises Signage. Tenant shall be entitled to install the following signage in connection with Tenant’s lease of the Premises (collectively, the “Premises Signage”): (i) one (1) sign identifying Tenant’s name and logo located at the front or side of the Building; and (ii) one (1) sign on the monument located directly in front of the Building (the “Building 6 Monument Sign”). Tenant’s signage rights on such Building 6 Monument Sign shall be exclusive with regard to the Building 6 Monument Sign, and Tenant may also identify an Acquirer on the Building 6 Monument Sign.

23.3.1.2 Building 5 Signage or Parking Structure 1 Building Signage. Tenant shall be entitled to install either, but not both, of the following signage: (i) two (2) signs on Parking Structure One facing Highway 237; provided, however, the Parking Structure 1 Building Signage shall not be exclusive; or (ii) in the event Tenant is unable to obtain the necessary approvals for the Parking Structure 1 Building Signage, one (1) sign identifying Tenant’s name and logo located on the roof of Building 5; provided, however, such roof signage shall not be exclusive (and Tenant’s sign shall be in addition to, not in lieu of existing signage located on the roof of Building 5).

23.3.2 Specifications and Permits. Tenant’s Signage shall set forth Tenant’s name and logo as determined by Tenant in its sole discretion and as reasonably approved by Landlord. The graphics, materials, color, design, lettering, lighting, size, illumination, specifications and exact location of Tenant’s Signage (collectively, the “Sign Specifications”) shall be subject to the prior written approval of Landlord, which approval shall not be unreasonably withheld, conditioned or delayed, and shall be

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consistent and compatible with the quality and nature of the Project and the Building Standard Signage Specifications. Tenant’s Signage shall be subject to Tenant’s receipt of all required governmental permits and approvals and shall be subject to all Applicable Laws and to any covenants, conditions and restrictions affecting the Project. Landlord shall cooperate with Tenant and use its best efforts to assist Tenant in obtaining all necessary governmental permits and approvals for Tenant’s Signage. Tenant hereby agrees that Landlord has made no representation or warranty to Tenant with respect to the probability of obtaining all necessary approvals and permits for Tenant’s Signage. In the event Tenant does not receive the necessary approvals and permits for Tenant’s Signage, Tenant’s and Landlord’s rights and obligations under the remaining TCCs of this Lease shall be unaffected.

23.3.3 Cost and Maintenance. The costs of the actual signs comprising Tenant’s Signage and the installation, design, construction, and any and all other costs associated with Tenant’s Signage, including, without limitation, utility charges and hook-up fees, permits, and maintenance and repairs shall be the sole responsibility of Tenant; provided that Tenant shall be responsible for the cost of Tenant’s sign panel on the Building 6 Monument Sign, but Landlord shall maintain all monument signs set forth in this Article 23 in good condition and repair, the cost of which shall be included in Operating Expenses. Should Tenant’s Signage require repairs, as determined in Landlord’s reasonable judgment, Landlord shall have the right to provide notice thereof to Tenant and Tenant (except as set forth above) shall cause such repairs to be performed within thirty (30) days after receipt of such Notice from Landlord at Tenant’s sole cost and expense; provided, however, if such repairs are reasonably expected to require longer than thirty (30) days to perform, Tenant shall commence such repairs and/or maintenance within such thirty (30) day period and shall diligently prosecute such repairs and maintenance to completion. Should Tenant fail to perform such repairs within the periods described in the immediately preceding sentence, Landlord shall have the right to cause such work to be performed and to charge Tenant as Additional Rent for the actual cost of such work. Upon the expiration or earlier termination of this Lease, Tenant shall, at Tenant’s sole cost and expense, cause Tenant’s Signage to be removed and shall cause the areas in which such Tenant’s Signage was located to be restored to the condition existing immediately prior to the placement of such Tenant’s Signage. If Tenant fails to timely remove such Tenant’s Signage or to restore the areas in which such Tenant’s Signage was located, as provided in the immediately preceding sentence, then Landlord may perform such work, and all actual costs incurred by Landlord in so performing shall be reimbursed by Tenant to Landlord within thirty (30) days after Tenant’s receipt of an invoice therefor. The TCCs of this Section 23.3.3 shall survive the expiration or earlier termination of this Lease.

ARTICLE 24 - COMPLIANCE WITH LAW

Tenant shall not do anything or suffer anything to be done in or about the Premises or the Project which will in any way conflict with any law, statute, ordinance, decrees, codes, common law, judgments, orders, rulings, awards or other governmental or quasi-governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated including any “Environmental Laws” as that term is defined in Section 30.33 of this Lease (“Applicable Laws”). At its sole cost and expense, Tenant shall promptly comply with all such governmental measures to the extent that such governmental measures relate to Tenant’s particular manner of use of the Premises for other than general office purposes, the Tenant Improvements located in the Premises, or any Alterations thereof. Should any standard or regulation now or hereafter be imposed on Landlord or Tenant by a state, federal or local governmental body charged with the establishment, regulation and enforcement of occupational, health or safety standards for employers, employees, landlords or tenants, then Tenant agrees, at its sole cost and expense, to comply promptly with such standards or regulations to the extent such standards or regulations relate to Tenant’s particular manner of use of the Premises for other than general office purposes, the Tenant Improvements located in the Premises, or any Alterations thereof; provided that Landlord shall comply with any standards or regulations which relate to the Base Building or the Building

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Systems, unless such compliance obligations are triggered by the Tenant Improvements or the Alterations in the Premises, in which event such compliance obligations shall be performed by Tenant at Tenant’s sole cost and expense. The judgment of any court of competent jurisdiction or the admission by either party hereto in any judicial action, regardless of whether this other party is a party thereto, that such party has violated any of said governmental measures, shall be conclusive of that fact as between Landlord and Tenant. Landlord shall comply with all Applicable Laws relating to the Project, Base Building and Building Systems, provided that compliance with such Applicable Laws is not the responsibility of Tenant under this Lease, and provided further that Landlord’s failure to comply therewith would prohibit Tenant from obtaining or maintaining a certificate of occupancy for the Premises, or would unreasonably and materially affect the safety of Tenant’s Parties or create a significant health hazard for Tenant’s Parties or otherwise materially interfere with or materially affect Tenant’s Permitted Use and enjoyment of the Premises. Landlord shall be permitted to include in Operating Expenses any costs or expenses incurred by Landlord under this Article 24 to the extent consistent with, and amortized to the extent required by, the TCCs of this Lease.

ARTICLE 25 - LATE CHARGES

If any installment of Rent or any other sum due from Tenant shall not be received by Landlord or Landlord’s designee within five (5) business days following the date when due (the “Cure Period”) on more than one occasion in any Lease Year, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the overdue amount. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord’s other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord’s remedies in any manner. In addition to the late charge described above, any Rent or other amounts owing hereunder which are not paid within the Cure Period shall bear interest from such due date until paid at an annual interest rate equal to the Prime Rate (as stated under the column “Money Rates” in The Wall Street Journal) plus two percent (2%); provided, however, in no event shall such annual interest rate exceed the highest annual interest rate permitted by Applicable Law.

ARTICLE 26 - LANDLORD’S RIGHT TO CURE DEFAULT: PAYMENTS BY TENANT

26.1 Landlord’s Cure. All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenant’s sole cost and expense and without any reduction of Rent, except to the extent, if any, otherwise expressly provided herein. If Tenant shall fail to perform any obligation under this Lease, and such failure shall continue in excess of the time allowed under Section 19.1.2. above, unless a specific time period is otherwise stated in this Lease, Landlord may, but shall not be obligated to, make any such payment or perform any such act on Tenant’s part without waiving its rights based upon any default of Tenant and without releasing Tenant from any obligations hereunder.

26.2 Tenant’s Reimbursement. Except as may be specifically provided to the contrary in this Lease, Tenant shall pay to Landlord, within fifteen (15) days following delivery by Landlord to Tenant of receipts therefor: (i) sums equal to expenditures reasonably made and obligations incurred by Landlord in connection with the remedying by Landlord of Tenant’s defaults pursuant to the provisions of Section 26.1: and (ii) sums equal to all losses, costs, liabilities, damages and expenses referred to in Article 10 of this Lease. Tenant’s obligations under this Section 26.2 shall survive the expiration or sooner termination of the Lease Term.

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ARTICLE 27 - ENTRY BY LANDLORD

Landlord reserves the right during normal business hours, when accompanied by a representative of Tenant and upon reasonable advance notice to Tenant (except in the case of an emergency), and in compliance with Tenant’s reasonable security measures, to enter the Premises to (i) inspect them; (ii) show the Premises to prospective purchasers, mortgagees or, during the last nine (9) months of the Lease Term, tenants, or to current or prospective mortgagees, ground or underlying lessors or insurers; (iii) post notices of nonresponsibility; or (iv) improve or repair the Premises or the Building, or for structural alterations, repairs or improvements to the Building or the Building’s systems and equipment. Notwithstanding anything to the contrary contained in this Article 27, Landlord may enter the Premises at any time to (A) perform services required of Landlord, including janitorial service; (B) take possession due to any breach of this Lease in the manner provided herein; and (C) during normal business hours, when accompanied by a representative of Tenant and upon forty-eight (48) hours prior notice, perform any covenants of Tenant which Tenant fails to perform. Landlord may make any such entries without the abatement of Rent and may take such reasonable steps as required to accomplish the stated purposes. No action by Landlord pursuant to this paragraph shall entitle Tenant to an abatement of rent or to terminate this Lease or otherwise release Tenant from any of Tenant’s obligations under this Lease, and Tenant hereby waives any claims for damages or for any injuries or inconvenience to or interference with Tenant’s business, lost profits, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby, except with respect to damage to Tenant’s personal property or the amount of any physical injury, but only to the extent caused by the gross negligence or willful misconduct of Landlord. For each of the above purposes, Landlord shall at all times have an electronic card key and key with which to unlock all the doors in the Premises, excluding Tenant’s vaults, safes and special security areas designated in advance by Tenant (the “Security Areas”). Notwithstanding anything set forth in this Article 27 to the contrary, Landlord shall have no access or inspection rights as to the Security Areas, except in the event of an emergency where such entry is reasonably required. In an emergency, Landlord shall have the right to use any means that Landlord may deem proper to open the doors in and to the Premises, provided Landlord has reasonably attempted, but to no avail, to obtain Tenant’s immediate cooperation in connection therewith. No entry into the Premises by Landlord shall be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an actual or constructive eviction of Tenant from any portion of the Premises. No provision of this Lease shall be construed as obligating Landlord to perform any repairs, alterations or decorations except as otherwise expressly agreed to be performed by Landlord herein.

ARTICLE 28 - TENANT PARKING

Tenant and the Tenant’s parties (including Tenant’s visitors) shall be entitled to utilize, without charge, commencing on the Lease Commencement Date, the amount of unreserved parking set form in Section 8 of the Summary, for the Premises, which parking shall pertain to the Project parking areas. Separate and apart from the allotment of parking provided in the Summary, Landlord shall provide the number of handicapped parking spaces required by Applicable Laws. Landlord hereby grants Tenant a license (the “License”) to use, on a nonexclusive basis, up to thirty five (35) parking spaces on a parcel adjacent to the Building which is not part of the Project, in the area shown on Exhibit A (the “Licensed Parking Area”). The License shall remain in force until the expiration or earlier termination of this Lease, at which time the License shall automatically terminate. Tenant shall not be required to pay Base Rent for the use of the Licensed Parking Area, but Tenant’s use thereof shall be subject to all of the other terms and conditions of this Lease (including without limitation Tenant’s insurance and indemnity obligations hereunder). The License shall be binding on any successor owner of the Licensed Parking Area, and if, for any reason during the Lease Term Tenant is unable to use the Licensed Parking Area as contemplated hereunder, Tenant shall be entitled to construct, at its sole expense, a covered walkway from “Parking Structure 1” (as so designated on Exhibit A), subject to the terms and conditions Articles 8

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and 9 hereof. Tenant shall cooperate with Landlord to attempt to require that Tenant Parties comply with the Rules and Regulations which are prescribed from time to time by Landlord for the orderly operation and use of the parking areas where the parking is located, including any sticker or other identification system established by Landlord, Tenant’s cooperation in seeing that Tenant’s employees and visitors also comply with such rules and regulations and Tenant not being in default under this Lease. Landlord specifically reserves the right to change the size, configuration, design, layout and all other aspects of the Project parking areas and improvements (provided that Tenant’s parking rights are not reduced as a result thereof and as long as Tenant’s obligations are not materially or unreasonably increased as a result thereof and such change(s) do not materially adversely affect Tenant’s use or occupancy of the Premises or create a security risk for Tenant or its employees) at any time upon thirty (30) days’ prior written notice and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, temporarily close-off or restrict access to the Project parking areas only for purposes of permitting or facilitating any such construction, alteration or improvements, not to exceed, without Tenant’s approval, ten (10) business days in any calendar year. Landlord may delegate its responsibilities hereunder to a parking operator in which case such parking operator shall have all the rights of control attributed hereby to the Landlord. The parking provided to by Tenant pursuant to this Article 28 is provided to Tenant solely for use by Tenant’s own personnel, visitors and Tenant’s occupants and such parking spaces may not be transferred, assigned, subleased or otherwise alienated by Tenant, except on a pro-rata basis in connection with an assignment or subletting of the Premises permitted or approved in accordance with the TCCs of Article 14.

ARTICLE 29 - RIGHT TO USE PERSONAL PROPERTY

Landlord hereby grants to Tenant the right to use the existing furniture and other personal property (collectively, the “Personal Property”) located in the Premises during the Lease Term at no additional cost. The Personal Property is more particularly listed on Exhibit D attached hereto (“Inventory List”). Within thirty (30) days after the Lease Commencement Date, Landlord and Tenant shall conduct a “walk-through” inspection of the Premises to confirm the completeness and accuracy of the Personal Property shown on the Inventory List. If as a result of the walk-through inspection, the parties determine that changes to the Inventory List are warranted, such list shall be updated and the parties agree to execute an amendment to this Lease reflecting such changes to the Inventory List. Tenant shall be responsible for the maintenance and repair of the Personal Property during the Lease Term at its sole cost and expense and shall insure the Personal Property as part of Tenant’s property insurance required to be carried hereunder. So long as this Lease is not terminated due to any default beyond applicable notice and cure periods by Tenant, then Tenant shall be entitled to purchase the Personal Property from Landlord concurrently with the expiration of the Lease Term for Ten Dollars ($10.00); provided, however, that Tenant shall not be entitled to purchase the generators and power screens included in the Personal Property. If Tenant is not entitled to purchase the Personal Property or elects not to do so, then upon the expiration or earlier termination of this Lease, Tenant shall return the Personal Property to Landlord in its condition existing as of the Effective Date, reasonable wear and tear excepted.

ARTICLE 30 - MISCELLANEOUS PROVISIONS

30.1 Terms: Captions. The words “Landlord” and “Tenant” as used herein shall include the plural as well as the singular. The necessary grammatical changes required to make the provisions hereof apply either to corporations or partnerships or individuals, men or women, as the case may require, shall in all cases be assumed as though in each case fully expressed. The captions of Articles and Sections are for convenience only and shall not be deemed to limit, construe, affect or alter the meaning of such Articles and Sections.

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30.2 Binding Effect. Subject to all other provisions of this Lease, each of the covenants, conditions and provisions of this Lease shall extend to and shall, as the case may require, bind or inure to the benefit not only of Landlord and of Tenant, but also of their respective heirs, personal representatives, successors or assigns, provided this clause shall not permit any assignment by Tenant contrary to the provisions of Article 14 of this Lease.

30.3 No Air Rights. Except for Tenant’s rights regarding Telecommunications Equipment set forth in Article 22, no rights to any view or to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease. If at any time any windows of the Premises are temporarily darkened or the light or view therefrom is obstructed by reason of any repairs, improvements, maintenance or cleaning in or about the Project, the same shall be without liability to Landlord and without any reduction or diminution of Tenant’s obligations under this Lease.

30.4 Transfer of Landlord’s Interest. Tenant acknowledges that Landlord has the right to transfer all or any portion of its interest in the Project or Building and in this Lease, and Tenant agrees that in the event of any such transfer, provided that Landlord has transferred to a transferee any Security Deposit held by Landlord in connection with this transaction, Landlord shall automatically be released from all liability under this Lease not accrued on or prior to the date of the transfer, and Tenant agrees to look solely to such transferee for the performance of Landlord’s obligations hereunder for events occurring after the date of transfer and to attorn to such transferee. Tenant further acknowledges that Landlord may assign its interest in this Lease to a mortgage lender as additional security. Such assignment shall not release Landlord from its obligations hereunder and Tenant shall continue to look to Landlord for the performance of its obligations hereunder. Landlord acknowledges that to the extent any Landlord obligation or liability under this Lease is accrued prior to the date of such transfer or assignment which is not assumed by the transferee or assignee, the same shall remain an obligation of Landlord.

30.5 Prohibition Against Recording. Neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Landlord or Tenant or by anyone acting through, under or on behalf of either party.

30.6 Landlord’s Title. Landlord’s title is and always shall be paramount to the title of Tenant. Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord.

30.7 Relationship of Parties. Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent, partnership, joint venturer or any association between Landlord and Tenant.

30.8 Application of Payments. Landlord shall have the right to apply payments received from Tenant pursuant to this Lease, regardless of Tenant’s designation of such payments, to satisfy any obligations of Tenant hereunder, in such order and amounts as Landlord, in its sole discretion, may elect.

30.9 Time of Essence. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor.

30.10 Partial Invalidity. If any term, provision or condition contained in this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Lease shall be valid and enforceable as permitted by law.

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30.11 No Warranty. In executing and delivering this Lease, Tenant has not relied on any representations (except as specifically set forth in this Lease), including, but not limited to, any representation as to the amount of any item comprising Additional Rent or the amount of the Additional Rent in the aggregate or that Landlord is furnishing the same services to other tenants, at all, on the same level or on the same basis, or any warranty or any statement of Landlord which is not set forth herein or in one or more of the exhibits attached hereto.

30.12 Landlord Exculpation. The liability of Landlord or the Landlord Parties to Tenant for any default by Landlord under this Lease or arising in connection herewith or with Landlord’s operation, management, leasing, repair, renovation, alteration or any other matter relating to the Project or the Premises shall be limited solely and exclusively to Landlord’s equity interest in the Project. Neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. The limitations of liability contained in this Section 30.12 shall inure to the benefit of Landlord’s and the Landlord Parties’ present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective partners, heirs, successors and assigns. Under no circumstances shall any present or future partner of Landlord (if Landlord is a partnership), or trustee or beneficiary (if Landlord or any partner of Landlord is a trust), have any liability for the performance of Landlord’s obligations under this Lease. Notwithstanding any contrary provision herein, neither Landlord nor the Landlord Parties shall be liable under any circumstances for injury or damage to, or interference with, Tenant’s business, including but not limited to, loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss of use, or any other consequential damages.

30.13 Entire Agreement. It is understood and acknowledged that there are no oral agreements between the parties hereto affecting this Lease and this Lease constitutes the parties’ entire agreement with respect to the leasing of the Premises and supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed by Landlord to Tenant with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease. None of the TCCs of this Lease can be modified, deleted or added to except in writing signed by the parties hereto.

30.14 Right to Lease. Landlord reserves the absolute right to effect such other tenancies in the Project as Landlord in the exercise of its sole business judgment shall determine to best promote the interests of the Building or Project. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or type or number of tenants shall, during the Lease Term, occupy any space in the Building or Project.

30.15 Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God (including inclement weather), inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease (collectively, a “Force Majeure”), notwithstanding anything to the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party’s performance caused by a Force Majeure; provided, however, such extension shall not exceed sixty (60) consecutive days.

30.16 Notices. All notices, demands, statements, designations, approvals or other communications (collectively, “Notices”) given or required to be given by either party to the other

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hereunder or by law shall be in writing, shall be (A) sent by United States certified or registered mail, postage prepaid, return receipt requested (“Mail”), (B) transmitted by telecopy, if such telecopy is promptly followed by a Notice sent by Mail, (C) delivered by a nationally recognized overnight courier, or (D) delivered personally. Any Notice shall be sent, transmitted, or delivered, as the case may be, to Tenant at the appropriate address set forth in Section 10 of the Summary, or to such other place as Tenant may from time to time designate in a Notice to Landlord, or to Landlord at the addresses set forth below, or to such other places as Landlord may from time to time designate in a Notice to Tenant. Any Notice will be deemed given (i) three (3) days after the date it is posted if sent by Mail, (ii) the date the telecopy is transmitted, (iii) the date the overnight courier delivery is made, or (iv) the date personal delivery is made or attempted to be made. If Tenant is notified of the identity and address of Landlord’s mortgagee or ground or underlying lessor, Tenant shall give to such mortgagee or ground or underlying lessor written notice of any default by Landlord under the TCCs of this Lease by registered or certified mail, and such mortgagee or ground or underlying lessor shall be given a reasonable opportunity to cure such default prior to Tenant’s exercising any remedy available to Tenant. As of the date of this Lease, any Notices to Landlord and Tenant must be sent, transmitted, or delivered, as the case may be, to the following addresses:

Landlord:

3Com Corporation

5500 Great America Parkway

Santa Clara, CA 95052

Attention: Real Estate Department

with copies to:

3Com Corporation

5500 Great America Parkway

Santa Clara, CA 95052

Attention: Legal Department

And

Gray Cary Ware & Freidenrich LLP

400 Hamilton Ave.

Palo Alto, CA 94301-1833

Tenant:

Magma Design Automation, Inc.

2 Results Way

Cupertino, CA 95104

with a copy to:

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Magma Design Automation, Inc.

2 Results Way

Cupertino, CA 95104

And

Fenwick & West LLP

801 California Street

Mountain View, CA 94041

30.17 Joint and Several. If there is more than one Tenant, the obligations imposed upon Tenant under this Lease shall be joint and several.

30.18 Authority. Each individual executing this Lease on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Lease and that each person signing on behalf of Tenant is authorized to do so. In such event, Tenant shall, within ten (10) days after execution of this Lease, deliver to Landlord satisfactory evidence of such authority and, if a corporation, upon demand by Landlord, also deliver to Landlord satisfactory evidence of (i) good standing in Tenant’s state of incorporation and (ii) qualification to do business in California.

30.19 Attorneys’ Fees. In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease or for any other relief against the other, then all costs and expenses, including reasonable attorneys’ fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment.

30.20 Governing Law. This Lease shall be construed and enforced in accordance with the laws of the State of California. Except as otherwise provided herein, all disputes arising hereunder, and all legal actions and proceedings related thereto, shall be solely and exclusively initiated and maintained in the court with the appropriate jurisdiction located in the City of San Diego, County of San Diego, State of California. IN ANY ACTION OR PROCEEDING ARISING HEREFROM, LANDLORD AND TENANT HEREBY CONSENT TO (I) THE JURISDICTION OF ANY COMPETENT COURT WITHIN THE STATE OF CALIFORNIA, AND (II) SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA LAW. IN THE EVENT LANDLORD COMMENCES ANY SUMMARY PROCEEDINGS OR ACTION FOR NONPAYMENT OF BASE RENT OR ADDITIONAL RENT, TENANT SHALL NOT INTERPOSE ANY COUNTERCLAIM OF ANY NATURE OR DESCRIPTION (UNLESS SUCH COUNTERCLAIM SHALL BE MANDATORY) IN ANY SUCH PROCEEDING OR ACTION, BUT SHALL BE RELEGATED TO AN INDEPENDENT ACTION AT LAW.

30.21 Submission of Lease. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of, option for or option to lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant.

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30.22 Brokers. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only the real estate brokers or agents specified in Section 11 of the Summary (the “Brokers”), and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation reasonable attorneys’ fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent, other than the Brokers, occurring by, through, or under the indemnifying party.

30.23 Independent Covenants. This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord’s expense or to any setoff of the Rent or other amounts owing hereunder against Landlord.

30.24 Project or Building Name and Signage. Landlord shall have the right at any time to change the name of the Project or Building and to install, affix and maintain any and all signs on the exterior and on the interior of the Project or Building as Landlord may, in Landlord’s sole discretion, desire. Tenant shall not use the name of the Project or Building or use pictures or illustrations of the Project or Building in advertising or other publicity or for any purpose other than as the address of the business to be conducted by Tenant in the Premises, without the prior written consent of Landlord.

30.25 Counterparts. This Lease may be executed in counterparts with the same effect as if both parties hereto had executed the same document. Both counterparts shall be construed together and shall constitute a single lease.

30.26 Confidentiality. Landlord and Tenant each hereby acknowledge that the contents of this Lease and any related documents are confidential information. Each of the parties shall keep such confidential information strictly confidential and shall not disclose such confidential information to any person or entity other than Landlord’s or Tenant’s partners, administrators, consultants, financial, legal, and space planning consultants, a prospective or current purchaser, mortgagee, or ground or underlying lessor of the Building or the Project, a prospective Transferee, and except as required by Applicable Laws or in connection with a dispute or litigation hereunder or as required by subpoena. Tenant shall have the right to review and approve (with no less than seventy-two (72) hour advance notice) any press releases of Landlord which reference Tenant by name (or makes reference in such a manner to preclude any entity other than Tenant).

30.27 Transportation Management. Tenant shall fully comply with all present or future programs required by Applicable Laws (provided Landlord provides Tenant with sufficient prior notice of such program’s requirements) which are intended to manage parking, transportation or traffic in and around the Building, and in connection therewith, Tenant shall take responsible action for the transportation planning and management of all employees located at the Premises by working directly with Landlord, any governmental transportation management organization or any other transportation- related committees or entities.

30.28 No Violation. Landlord and Tenant hereby warrant and represent that neither its execution of nor performance under this Lease shall cause either party to be in violation of any agreement, instrument, contract, law, rule or regulation by which it is bound, and each party shall protect, defend, indemnify and hold the other harmless against any claims, demands, losses, damages, liabilities,

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costs and expenses, including, without limitation, reasonable attorneys’ fees and costs, arising from Tenant’s breach of this warranty and representation.

30.29 Communications and Computer Lines. Tenant may install, maintain, replace, remove or use any communications or computer wires and cables (collectively, the “Lines”) at the Project in or serving the Premises, provided that (i) Tenant shall obtain Landlord’s prior written consent, use an experienced and qualified contractor approved in writing by Landlord, and comply with all of the other provisions of Articles 7 and 8 of this Lease, (ii) the Lines therefor (including riser cables) shall be appropriately insulated to prevent excessive electromagnetic fields or radiation, and shall be surrounded by a protective conduit reasonably acceptable to Landlord, (iii) any new or existing, Lines servicing the Premises shall comply with all applicable governmental laws and regulations, and (iv) Tenant shall pay all costs in connection therewith. Landlord reserves the right to require that Tenant remove any Lines located in or serving the Premises which are installed in violation of these provisions, or which are at any time in violation of any laws or cause a dangerous or potentially dangerous condition.

30.30 Hazardous Substances.

30.30.1 Definitions. For purposes of this Lease, the following definitions shall apply: “Hazardous Material(s)” shall mean any substance or material that is described as a toxic or hazardous substance, waste, material, pollutant, contaminant or infectious waste, or any matter that in certain specified quantities would be injurious to the public health or welfare, or words of similar import, in any of the “Environmental Laws,” as that term is defined below in this Section 30.31.1, or any other words which are intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity or reproductive toxicity and includes, without limitation, asbestos, petroleum (including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel, or any mixture thereof), petroleum products, polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive matter, medical waste, and chemicals which may cause cancer or reproductive toxicity. “Environmental Laws” shall mean all federal, state, local and quasi-governmental laws (whether under common law, statute or otherwise), ordinances, decrees, codes, rulings, awards, rules, regulations and guidance documents now or hereafter be enacted or promulgated as amended from time to time, in any way relating to or regulating Hazardous Materials.

30.30.2 Compliance with Environmental Laws. Landlord covenants that during the Lease Term, Landlord shall comply with all Environmental Laws in accordance with, and as required by, the TCCs of Article 24 of this Lease.

30.30.3 Indemnifications. Landlord, for itself and its successors, agrees to indemnify, defend, protect and hold harmless the Tenant Parties from any and all Claims arising from any Hazardous Materials to the extent placed in, on, under or about the Project by Landlord or any Landlord Parties. Tenant, for itself and its successors, agrees to indemnify, defend, protect and hold harmless the Landlord Parties from any and all Claims arising from any Hazardous Materials to the extent placed in, on, under or about the Premises or the Project by Tenant or Tenant Parties.

30.31 Development of the Project.

30.31.1 Subdivision. Landlord reserves the right to further subdivide all or a portion of the Project.

30.31.2 The Other Improvements. If portions of the Project or property adjacent to the Project (collectively, the “Other Improvements”) are at any time owned by an entity

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other than Landlord, Landlord, at its option, may enter into an agreement with the owner or owners of any or all of the Other Improvements to provide (i) for reciprocal rights of access and/or use of the Project and the Other Improvements, (ii) for the common management, operation, maintenance, improvement and/or repair of all or any portion of the Project and the Other Improvements, (iii) for the allocation of a portion of the Direct Expenses to the Other Improvements and the operating expenses and taxes for the Other Improvements to the Project, and (iv) for the use or improvement of the Other Improvements and/or the Project in connection with the improvement, construction, and/or excavation of the Other Improvements and/or the Project. At Landlord’s request, Tenant shall subordinate this Lease to any such agreement per Section 5.3. Nothing contained herein shall be deemed or construed to limit or otherwise affect Landlord’s right to convey all or any portion of the Project or any other of Landlord’s rights described in this Lease.

30.31.3 Construction of Project and Other Improvements. Tenant acknowledges that portions of the Project and/or the Other improvements may be under construction following Tenant’s occupancy of the Premises, and that such construction may result in levels of noise, dust, obstruction of access, etc. which are in excess of that present in a fully constructed project. Tenant hereby waives any and all rent offsets or claims of constructive eviction which may arise in connection with such construction, including any offsets or claims of constructive eviction which may arise in connection with the Building Renovations (as defined in Section 30.31.4 below), provided such construction by Landlord does not adversely impact Tenant’s use or occupancy of the Premises or the Project

30.31.4 Building Renovations. It is specifically understood and agreed that Landlord has made no representation or warranty to Tenant and has no obligation and has made no promises to alter, remodel, improve, renovate, repair or decorate the Premises, Building, or any part thereof and that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant except as specifically set forth herein or in the Tenant Work Letter. However, Tenant hereby acknowledges that Landlord is currently renovating or may during the Lease Term renovate, improve, alter, or modify (collectively, the “Renovations”) the Project, the Building and/or the Premises including without limitation the parking structure, common areas, systems and equipment, roof, and structural portions of the same. Landlord shall have no responsibility or for any reason be liable to Tenant for any direct or indirect injury to or interference with Tenant’s business arising from the Renovations.

30.32 No Consequential Damages. Notwithstanding any provision of this Lease to the contrary, except as specifically set forth in Article 16 of this lease, under no circumstances shall either party be liable to the other for any consequential damages.

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IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the day and date first above written.

“Landlord”:
3COM CORPORATION, a California corporation
By:	/s/    MARK SLAVEN
	Its: Chief Financial Officer
By:	/s/    MARK MICHAEL
	Its: SVP, General Counsel
“Tenant”:
MAGMA DESIGN AUTOMATION, INC., a Delaware corporation
By:	/s/    GREGORY C. WALKER
	Its: Chief Financial Officer
By:	/s/    CAMELLIA NGO
	Its: Director, Corporate Facilities

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EXHIBIT A

SITE PLAN

[GRAPHIC]

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EXHIBIT B

TENANT WORK LETTER

A. Tenant Improvements. The term “Tenant Improvements” shall mean those improvements that Tenant shall construct in the Premises pursuant to Paragraph B below.

B. Procedure and Time Schedules.

1. Tenant Improvements. Tenant intends to construct the following improvements on the Premises:

• Customize two (2) large training rooms;

• Provide a total of sixty (60) private offices, including 5-8 executive offices, and 4-6 conference rooms;

• Modify the existing lab/IT area on the first floor to approximately 4,000 square feet in a single room; and

• Modify and/or demolish the lab spaces on floors 2, 3 and 4 of the Building.

2. Approval of Plans. Tenant shall prepare and submit to Landlord for Landlord’s approval, which approval shall not be unreasonably withheld, preliminary plans and specifications for the Tenant Improvements which Tenant desires to have installed on the Premises. As soon as the final plans, specifications and working drawings are completed, Tenant shall deliver the same to Landlord for its approval, which shall not be unreasonably withheld, and which shall be based solely upon whether such final plans are consistent with the preliminary plans and the terms of this Lease. In all events, the parties shall use their best efforts to reach agreement so that such plans may be submitted for governmental approval within seven (7) business days from submission of such plans to Landlord for its approval. If Landlord and Tenant agree on such plans, they shall indicate their approval thereof by initialing and dating the same. Tenant shall submit such final plans, specifications and working drawings to all appropriate governmental agencies for approval. Tenant shall notify Landlord of any changes required by any governmental agencies, and Landlord shall have five (5) business days thereafter to indicate its approval thereof. The final plans, specifications and working drawings as approved, and all change orders specifically permitted pursuant to Paragraph C below, shall be referred to herein as the “Approved Plans.”

C. Commencement and Completion of the Tenant Improvements. As soon as (1) the Approved Plans have been developed as provided above, and (2) all necessary governmental approvals have been obtained, then Tenant shall thereafter commence construction of such improvements and shall diligently prosecute such construction to completion. The Tenant Improvements shall be constructed by Tenant substantially in accordance with the Approved Plans, in a good and workmanlike manner, and in compliance with all applicable regulations, ordinances, building codes, and statutes of lawful governmental authority, including but not limited to the Americans with Disabilities Act.

D. Payment for Costs. Tenant shall pay all costs (“Tenant Improvement Costs”) associated with construction of the Tenant Improvements and Landlord shall have no responsibility or liability for such construction costs.

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E. Compliance with Article 8 and Article 9 of the Lease. Tenant shall comply with the provisions of Article 8 and Article 9 of the Lease with respect to the construction of the Tenant Improvements.

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EXHIBIT C

RULES AND REGULATIONS

1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant’s expense and without notice, any sign installed or displayed in violation of this rule.

2. Except as consented to in writing by Landlord or in accordance with Building standard improvements, no draperies, curtains, blinds, shades, screens or other devices shall be hung at or used in connection with any window or exterior door or doors of the Premises. No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises.

3. Tenant shall not obstruct any sidewalks, halls, lobbies, passages, exits, entrances, elevators or stairways of the Building. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building or make any roof or terrace penetrations. Tenant shall not allow anything to be placed on the outside terraces or balconies without the prior written consent of Landlord.

4. Tenant shall deliver to Landlord, upon the termination of its tenancy, all keys and all electronic card keys to all locks for doors on the Premises.

5. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord’s instructions for their installation.

6. Tenant shall not place a load upon any floor of the Premises which exceeds the maximum load per square foot which the floor was designed to carry and which is allowed by law. Tenant’s business machines and mechanical equipment which cause noise or vibration which may be transmitted to the structure of the Building or to any space therein, and which is objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant’s expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration.

7. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations. No animal, except seeing eye dogs when in the company of their masters, may be brought into or kept in the Building.

8. Tenant shall cooperate fully with Landlord to assure the most effective operation of the Building’s heating and air-conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice.

9. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building.

10. Landlord reserves the right to prevent access to the Building by closing the doors or by other appropriate action in case of invasion, mob, riot, public excitement or other commotion.

11. Tenant shall close and lock the doors of its Premises, shut off all water faucets or other water apparatus and turn off all lights and other equipment which is not required to be continuously run.

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Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or Landlord for noncompliance with this Rule.

12. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be placed therein. The expense of any breakage, stoppage or damage resulting from any violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it.

13. Except as otherwise provided in the Lease, Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere.

14. Tenant shall not cut or bore holes for wires in the partitions, woodwork or plaster of the Premises. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair, or be responsible for the cost of repair of any damage resulting from noncompliance with this Rule.

15. Canvassing, soliciting and distributing handbills or any other written material and peddling in the Building are prohibited, and each tenant shall cooperate to prevent these activities.

16. Tenant shall store all its trash and garbage within its Premises or in enclosed and/or screened outside areas as approved by Landlord, which approval shall not be unreasonably withheld.

17. Use by Tenant of approved equipment for brewing coffee, tea, hot chocolate and similar beverages and microwaving food shall be permitted, provided that the equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations.

18. Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant, except as Tenant’s address, without the written consent of Landlord.

19. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. Tenant shall be responsible for any increased insurance premiums attributable to Tenant’s use of the Premises, Building or Project.

20. Tenant assumes any and all responsibility for protecting its Premises from theft and robbery, which responsibility includes keeping doors locked and other means of entry to the Premises closed.

21. Tenant shall not use the Premises, or suffer or permit anything to be done on, in or about the Premises, which may result in an increase to Landlord in the cost of insurance maintained by Landlord on the Building and Common Areas.

22. Tenant’s requests for assistance will be attended to only upon appropriate application to the office of the Building by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord.

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23. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no waiver by Landlord shall be construed as a waiver of the Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing the Rules and Regulations against any or all of the tenants of the Building.

24. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Building.

25. Landlord reserves the right to make other reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order therein. Tenant agrees to abide by all Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted.

26. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant’s employees, agents, clients, customers, invitees and guests.

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EXHIBIT E

DETERMINATION OF FAIR MARKET VALUE

The term “Fair Market Value” of Base Rent for the Extended Term, as used in Section 2.2, above, shall be determined as follows: Within forty five (45) days after receiving Tenant’s notice exercising its Option to Extend, Landlord shall notify Tenant of its determination of the Fair Market Value Base Rent. Tenant shall have thirty (30) days from the date of such notice (the “Response Period”) to notify Landlord whether it disagrees with such determination. If Tenant fails to so timely notify Landlord during the Response Period, the Fair Market Value Base Rent shall be as provided in Landlord’s notice. If Tenant gives Landlord timely notice of its disagreement, Landlord and Tenant shall negotiate in good faith to agree on Fair Market Value for an additional fifteen (15) day period. If the parties have not resolved Fair Market Value within such time, promptly thereafter each shall specify in writing to each other the name and address of a person to act as the appraiser or broker on its behalf. Each such person shall be an MAI certified commercial real estate broker or appraiser with at least five (5) years of experience with commercial and industrial properties in the Silicon Valley area. If either party fails to timely appoint an appraiser or broker, the determination of the timely appointed appraiser or broker shall be final and binding.

The two appraiser/brokers shall have thirty (30) days from the day of their respective appointments (the “Determination Period”) to make their respective determinations and agree on Fair Market Value. If the two appraiser/brokers selected by the Landlord and Tenant cannot reach agreement on Fair Market Value within such time, the two appraisers shall within ten (10) days after expiration of the Determination Period jointly appoint an impartial third appraiser/broker with qualifications similar to those of the first two appraiser/brokers, and Fair Market Value shall be established by the three appraiser/brokers in accordance with the following procedures: The appraiser/broker selected by each party shall state in writing his other determination of Fair Market Value. The first two appraiser/brokers shall arrange for the simultaneous delivery of their determinations to the third appraiser/broker no later than ten (10) days after the appointment of such third appraiser/broker The role of the third appraiser shall be to select which of the two proposed determinations most closely approximates the third appraiser’s determination of Fair Market Value, and shall have no more than twenty (20) days in which to select the final determination. The third appraiser shall have no right to propose a middle ground or any modification of the two proposed determinations. The determination chosen by the third appraiser shall constitute the decision of the appraisers and be final and binding on the parties. Each party shall pay the cost of its own appraiser and shall share equally the cost of the third appraiser.

In the event the appraisers have not determined Fair Market Value as of the date the Option Period is to begin, Tenant shall on an interim basis pay Landlord monthly rent based upon Landlord’s determination of Fair Market Value as stated in Landlord’s notice to Tenant. If the appraisers’ final determination is less than Landlord’s determination, Tenant shall be entitled to a credit against the next rental payment due from Tenant hereunder in the amount of the difference. Alternatively, if the appraisers’ final determination is more than Landlord’s determination, Tenant shall pay such difference with the next rental payment due.

Nothing contained herein shall prevent Landlord and Tenant from jointly selecting a single appraiser/broker to determine Fair Market Value if both Landlord and Tenant agree in writing to do so within the Response Period, in which event the determination of the appraiser/broker shall be conclusively deemed the Fair Market Value Base Rent. In such event, Landlord and Tenant shall share equally the fees and expenses of said joint appraiser/broker.

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EX-31.1

Exhibit 31.1

Certification Pursuant to 18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Rajeev Madhavan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Magma Design Automation, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date November 14 , 2003

/s/ Rajeev Madhavan

Rajeev Madhavan

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification Pursuant to 18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Gregory C. Walker, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Magma Design Automation, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date November 14, 2003

/s/ Gregory C. Walker

Gregory C. Walker

Senior Vice President—Finance and Chief Financial

Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant To

Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Magma Design Automation, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rajeev Madhavan, Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods presented therein.

/s/ Rajeev Madhavan

Rajeev Madhavan

Chief Executive Officer

November 14, 2003

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant To

Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Magma Design Automation, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory C. Walker, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods presented therein.

/s/ Gregory C. Walker

Gregory C. Walker

Senior Vice President—Finance and

Chief Financial Officer

November 14, 2003

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.