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 October 2, 2005

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

On November 1, 2005, 35,273,484 shares of Registrant’s Common Stock, $.0001 par value were outstanding.

MAGMA DESIGN AUTOMATION, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED OCTOBER 2, 2005

INDEX

		Page
Part I: Financial Information		3
Item 1:	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets at October 2, 2005 and March 31, 2005	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended October 2, 2005 and September 30, 2004	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended October 2, 2005 and September 30, 2004	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4:	Controls and Procedures	55
Part II: Other Information		56
Item 1:	Legal Proceedings	56
Item 4:	Submission of Matters to a Vote of Security Holders	59
Item 6:	Exhibits	60
Signatures		62
Exhibit Index		63

2

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements.

MAGMA DESIGN AUTOMATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	October 2, 2005			March 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	53,471		$	20,622
Restricted cash		253			2,950
Short-term investments		35,000			114,896
Accounts receivable, net		29,057			33,851
Prepaid expenses and other current assets		5,909			7,088
Total current assets		123,690			179,407
Property and equipment, net		20,697			21,309
Intangibles, net		86,350			69,573
Goodwill		42,723			43,194
Restricted cash		3,570			—
Other assets		5,704			5,741
Total assets	$	282,734		$	319,224
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,850		$	3,010
Accrued expenses		26,093			22,321
Deferred revenue		21,986			20,745
Total current liabilities		49,929			46,076
Convertible subordinated notes		105,500			150,000
Other long-term liabilities		5,810			1,749
Total liabilities		161,239			197,825
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock		4			4
Additional paid-in capital		281,738			261,627
Deferred stock-based compensation		(4,073	)		(5,749	)
Accumulated deficit		(122,287	)		(115,644	)
Treasury stock		(32,651	)		(16,606	)
Accumulated other comprehensive loss		(1,236	)		(2,233	)
Total stockholders’ equity		121,495			121,399
Total liabilities and stockholders’ equity	$	282,734		$	319,224

See accompanying notes to unaudited condensed consolidated financial statements.

3

MAGMA DESIGN AUTOMATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	For the Three Months Ended						For the Six Months Ended
	October 2, 2005			September 30, 2004			October 2, 2005			September 30, 2004
Revenue:
Licenses	$	32,704		$	31,275		$	66,614		$	62,167
Services		7,182			5,653			12,104			10,790
Total revenue		39,886			36,928			78,718			72,957
Cost of revenue:
Licenses		6,483			1,695			10,897			3,003
Services*		4,525			3,815			8,382			7,549
Total cost of revenue		11,008			5,510			19,279			10,552
Gross profit		28,878			31,418			59,439			62,405
Operating expenses:
Research and development		11,381			10,524			22,356			20,093
In-process research and development		—			—			—			4,009
Sales and marketing		10,658			11,679			21,860			22,946
General and administrative		9,842			3,455			18,455			7,080
Amortization of intangible assets		2,882			4,093			6,470			8,568
Amortization of stock-based compensation**		1,273			116			2,945			574
Restructuring charge		—			(63	)		—			439
Total operating expenses		36,036			29,804			72,086			63,709
Operating income (loss)		(7,158	)		1,614			(12,647	)		(1,304	)
Other income (expense):
Interest income		586			556			1,246			1,109
Interest expense		(224	)		(251	)		(432	)		(497	)
Other income (expense), net		(352	)		(642	)		7,098			(1,204	)
Other income (expense), net		10			(337	)		7,912			(592	)
Net income (loss) before income taxes		(7,148	)		1,277			(4,735	)		(1,896	)
Benefit from (provision) for income taxes		528			(990	)		(1,908	)		(352	)
Net income (loss)	$	(6,620	)	$	287		$	(6,643	)	$	(2,248	)
Net income (loss) per common share
Basic	$	(0.19	)	$	0.01		$	(0.19	)	$	(0.07	)
Diluted	$	(0.19	)	$	0.01		$	(0.19	)	$	(0.07	)
Shares used in calculation:
Basic		34,098			33,734			34,115			33,702
Diluted		34,098			42,333			34,115			33,702
* Stock-based compensation included in cost of service revenue	$	47		$	2		$	47		$	6
** Components of stock-based compensation included in operating expenses:
Research and development	$	1,162		$	(16	)	$	2,796		$	274
Sales and marketing		68			18			76			43
General and administrative		43			114			73			257
	$	1,273		$	116		$	2,945		$	574

See accompanying notes to unaudited condensed consolidated financial statements.

4

MAGMA DESIGN AUTOMATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended
	October 2, 2005			September 30, 2004
Cash flows from operating activities:
Net loss	$	(6,643	)	$	(2,248	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		4,685			3,317
Amortization of intangible assets		16,898			11,306
In-process research and development		—			4,009
Provision for (recovery from) doubtful accounts		(150	)		165
Amortization of debt issuance costs		371			497
Impairment of or loss on strategic equity investments		511			665
Gain on repurchase of convertible notes, net of debt issuance cost write-off		(8,781	)		—
Loss on sale of short-term investments		661			—
Amortization of stock-based compensation		2,992			580
Restructuring charge		—			439
Income tax benefit realized from gain on repurchase of convertible notes		50			—
Income tax benefit realized from debt issuance costs		106			—
Change in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		5,196			2,456
Prepaid expenses and other assets		175			1,245
Accounts payable		(1,160	)		826
Accrued expenses		7,664			(4,902	)
Deferred revenue		1,241			99
Other long-term liabilities		(390	)		446
Net cash provided by operating activities		23,426			18,900
Cash flows from investing activities:
Purchase of intangible assets		(20,435	)		(11,918	)
Purchase of property and equipment		(1,995	)		(9,183	)
Purchase of short-term investments		(56,297	)		(85,409	)
Proceeds from sale and maturities of short-term investments		136,349			104,544
Purchase of strategic equity investments		(750	)		(1,100	)
Net cash provided by (used in) investing activities		56,872			(3,066	)
Cash flows from financing activities:
Proceeds from issuance of common stock		3,670			5,463
Repurchase of common stock		(16,045	)		(16,606	)
Repurchase of convertible notes, net		(34,668	)		—
Repayment of lease obligation		(332	)		—
Net cash used in financing activities		(47,375	)		(11,143	)
Effect of foreign currency translation on cash and cash equivalents		(74	)		438
Net increase in cash and cash equivalents		32,849			5,129
Cash and cash equivalents at beginning of period		20,622			17,634
Cash and cash equivalents at end of period	$	53,471		$	22,763
Supplemental disclosure:
Non-cash investing and financing activities:
Deferred stock-based compensation	$	(1,089	)	$	(458	)
Issuance of common stock (or issuable) in connection with intangible asset purchase	$	11,747		$	12,007
Issuance of common stock warrant in connection with intangible asset purchase	$	3,080		$	—
Purchase of fixed assets under capital leases	$	2,048		$	—

See accompanying notes to unaudited condensed consolidated financial statements.

5

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Basis of Presentation

The interim unaudited condensed consolidated financial statements included herein have been prepared by Magma Design Automation, Inc. (“Magma” or “the Company”), 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 unaudited 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 April 2, 2006. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Form 10-K for the year ended March 31, 2005, as filed with the SEC on June 14, 2005. The accompanying unaudited condensed consolidated balance sheet at March 31, 2005 is derived from audited consolidated financial statements at that date.

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.

Principles of Consolidation

The consolidated financial statements of Magma include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Accounts denominated in foreign-currency have been translated using the U.S. dollar as the functional currency.

Change in Fiscal Year End

On January 26, 2005, the Company’s Board of Directors approved a change in Magma’s fiscal year end from March 31 to a 52-53 week fiscal year ending on the first Sunday subsequent to March 31. After the fiscal year ended March 31, 2005, Magma’s fiscal years will consist of four quarters of 13 weeks each except for each seventh fiscal year, which will include one quarter with 14 weeks. The current fiscal year ends on April 2, 2006. All references to years or quarters in these notes to consolidated financial statements represent fiscal years or fiscal quarters, respectively, unless otherwise noted. As a result of this change, the first quarter of Magma’s fiscal year 2006 includes three additional days, the results of which are included in the accompanying condensed consolidated financial statements for the six months ended October 2, 2005.

Reclassifications

Certain amounts in the fiscal 2005 financial statements have been reclassified to conform with the fiscal 2006 presentation. Certain auction rate securities have been reclassified from cash equivalents to short-term investments. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction, at predetermined short-term intervals, usually every 7, 28 or 35 days. They trade at par and are callable at par on any interest payment date at the option of the issuer. Interest paid during a given period is based upon the interest rate determined during the prior auction.

6

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity provided through the interest rate reset. Based on the Company’s ability either to liquidate the holdings or to roll the investment over to the next reset period, the Company had historically classified some or all of these instruments as cash equivalents if the period between interest rate resets was 90 days or less.

The Company accounts for its marketable securities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Such investments are classified as “available for sale” and are reported at fair value in the Company’s balance sheets. The short-term nature and structure, the frequency with which the interest rate resets and the ability to sell auction rate securities at par and at the Company’s discretion indicates that such securities should more appropriately be classified as short-term investments with the intent of meeting the Company’s short-term working capital requirements.

Based upon the Company’s re-evaluation of these securities, Magma reclassified as short-term investments any auction rate securities previously classified as cash equivalents for the fiscal 2005 and 2004 periods. As a result, purchases and sales of short-term investments included in the consolidated statements of cash flows have been revised to reflect the purchase of $52.9 million and sale of $76.5 million auction rate securities during the six months ended September 30, 2004. This resulted in a decrease in cash used in investing activities by $23.6 million for the six months ended September 30, 2004. These reclassifications had no impact on the previously reported net income or cash flows from operations.

Recently Issued Accounting Pronouncements

In July 2005, the Accounting Standards Board (“FASB”) issued an Exposure Draft of a proposed interpretation “Accounting for Uncertain Tax Positions—an interpretation of FASB Statement No. 109.” This proposal seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement requirements related to accounting for income taxes. Specifically, the interpretation requires that an enterprise recognize in its financial statements, the best estimate of the impact of a tax position only if that position is probable of being sustained on audit based solely on the technical merits of the position. In evaluating whether the probable recognition threshold has been met, this proposed interpretation would require the presumption that the tax position will be evaluated during an audit by taxing authorities. The Exposure Draft is scheduled to be finalized in the first quarter of calendar year 2006. The Company is currently reviewing the provisions in the Exposure Draft to determine its impact to its consolidated financial statements.

In June 2005, the Emerging Issues Task Force (“EITF”) issued No. 05-06, “Determining the Amortization Period for Leasehold Improvements” (“EITF 05-6”). The pronouncement requires that leasehold improvements acquired in a business combination or purchase, subsequent to the inception of the lease, be amortized over the lesser of the useful life of the asset or the lease term that includes reasonably assured lease renewals as determined on the date of the acquisition of the leasehold improvement. This pronouncement is effective for leasehold improvements that are purchased or acquired in reporting periods beginning after June 29, 2005. The adoption of EITF 05-6 has not had a significant impact on the Company’s financial position and results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). This new standard replaces APB Opinion No. 20, “Accounting Changes in Interim Financial Statements”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and represents another step in

7

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

the FASB’s goal to converge its standards with those issued by the International Accounting Standards Board (“IASB”). Among other changes, SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. Management does not expect the adoption of SFAS 154 to have a material effect on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” (“SFAS 123R”) SFAS 123R eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for using a fair-value based method. Companies are required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. The new rules will be applied on a modified prospective basis as defined in SFAS 123R, and will be effective for annual periods beginning after June 15, 2005 and, thus, will be effective for us no later than the first quarter of fiscal 2007. The Company is currently evaluating which transition method to use and option valuation methodologies and assumptions in light of SFAS 123R related to employee stock options and employee stock purchase plans. The adoption of SFAS 123R will have a significant impact on the Company’s consolidated statement of operations as the Company will be required to expense the fair value of its stock option grants and stock purchases under its employee stock purchase plan rather than disclose the impact on its consolidated net income within the footnotes (see Note 2 to the Condensed Consolidated Financial Statements), as is the Company’s current practice.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 “Share-Based Payment”. SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123R, the modification of employee share options prior to adoption of SFAS 123R and disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS 123R. The provisions of SAB 107, as appropriate, will be adopted upon implementation of SFAS 123R in fiscal 2007.

FASB Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”), provides guidance under SFAS No. 109, “Accounting for Income Taxes,” (“SFAS 109”) with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109. The Company has completed evaluating the impact of the repatriation provisions. The adoption of FSP 109-2 did not have any impact on the Company’s results of operations or financial condition. Among other things, the Jobs Act repeals an export incentive and creates a new tax deduction for qualified domestic manufacturing activities. At this time, the Company does not expect that the deduction will have a material impact on its reported income tax rate.

8

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Note 2. Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as interpreted by FASB Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB 25” and Emerging Issues Task Force No. 00-23 (“EITF 00-23”), “Issues related to the Accounting for Stock Compensation under APB 25 and FIN 44,” and FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans,” and complies with the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS 123.” Under APB Opinion No. 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and the exercise price. SFAS 123 as amended by SFAS 148 requires a fair-value based method of accounting for an employee stock option or similar equity instrument. Had compensation cost for the Company’s stock-based compensation plan been determined using the Black-Scholes option pricing model at the grant date for awards granted in accordance with the provisions of SFAS 123, the Company’s net loss would have been the amounts indicated below (in thousands, except net loss per share data):

	Three Months Ended						Six Months Ended
	October 2, 2005			September 30, 2004			October 2, 2005			September 30, 2004
Net income (loss):
As reported	$	(6,620	)	$	287		$	(6,643	)	$	(2,248	)
Add: Stock-based employee compensation expense included in reported net loss		1,320			118			2,992			580
Deduct: Stock-based employee compensation expense determined under fair value method for all awards		(6,288	)		(5,133	)		(11,609	)		(10,876	)
Pro forma	$	(11,588	)	$	(4,728	)	$	(15,260	)	$	(12,544	)
Net income (loss) per share, basic and diluted:
As reported	$	(0.19	)	$	0.01		$	(0.19	)	$	(0.07	)
Pro forma	$	(0.34	)	$	(0.14	)	$	(0.45	)	$	(0.37	)

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.

The weighted-average estimated fair value per share at the date of grant for options granted to employees and for share purchase rights granted under the employee stock purchase plans was as follows:

	Three Months Ended				Six Months Ended
	October 2, 2005		September 30, 2004		October 2, 2005		September 30, 2004
Stock options	$	4.02	$	5.26	$	3.85	$	5.85
Employee stock purchase plans	$	3.93	$	3.56	$	2.58	$	3.58

9

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model, with the following weighted-average assumptions:

	Three Months Ended				Six Months Ended
	October 2, 2005		September 30, 2004		October 2, 2005		September 30, 2004
Stock options:
Risk-free interest rate	4.01	%	3.29	%	3.97	%	3.10	%
Expected dividend yield	0	%	0	%	0	%	0	%
Volatility	63	%	43	%	62	%	44	%
Expected life (years)	2.94		3.14		3.00		2.91
Employee stock purchase plans:
Risk-free interest rate	4.36	%	2.37	%	4.24	%	2.03	%
Expected dividend yield	0	%	0	%	0	%	0	%
Volatility	62	%	43	%	62	%	44	%
Expected life (years)	1.14		1.19		1.16		1.17

The fair value option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options.

Note 3. Basic and Diluted Net Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with SFAS 128, “Earnings per Share”. Basic net income (loss) 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 convertible subordinated notes using the as-if-converted method.

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 October 2, 2005 and September 30, 2004 (in thousands):

	Three Months Ended		Six Months Ended
	October 2, 2005	September 30, 2004	October 2, 2005	September 30, 2004
Weighted average common shares used to calculate basic net income (loss) per share	34,098	33,734	34,115	33,702
Options outstanding using the treasury method	—	1,515	—	—
Convertible subordinated notes using the as-if-converted method	—	6,562	—	—
Warrants outstanding using the treasury stock method	—	—	—	—
Common stock subject to repurchase	—	522	—	—
Weighted average common and potential common shares used to calculate diluted net income per share	34,098	42,333	34,115	33,702

10

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

For the three and six months ended October 2, 2005 and the six months ended September 30, 2004, all potential common shares outstanding during the period were excluded from the computation of diluted net loss per share as their effect would be anti-dilutive. For the three months ended September 30, 2004, certain shares of stock option were excluded from computation of diluted net loss per share as their effect would be anti-dilutive. Such shares included the following:

	Three Months Ended				Six Months Ended
	October 2, 2005		September 30, 2004		October 2, 2005		September 30, 2004
Shares of common stock if converted under convertible subordinated notes		4,615,000		—		4,615,000		6,562,000
Shares of common stock issuable under stock option plans outstanding		8,808,545		4,686,962		8,808,545		8,387,969
Weighted average price of shares issuable under stock option plans	$	10.83	$	20.14	$	10.83	$	15.75

Note 4. Comprehensive Income (Loss)

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

	Three Months Ended					Six Months Ended
	October 2, 2005			September 30, 2004		October 2, 2005			September 30, 2004
Net income (loss)	$	(6,620	)	$	287	$	(6,643	)	$	(2,248	)
Unrealized gain (loss) on available-for-sale investments		(6	)		284		817			(599	)
Foreign currency translation adjustments		81			199		180			276
Comprehensive income (loss)	$	(6,545	)	$	770	$	(5,646	)	$	(2,571	)

Components of accumulated other comprehensive loss were as follows (in thousands):

	October 2, 2005			March 31, 2005
Unrealized loss on available-for-sale investments	$	(30	)	$	(847	)
Foreign currency translation adjustments		(1,206	)		(1,386	)
Accumulated other comprehensive loss	$	(1,236	)	$	(2,233	)

11

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Note 5. Cash equivalents and investments

Cash equivalents and short-term investments are detailed as follows (in thousands):

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
October 2, 2005
Classified as current assets:
Cash	$	15,332	$	—	$	—		$	15,332
Money market funds		7,138		—		—			7,138
Commercial paper		31,031		—		(30	)		31,001
Auction rate certificates		35,000		—		—			35,000
	$	88,501	$	—	$	(30	)	$	88,471
March 31, 2005
Classified as current assets:
Cash	$	16,979	$	—	$	—		$	16,979
Money market funds		395		—		—			395
Commercial paper		3,249		—		(1	)		3,248
Auction rate preferred securities		6,998		2		—			7,000
Government agencies		49,499		—		(525	)		48,974
Corporate bonds		37,506		—		(316	)		37,190
Auction rate certificates		19,650		—		—			19,650
Municipal obligations		2,090		—		(8	)		2,082
	$	136,366	$	2	$	(850	)	$	135,518

As of October 2, 2005, the stated maturities of the Company’s current investments (including $31.0 million classified as cash equivalent investments in the table above) are $31.0 million within one year and $35.0 million after ten years.

As of October 2, 2005, $30,000 of the unrealized losses has a duration of less than twelve months. The gross unrealized losses on these investments were primarily due to interest rate fluctuations and market-price movements. The Company reviewed the investment portfolio and determined that the gross unrealized losses on these investments at October 2, 2005 were temporary in nature. The Company has the ability and intent to hold these investments until recovery of their carrying values. The Company also believes that it will be able to collect both principal and interest amounts due to the Company at maturity, given the high credit quality of these investments.

In May 2005, the Company liquidated certain investments to repurchase a portion of the convertible subordinated notes, resulting in a realized loss of approximately $0.7 million. See Note 8 for information regarding the repurchase of convertible subordinated notes.

Note 6. Asset Purchases

Technology License

On June 30, 2005, the Company acquired a technology license from International Business Machines Corporation (“IBM”) to copyrighted material pertinent to technology relating to electronic design automation

12

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(“EDA”), as well as other intellectual property owned by IBM. Also in connection with the technology license agreement, IBM and Magma entered into an amendment extending to 2010 the term of Magma’s patent license agreement with IBM dated March 24, 2004. These two licenses cover IBM’s patents and significant technology with respect to the development of EDA tools and products that perform physical implementation.

The total fee for the licenses was $7.0 million paid on June 30, 2005. In connection with the license agreements, the Company also entered into a warrant agreement pursuant to which IBM is entitled to purchase up to 500,000 shares of Magma common stock at an exercise price of $4.73 per share. The warrant is exercisable immediately and expires on the earlier of June 30, 2010 or immediately prior to a change of control of Magma. The warrant may be exercised by payment of the exercise price in cash or pursuant to a cashless net exercise provision. The fair value of the warrants was estimated to be $6.16 per share using the Black-Scholes option pricing model, with the following weighted-average assumptions:

Risk-free interest rate	3.72	%
Expected dividend yield	0	%
Volatility	65	%
Expected life (years)	5.00

The license fee of $7.0 million and $3.1 million fair value of the 500,000 shares of common stock warrant were included in the intangible asset balance on the Company’s unaudited condensed consolidated balance sheet as of October 2, 2005 (see Note 7).

Acquisition-Related Earnouts

For a number of Magma’s acquisitions, the asset purchase or merger agreements, as applicable, included an earnout provision under which the Company may pay contingent consideration in cash and/or stock based on the achievement of certain technology milestones as outlined in the respective asset purchase or merger agreement.

In six months ended October 2, 2005, the Company recorded $23.6 million of intangible assets resulting from contingent consideration that was paid or became payable to stockholders of acquired companies as follows (in thousands):

	Cash		Common Stock Value
Mojave, Inc.	$	10,666	$	10,666
Aplus Design Technologies		268		1,081
Other		914		—
Total earnout consideration	$	11,848	$	11,747

In addition, during six months ended October 2, 2005, Magma recorded deferred stock-based compensation totaling $1.1 million related to the Mojave earnouts.

13

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Note 7. Goodwill and Intangible Assets

The following table summarizes the components of goodwill, intangible assets and related accumulated amortization balances as of October 2, 2005 and March 31, 2005 (in thousands):

	Weighted Average Life (months)	October 2, 2005							March 31, 2005
		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Goodwill		$	42,723	$	—		$	42,723	$	43,194	$	—		$	43,194
Intangible assets:
Developed technology	47	$	82,539	$	(26,697	)	$	55,842	$	59,083	$	(16,488	)	$	42,595
Licensed technology	36		33,093		(12,446	)		20,647		23,014		(7,668	)		15,346
Customer relationship or base	61		2,200		(859	)		1,341		2,200		(637	)		1,563
Patents	59		11,932		(4,634	)		7,298		11,792		(3,355	)		8,437
Acquired customer contracts	36		900		(590	)		310		900		(438	)		462
Assembled workforce	43		1,235		(504	)		731		1,235		(330	)		905
No shop right	24		100		(98	)		2		100		(73	)		27
Trademark	45		400		(221	)		179		400		(162	)		238
Total		$	132,399	$	(46,049	)	$	86,350	$	98,724	$	(29,151	)	$	69,573

During the six months ended October 2, 2005, the Company reduced its goodwill by $0.5 million to reflect purchase price adjustments primarily on an acquisition related to tax benefits recognized on net operating loss carryforwards.

The Company has included the amortization expense on intangible assets that relate to products sold in cost of license revenue, while the remaining amortization is shown as a separate line item on the Company’s unaudited condensed consolidated statement of operations. For the three and six months ended October 2, 2005 and September 30, 2004, the amortization expense related to intangible assets was as follows (in thousands):

	Three Months Ended				Six Months Ended
	October 2, 2005		September 30, 2004		October 2, 2005		September 30, 2004
Amortization of intangible assets included in:
Cost of revenue—licenses	$	47	$	2	$	47	$	6
Operating expenses		1,273		116		2,945		574
Total	$	1,320	$	118	$	2,992	$	580

The expected future annual amortization expense of intangible assets is as follows (in thousands):

Fiscal Year	Estimated Amortization Expense
2006 (remaining six months)	$	18,618
2007		36,043
2008		18,532
2009		12,131
2010 – 2020		1,026
Total expected future annual amortization	$	86,350

14

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Note 8. Repurchase of Convertible Subordinated Notes

In May 2005, the Company repurchased, in privately negotiated transactions, $44.5 million face amount (or approximately 29.7 percent of the total) of the Company’s zero coupon convertible subordinated notes due May 2008 at an average discount to face value of approximately 22 percent. The Company spent approximately $34.8 million on the repurchases. The repurchase left approximately $105.5 million principal amount of convertible subordinated notes outstanding. In addition, a portion of the hedge and warrant transactions entered into by Magma in 2003 to limit potential dilution from conversion of the notes was terminated in connection with the repurchase. In the first quarter of fiscal 2006, the Company recorded a gain of $8.8 million on the repurchase of the convertible subordinated notes, which was net of the write-off of $0.9 million of deferred financing costs associated with the convertible subordinated notes. The net proceeds of $140,000 from the termination of a portion of the hedge and warrant were recorded against additional paid-in capital.

Note 9. Restructuring Charge

During the six months ended September 30, 2004, the Company recorded net restructuring charges of $0.4 million related to employee termination costs for 7 employees resulting from the Company’s realignment to current business conditions. The Company has paid these termination costs as of September 30, 2004.

Note 10. Contingencies

Synopsys, Inc. v. Magma Design Automation, Inc., Civil Action No. C04-03923, United States District Court, Northern District of California. In this action, filed September 17, 2004, Synopsys has sued the Company for alleged infringement of U.S. Patent Nos. 6,378,114 (“the ‘114 Patent”), 6,453,446 (“the ‘446 Patent”), and 6,725,438 (“the ‘438 Patent”). The patents-in-suit relate to methods for designing integrated circuits. The Complaint seeks unspecified monetary damages, injunctive relief, trebling of damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged infringement of the patents-in-suit.

On October 21, 2004, the Company filed its answer and counterclaims (“Answer”) to the Complaint. On November 10, 2004 Synopsys filed motions to strike and dismiss certain affirmative defenses and counterclaims in the Answer. On November 24, 2004 the Company filed an Amended Answer and Counterclaims (“Amended Answer”). By order dated November 29, 2004, the Court denied Synopsys’ motions as moot in light of the Amended Answer. On December 10, 2004, Synopsys moved to strike and dismiss certain affirmative defenses and counterclaims in the Amended Answer. By order dated January 20, 2005, the Court denied in part and granted in part Synopsys’ motion. In its pretrial preparation order dated January 21, 2005, the Court set forth a schedule for the case which, among other things, sets trial for April 24, 2006. Discovery is ongoing.

On February 3, 2005, Synopsys filed its Reply to the Amended Answer. On March 17, 2005, Synopsys filed a First Amended Complaint, which asserts seven causes of action against the Company and/or Lukas van Ginneken: (1) patent infringement (against both defendants), (2) breach of contract (against van Ginneken), (3) inducing breach of contract (against the Company), (4) fraud (against the Company), (5) conversion (against both defendants), (6) unjust enrichment/constructive trust (against both defendants), and (7) unfair competition (against both defendants). Synopsys seeks injunctive relief, declaratory relief, at least $100 million in damages, trebling of damages, punitive damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged exploitation of the alleged inventions in the patents-in-suit. On April 1, 2005, the Company filed a motion to dismiss the third through seventh causes of action. This motion was granted in part and denied in part by order dated May 18, 2005.

15

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

On April 11, 2005, Synopsys voluntarily dismissed van Ginneken from the lawsuit without prejudice. Also on April 11, 2005, Synopsys filed against the Company a motion for partial summary judgment establishing unfair competition and a motion for partial summary judgment based on the doctrine of assignor estoppel.

On June 7, 2005, Synopsys filed a Second Amended Complaint that asserts six causes of action against the Company: (1) patent infringement, (2) inducing breach of contract/interference with contractual relations, (3) fraud, (4) conversion, (5) unjust enrichment/constructive trust/quasi-contract, and (6) unfair competition. Synopsys seeks injunctive relief, declaratory relief, at least $100 million in damages, trebling of damages, punitive damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged exploitation of the alleged inventions in the patents-in-suit. On June 10, 2005, Magma moved for summary judgment as to the second through sixth causes of action in the Second Amended Complaint. On June 21, 2005, the Company moved to dismiss the third cause of action for fraud in the Second Amended Complaint and moved to strike certain allegations in the Second Amended Complaint. The court granted the Company’s motion to dismiss and strike by order dated July 15, 2005.

On July 1, 2005, the Court granted Synopsys’s motion for partial summary judgment regarding assignor estoppel, dismissing Magma’s affirmative defenses and counterclaim alleging the invalidity of the ‘114 Patent. On July 14, 2005, the court vacated the hearings on Magma’s motion for summary judgment on the second through sixth causes of action in the Second Amended Complaint and Synopsys’s motion for partial summary judgment establishing unfair competition. The court stated that it would reset the motions for hearing, if necessary, after the claims construction hearing scheduled for August 15, 2005.

On July 29, 2005, Synopsys moved to preliminarily enjoin the Company from abandoning or dedicating to the public the ‘446 Patent or the ‘438 Patent. Also on July 29, 2005, Synopsys moved for partial summary judgment seeking dismissal of certain counterclaims and defenses asserted by the Company on the grounds of estoppel by contract. On September 16, 2005, Synopsys filed a revised motion for preliminary injunction. On September 30, 2005, the Company filed its oppositions to Synopsys’s preliminary injunction motion and estoppel by contract motion. Both motions are scheduled to be heard December 2, 2005.

On August 3, 2005, Synopsys filed a Third Amended Complaint that asserts six causes of action against the Company: (1) patent infringement, (2) inducing breach of contract/interference with contractual relations, (3) fraud, (4) conversion, (5) unjust enrichment/constructive trust/quasi-contract, and (6) unfair competition. Synopsys seeks injunctive relief, declaratory relief, at least $100 million in damages, trebling of damages, punitive damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged exploitation of the alleged inventions in the patents-in-suit.

On August 30, 2005, the Court issued a temporary restraining order against the Company restraining and enjoining the Company from taking any steps in the United States Patent and Trademark Office to abandon, suspend or disclaim the ‘446 and ‘438 Patents, failing or refusing to pay the maintenance fees for the ‘446 and ‘438 Patents, or seeking reexamination of the ‘446 and ‘438 Patents. The temporary restraining order will remain in effect until the hearing on Synopsys’s motion for a preliminary injunction scheduled for December 2, 2005.

On September 2, 2005, the Company filed an Answer and Counterclaims to Synopsys’s Third Amended Complaint. In that pleading, the Company alleges, inter alia, that IBM is a joint owner of the patents-in-suit and that, as a result, the Company cannot be liable for infringement because (1) Synopsys lacks standing to assert the patents-in-suit against Magma, and (2) the patents-in-suit are licensed to Magma by IBM.

16

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

On October 19, 2005, the Court granted in part and denied in part Synopsys’s motion to strike certain affirmative defenses and to dismiss certain counterclaims in the Company’s Answer and Counterclaims to Synopsys’s Third Amended Complaint. The Court dismissed without leave to amend the Company’s counterclaims seeking correction of inventorship of the ‘446 and ‘438 Patents. The Court also struck without leave to amend the Company’s affirmative defenses of (1) invalidity of the ‘446 and ‘438 Patents based on failure to name all inventors, (2) unenforceability of the ‘446 and ‘438 patents due to inequitable conduct, and (3) unclean hands. The Court struck with leave to amend the Company’s affirmative defenses of invalidity of the ‘446 and ‘438 Patents based on 35 U.S.C. §§ 102, 103 and 112, as well as the Company’s affirmative defense that Synopsys is not the owner of any invention defined by the claims of the ‘446 and ‘438 Patents.

On October 24, 2005, the Company filed a motion for summary judgment as to the first cause of action (for patent infringement) in Synopsys’s Third Amended Complaint on the grounds that IBM is an owner of all the patents-in-suit. Also on October 24, 2005, Synopsys filed (1) a motion for partial summary judgment to dismiss the Company’s joint ownership defenses and counterclaims, and (2) a motion for partial summary judgment to dismiss allegations of co-ownership based on judicial and quasi-estoppel. All three motions are scheduled to be heard on December 2, 2005.

The Company intends to vigorously defend against the claims asserted by Synopsys and to fully enforce its rights against Synopsys. However, the results of any litigation are inherently uncertain and the Company can not assure that it will be able to successfully defend against the Complaint. A favorable outcome for Synopsys could have a material adverse effect on the Company’s financial position, results of operations or cash flows. The Company is currently unable to assess the extent of damages and/or other relief, if any, that could be awarded to Synopsys; therefore, no contingent liability has been recorded on the Company’s condensed consolidated balance sheet as of October 2, 2005.

On April 18, 2005, Synopsys, Inc. filed an action against the Company in Germany at the Landgericht München I (District Court in Munich) seeking to obtain ownership of the European patent application corresponding to the Company’s ‘446 Patent. The action has been stayed pending the outcome of the above-referenced Synopsys action filed in the United States.

On July 29, 2005, Synopsys, Inc. filed an action against the Company in Japan in Civil Department No. 40 of the Tokyo District Court seeking to obtain ownership of the Japanese patent application corresponding to the Company’s ‘446 Patent. The Company has engaged counsel in Japan and will seek to stay this action pending the outcome of the above-referenced Synopsys action filed in the United States.

On June 13, 2005, a putative shareholder class action lawsuit captioned The Cornelia I. Crowell GST Trust vs. Magma Design Automation, Inc., Rajeev Madhavan, Gregory C. Walker and Roy E. Jewell., No. C 05 02394, was filed in U.S. District Court, Northern District of California. The complaint alleges that defendants failed to disclose information regarding the risk of Magma infringing intellectual property rights of Synopsys, Inc., in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and prays for unspecified damages.

On July 26, 2005, a putative derivative complaint captioned Susan Willis v. Magma Design Automation, Inc. et al., No. 1-05-CV-045834, was filed in the Superior Court of the State of California for the County of Santa Clara. The Complaint seeks unspecified damages purportedly on behalf of the Company for alleged breaches of fiduciary duties by various directors and officers, as well as for alleged violations of insider trading laws by executives during a period between October 23, 2002 and April 12, 2005. Defendants have demurred to the Complaint, and a hearing is scheduled for December 2005.

17

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

On September 26, 2005, Synopsys, Inc. filed an action against the Company in the Superior Court of the State of California in and for the County of Santa Clara, entitled Synopsys, Inc. v. Magma Design Automation, Inc., et al., Case Number 105 CV 049638. Synopsys alleges that Magma committed unfair business practices by asserting defenses of non-infringement and invalidity to patent infringement allegations brought by Synopsys in the patent infringement action already pending against Magma in the Northern District of California. On October 19, 2005, the Company removed he action to the United States District Court for the Northern District of California. On October 26, 2005, the Company moved to strike and dismiss the complaint. On October 27, 2005, the Court granted the Company’s motion to relate the removed action with the preexisting patent infringement action, and both actions are now assigned to Judge Maxine M. Chesney.

On September 26, 2005, Synopsys, Inc. filed an action against the Company in Delaware federal court, Synopsys, Inc. v. Magma Design Automation, Inc., Civil Action No. 05-701. The Complaint alleges infringement of U.S. Patent Nos. 6,434,733 (“the ‘733 Patent”), 6,766,501 (“the ‘501 Patent”), and 6,192,508 (“the ‘508 Patent”) and seeks unspecified monetary damages, injunctive relief, trebling of damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged infringement of the patents-in-suit.

On October 19, 2005, the Company filed its answer and counterclaims (“Answer”) to Synopsys’s Complaint. The Answer asserts that Magma’s products do not infringe the patents-in-suit, that the patents-in-suit are unenforceable, and that the ‘733 Patent and the ‘501 Patent were fraudulently obtained by Synopsys and are therefore unenforceable. The Answer also asserts antitrust counterclaims based on Synopsys’s assertion of the ‘733 and ‘501 Patents, as well as claims for product disparagement and trade libel, statutory and common law unfair competition, and tortuous interference with business relations. The counterclaims seek treble damages and other equitable relief for Synopsys’s anticompetitive and tortuous conduct.

On October 25, 2005, the Company filed an Amended Answer, adding a counterclaim for infringement of U.S. Patent No. 6,505,328 (“the ‘328 Patent”). The Company seeks treble damages and an injunction against Synopsys for the sale and manufacture of products the Company alleges infringe the ‘328 Patent.

With respect to the above-referenced lawsuits, the Company is currently unable to assess the possible extent of damages and/or other relief, if any, that could be awarded against the Company, therefore, no contingent liability has been recorded on the Company’s condensed consolidated balance sheet as of October 2, 2005. The ultimate resolution of this matter or other third party assertions could have a material adverse effect on the Company’s financial position, results of operations or cash flows.

In addition to the above, from time to time, the Company is involved in 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 it 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, financial condition, results of operations or cash flows.

Indemnification Obligations

The Company enters into standard license agreements in the ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify its customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to the

18

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Company’s products. These indemnification obligations have perpetual terms. The Company’s normal business practice is to limit the maximum amount of indemnification to the amount received from the customer. On occasion, the maximum amount of indemnification the Company may be required to make may exceed its normal business practices. The Company estimates the fair value of its indemnification obligations as insignificant, based upon its historical experience concerning product and patent infringement claims. Accordingly, the Company had no liabilities recorded for indemnification under these agreements as of October 2, 2005.

The Company has agreements whereby its officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a directors’ and officers’ liability insurance policy that reduces its exposure under these agreements. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, no liabilities have been recorded for these agreements as of October 2, 2005.

In connection with certain of the Company’s recent business acquisitions, it has also agreed to assume, or cause Company subsidiaries to assume, the indemnification obligations of those companies to their respective officers and directors.

Warranties

The Company offers its customers a warranty that its products will conform to the documentation provided with the products. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, the Company has no liabilities recorded for these warranties as of October 2, 2005. The Company assesses the need for a warranty accrual on a quarterly basis, and there can be no guarantee that a warranty accrual will not become necessary in the future.

Note 11. Segment Information

The Company adopted 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 management for purposes of evaluating performance and allocating resources. Based on this approach, the Company has one reportable segment as the management reviews financial information on a basis consistent with that presented in the unaudited condensed consolidated financial statements.

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

	Three Months Ended				Six Months Ended
	October 2, 2005		September 30, 2004		October 2, 2005		September 30, 2004
North America*	$	29,344	$	20,137	$	57,505	$	43,115
Europe		4,495		5,415		8,696		10,265
Japan		3,739		9,705		7,975		15,271
Asia-Pacific (excluding Japan)		2,308		1,671		4,542		4,306
	$	39,886	$	36,928	$	78,718	$	72,957

19

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

	Three Months Ended				Six Months Ended
	October 2, 2005		September 30, 2004		October 2, 2005		September 30, 2004
North America*	74	%	55	%	73	%	59	%
Europe	11		15		11		14
Japan	9		26		10		21
Asia-Pacific (excluding Japan)	6		4		6		6
	100	%	100	%	100	%	100	%

* The Company has substantially all its North America revenue in the United States for all periods presented.

As of October 2, 2005 and March 31, 2005, one customer accounted for 10% of accounts receivable.

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				Six Months Ended
	October 2, 2005		September 30, 2004		October 2, 2005		September 30, 2004
Customer A	13	%	12	%	22	%	19	%
Customer B	15	%	*		*		*
Customer C	*		15	%	*		*

* Less than 10% of revenue.

The Company has substantially all of its long-lived assets located in the United States.

Note 12. Stockholders’ Equity

Repurchase of Common Stock

On April 13, 2005, the Company announced that its Board of Directors authorized Magma to repurchase up to 2.0 million shares of its common stock. The stock repurchase was completed in May 2005, with repurchase prices ranging from $7.82 to $8.17 per share. The Company used approximately $16.0 million to repurchase 2.0 million shares of common stock. The repurchased shares are being held as treasury stock and are to be used for general corporate purposes.

Option Exchange Program

In August 2005, the Company offered to its employees a voluntary stock option exchange program designed to promote employee retention and reward contributions to stockholder value. Directors and executive officers were not eligible to participate in this option exchange program. Under the program, the company offered to exchange outstanding options to purchase common stock at exercise prices greater than or equal to $10.50, for a smaller number of new options at an exercise price of $9.20, equal to fair market value on the date of grant, August 22, 2005. The exchange ratio ranged from 60% to 75% depending on exercise price of the old option. As a result of the exchange program, options to purchase an aggregate of approximately 4.4 million shares of its common stock were canceled (with exercise prices ranging from $10.50 to $30.28) and options to purchase an aggregate of approximately 3.0 million shares of its common stock were granted under the Company’s 2001

20

MAGMA DESIGN AUTOMATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Stock Incentive Plan on August 22, 2005. The new options generally will vest and become exercisable over a two to four-year period, with 12.5% to 25% of each new option generally becoming exercisable after each six-month period of continued service following the grant date.

As a result of the exchange program and in accordance with the guidance of FIN 44, the Company is required to prospectively apply variable accounting to these new options (and any options granted with a lower exercise price than the canceled options in the six-month look-back and look-forward periods) until the options are exercised, cancelled or expire, unless the price of the Company’s common stock at the end of each fiscal quarter is less than the exercise price of the newly granted stock options. In addition, in accordance with the guidance of the FASB’s EITF 00-23, the options that were retained by eligible employees who did not participate in the exchange program, are also subject to variable accounting until the options in question are exercised, forfeited or expire unexercised. As of October 2, 2005, options to purchase an aggregate of approximately 5.5 million shares of its common stock were subject to variable accounting. The Company will be required to prospectively apply variable accounting to these options in this context until the Company adopts SFAS 123R, which it currently intends to do beginning with the first quarter of fiscal year 2007. As a result of variable accounting, the company recorded a compensation expense of approximately $213,000, relating to options granted during the six-month look-back period, for the fiscal quarter ended October 2, 2005.

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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 our unaudited condensed consolidated financial statements and results appearing elsewhere in this report. Throughout this section, we make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can often identify forward looking statements by terms such as “becoming,” “may,” “will,” “should,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” 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: competition in the EDA market; our ability to integrate acquired businesses and technologies; potentially higher-than-anticipated costs of litigation; potentially higher-than-anticipated costs of compliance with regulatory requirements, including those relating to internal control over financial reporting; any delay of customer orders or failure of customers to renew licenses; weaker-than-anticipated sales of our products and services; weakness in the semiconductor or electronic systems industries; the ability to manage expanding operations; the ability to attract and retain management and technical personnel; our ability to continue to deliver competitive products to customers; and changes in accounting rules.

Overview

Magma Design Automation provides electronic design automation (“EDA”) software products and related services. Our software 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. Our focus is on software used to design the most technologically advanced integrated circuits, specifically those with minimum feature sizes of 0.13 micron and smaller. See “Item 1, Business” in our Annual Report on Form 10-K for the year ended March 31, 2005 for a more complete description of our business.

As an EDA software provider, we generate substantially all our revenue from the semiconductor and electronics industries. Our customers typically fund purchases of our software and services out of their research and development budgets. As a result, our revenue is heavily influenced by our customers’ long-term business outlook and willingness to invest in new chip designs.

Beginning in late calendar 2000, the semiconductor industry entered its steepest and longest downturn of the past 20 years, with industry sales dropping significantly from late 2000 to early 2002. As a result, our customers have focused on controlling costs and reducing risk, lowering research and development (“R&D”) expenditures, cutting back on design starts, purchasing from fewer suppliers, requiring more favorable pricing and payment terms from suppliers, and pursuing consolidation within their own industry. Further, during the downturn, many start-up semiconductor design companies failed or were acquired, and the pace of investment in new companies declined. While the semiconductor industry has experienced a moderate recovery in recent years, our customers have remained cautious. It is not yet clear when improved demand in our own customers’ electronics end markets will result in significantly increased R&D spending or design starts, and corresponding spending on EDA tools.

To support our customers, we have focused on providing the most technologically advanced products to address each step in the integrated circuit (“IC”) design process, as well as integrating these products into broad platforms, and expanding our product offerings. Our goal is to be the EDA technology supplier of choice for our customers as they pursue longer-term, broader and more flexible relationships with fewer suppliers.

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Despite the condition of the semiconductor industry described above, we were able to achieve the following during the second quarter of fiscal 2006:

• We achieved record quarterly revenue of $39.9 million during the second quarter of fiscal 2006, up 3% from the prior quarter and up 8% from the same quarter in fiscal 2005. License sales for the quarter ended October 2, 2005 accounted for approximately 82% of total revenue, compared to 87% in the prior quarter and 85% from the same quarter in the prior year. Revenue increased primarily from sales of additional licenses, services and contract extensions to existing customers in North America.

• We continued to penetrate our market, and during the second quarter of fiscal 2006 we passed the 220-customer threshold.

• We neared completion of the rollout of new products developed as part of our 18-month-long Cobra initiative. With these products, we further widen our lead in producing the best quality of results as defined by chip performance, area and manufacturability.

• Our technology continues to be a top choice among designers working on the most advanced designs. A number of Magma customers are currently using our technology for 90 nanometer and 65 nanometer designs. Several customers have already completed 65 nanometer designs using Magma technology.

Critical Accounting Policies and Estimates

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our 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 most significant 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, asset purchases and business combinations, income taxes and valuation of long-lived assets to be our most critical policies due to the estimation processes involved in each.

Revenue recognition

We recognize revenue in accordance with Statement of Position (“SOP”) 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 us. If evidence of fair value does not exist for each element of a license arrangement 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 does exist for the elements that have not been delivered, but does not exist for one or more delivered elements, then revenue is recognized using the residual method, under which recognition of revenue for the undelivered elements is deferred and the residual license fee is recognized as revenue immediately.

Our revenue recognition policy is detailed in Note 1 of the Notes to Consolidated Financial Statements on Form 10-K for the year ended March 31, 2005. Management has made significant judgments related to revenue recognition; specifically, in connection with each transaction involving our products (referred to as an “arrangement” in the accounting literature) we must evaluate whether our fee is “fixed or determinable” and we must assess whether “collectibility is probable”. These judgments are discussed below.

The fee is fixed or determinable. With respect to each arrangement, we must make a judgment as to whether the arrangement fee is fixed or determinable. If the fee is fixed or determinable, then revenue is recognized upon delivery of software (assuming other revenue recognition criteria are met). If the fee is not fixed or determinable, then the revenue recognized in each period (subject to application of other revenue recognition criteria) will be the lesser of the aggregate of amounts due and payable or the amount of the arrangement fee that would have been recognized if the fees were being recognized ratably.

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Except in cases where we grant extended payment terms to a specific customer, we have determined that our fees are fixed or determinable at the inception of our arrangements based on the following:

• The fee our customers pay for our products is negotiated at the outset of an arrangement and is generally based on the specific volume of products to be delivered.

• Our license fees are not a function of variable-pricing mechanisms such as the number of units distributed or copied by the customer or the expected number of users of the product delivered.

In order for an arrangement to be considered fixed or determinable, 100% of the arrangement fee must be due within one year or less from the order date. We have a history of collecting fees on such arrangements according to contractual terms. Arrangements with payment terms extending beyond 12 months are considered not to be fixed or determinable.

Collectibility is probable. In order to recognize revenue, we must make a judgment about the collectibility of the arrangement fee. Our judgment of the collectibility is applied on a customer-by-customer basis pursuant to our credit review policy. We typically sell to customers for which there is a history of successful collection. New customers are subjected to a credit review process, which evaluates the customers’ financial positions and ability to pay. If it is determined from the outset of an arrangement that collectibility is not probable based upon our credit review process, revenue is recognized on a cash receipts basis (as each payment is collected).

License revenue

We derive license revenue primarily from licenses of our design and implementation software and, to a much lesser extent, from licenses of 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 (“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 amounts due and payable.

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 payment for less than 100% of the license, services and initial post contract support is due within one year of the contract date—we recognize revenue to the extent of the lesser of the portion of the amount 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 thereafter renewable by the customer at the substantive rates 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. 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

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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. Additional 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 our ability to recognize the software license fee.

Unbilled accounts receivable

Unbilled accounts receivable represent revenue that has been recognized in advance of being invoiced to the customer. In all cases, the revenue and unbilled receivables are for contracts which are non-cancelable, there are no contingencies and where the customer has taken delivery of both the software and the encryption key required to operate the software. We typically generate invoices 45 days in advance of contractual due dates, and we invoice the entire amount of the unbilled accounts receivable within one year from the contract inception.

Allowances 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 in any one customer, industry or geographic region.

As of October 2, 2005, one customer accounted for more than 10% of total receivables. 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 allowance we have established, that would increase our general and administrative expenses and reported net loss. Conversely, if actual credit losses are significantly less than our allowance, this would decrease our general and administrative expenses and our reported net income would increase.

Accounting for asset purchases and business combinations

We are required to allocate the purchase price of acquired assets and business combinations to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair values. Such a valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets.

Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from license sales, maintenance agreements, consulting contracts, customer contracts, acquired workforce and acquired developed technologies and patents; expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; and discount rates.

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Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

Other estimates associated with the accounting for these acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed resulting in changes in the purchase price allocation.

Goodwill impairment

Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting unit, and determining the fair value of the reporting unit. We have determined that we have one reporting unit (see Note 11 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q). Significant judgments required to estimate the fair value of a reporting unit include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for the reporting unit. Any impairment losses recorded in the future could have a material adverse impact on our financial condition and results of operations.

Valuation of intangibles and long-lived assets

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that we record an impairment charge on finite-lived intangibles or long-lived assets to be held and used when we determine that the carrying value of intangible assets and long-lived assets may not be recoverable. Based on the existence of one or more indicators of impairment, we measure any impairment of intangibles or long-lived assets based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our business model. Our estimates of cash flows require significant judgment based on our historical results and anticipated results and are subject to many factors.

Income taxes

We account for income taxes in accordance with SFAS 109, “Accounting for Income Taxes.” Significant judgment is required in determining our provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax outcome is uncertain. The amount of income taxes we pay could be subject to audits by federal, state, and foreign tax authorities, which could result in proposed assessments. Although we believe that our estimates are reasonable, no assurance can be given that the final outcome of these tax matters will not be different than that which is reflected in our historical income tax provisions.

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 all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent fiscal years, future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. The Company will continue to evaluate the realizability of the deferred tax assets on a quarterly basis. Future reversals or increases to our valuation allowance could have a significant impact on our future earnings.

Strategic investments in privately-held companies

Our strategic equity investments consist of preferred stock and convertible notes that are convertible into preferred or common stock of several privately-held companies. As of October 2, 2005, $0.6 million of the notes

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has been converted into an investee company’s preferred stock. The carrying value of our portfolio of strategic equity investments in non-marketable equity securities (privately-held companies) totaled $2.5 million at October 2, 2005. Our ability to recover our investments in private, non-marketable equity securities and to earn a return on these investments is primarily dependent on how successfully these companies are able to execute on their business plans and how well their products are accepted, as well as their ability to obtain additional capital funding to continue operations. In the current equity market environment, their ability to obtain additional funding as well as to take advantage of liquidity events, such as initial public offerings, mergers and private sales, may be significantly constrained.

Under our accounting policy, the carrying value of a non-marketable investment is the amount paid for the investment unless it has been determined to be other than temporarily impaired, in which case we write the investment down to its estimated fair value. We review all of our investments periodically for impairment; however, for non-marketable equity securities, the fair value analysis requires significant judgment. This analysis includes assessment of each investee’s financial condition, the business outlook for its products and technology, its projected results and cash flows, the likelihood of obtaining subsequent rounds of financing and the impact of any relevant contractual equity preferences held by us or others. If an investee obtains additional funding at a valuation lower than our carrying amount, we presume that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise, such as when we hold contractual rights that give us a preference over the rights of other investors. As the equity markets have declined significantly over the past few years, we have experienced substantial impairments in our portfolio of non-marketable equity securities. If equity market conditions do not improve, as companies within our portfolio attempt to raise additional funds, the funds may not be available to them, or they may receive lower valuations, with more onerous investment terms than in previous financings, and the investments will likely become impaired. However, we are not able to determine at the present time which specific investments are likely to be impaired in the future, or the extent or timing of individual impairments. We recorded impairment charges related to these non-marketable equity investments of $0.1 million and $0.5 million during the three and six months ended October 2, 2005, respectively. Similarly, we recorded impairment charges related to these non-marketable equity investments of $0.3 million and $0.7 million during the three and six months ended September 30, 2004, respectively.

Results of Operations

Revenue

Revenue consists of licenses revenue and services revenue. License revenue consists of fees for time-based or perpetual licenses of our products. Services revenue consists of fees for services, such as post-contract customer support (“PCS”), customer training and consulting. We recognize revenue based on the specific terms and conditions of the license contracts with our customer for our products and services as described in detail above in our “Critical Accounting Policies and Estimates.” For management reporting and analysis purposes we classify our revenue into the following four categories:

• Ratable

• Due & Payable

• Cash Receipts

• “Turns or Up-front”/ Perpetual or Time-Based

We classify our license arrangements as either bundled or unbundled. Bundled license contracts include maintenance with the license fee and do not include optional maintenance periods. Unbundled license contracts have separate maintenance fees and include optional maintenance periods.

We use this classification of license revenue to provide greater insight into the reporting and monitoring of trends in the components of our revenue and to assist us in managing our business. It is important to note that the

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characterization of an individual contract may change over time. For example, a contract originally characterized as Ratable may be redefined as Cash Receipts if that customer has difficulty in making payments in a timely fashion. In cases where a contract has been re-characterized for management reporting purposes, prior periods are not restated to reflect that change. The following table shows the breakdown of license revenue by category as defined for management reporting and analysis purposes:

		October 2, 2005		% of Revenue		September 30, 2004		% of Revenue
Revenue category:
Three Months Ended:
License revenue
Ratable	Bundled and Unbundled	$	6,257	16	%	$	4,309	12	%
Due & Payable	Unbundled		14,539	36	%		12,933	35	%
Cash Receipts	Unbundled		2,612	7	%		2,848	8	%
Turns	Unbundled		9,296	23	%		11,185	30	%
Total license revenue			32,704	82	%		31,275	85	%
Services revenue			7,182	18	%		5,653	15	%
Total Revenue		$	39,886	100	%	$	36,928	100	%
Six Months Ended:
License revenue
Ratable	Bundled and Unbundled	$	11,264	14	%	$	9,172	13	%
Due & Payable	Unbundled		28,132	36	%		28,284	39	%
Cash Receipts	Unbundled		4,488	6	%		5,425	7	%
Turns	Unbundled		22,730	29	%		19,286	26	%
Total license revenue			66,614	85	%		62,167	85	%
Services revenue			12,104	15	%		10,790	15	%
Total Revenue		$	78,718	100	%	$	72,957	100	%

Bundled and Unbundled Licenses: Ratable. For bundled time-based licenses, we recognize license revenue ratably over the contract term, or as customer payments become due and payable, if less. The revenue for these bundled arrangements for both license and maintenance is classified as license revenue in our statement of operations. For unbundled time-based with a term of less than 15 months, we recognize license revenue ratably over the license term, or as customer payments become due and payable, if earlier. For management reporting and analysis purposes, we refer to both these types of licenses generally as “Ratable” and we generally refer to all time-based licenses recognized on a ratable basis as “Long Term,” independent of the actual length of term of the license.

We classify unbundled perpetual or time-based licenses with a term of fifteen months or greater based on the payment term structure, as “Due and Payable,” “Cash Receipts” or “Perpetual”:

Unbundled Licenses: Due and Payable/Time-Based licenses with long term payments. For unbundled time-based licenses where the payment terms extend greater than one year from the arrangement effective date, we recognize license revenue on a due and payable basis and we recognize maintenance and services revenue ratably over the maintenance term. For management reporting and analysis purposes, we refer to this type of license generally as “Due and Payable/Long Term Time-Based Licenses.”

Unbundled Licenses: Cash Receipts. We recognize revenue from customers who have not met our predetermined credit criteria on a cash receipts basis to the extent that revenue has otherwise been earned. Such customers generally order short-term time based licenses or separate annual maintenance. We recognize license revenue as we receive cash payments from these customers. Maintenance is recognized ratably over the

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maintenance term after the customer has remitted payment. For management reporting and analysis purposes, we refer to this type of license revenue as “Cash Receipts.”

Unbundled Licenses: “Turns”/Perpetual License or Time-Based licenses with short-term payments. For unbundled time-based and perpetual licenses, we recognize license revenue upon shipment as long as the payment terms require the customer to pay 100% of the license fee and the initial period of PCS within one year from the agreement date and payments are generally linear. We recognize maintenance revenue ratably over the maintenance term. In all of these cases, the contracts are non-cancelable, and the customer has taken delivery of both the software and the encryption key required to operate the software. For management reporting and analysis purposes, we refer to this type of license generally as “Turns,” where the license is either perpetual or time-based.

Our license revenue in any given quarter depends upon the mix and volume of perpetual or short term licenses ordered during the quarter and the amount of long-term ratable or due and payable, and cash receipts license revenue recognized during the quarter. In general, we refer to license revenue recognized from perpetual or time based licenses during the quarter as “Up-front” or “turns” revenue, for management reporting and analysis purposes. All other types of revenue are generally referred to as revenue from backlog. We set our revenue targets for any given period based, in part, upon an assumption that we will achieve a certain level of orders and a certain mix of short term licenses. The precise mix of orders fluctuates substantially from period to period and affects the revenue we recognize in the period. If we achieve our target level of total orders but are unable to achieve our target license mix, we may not meet our revenue targets (if we have more-than-expected long term licenses) or may exceed them (if we have more-than-expected short term or perpetual licenses). If we achieve the target license mix but the overall level of orders is below the target level, then we may not meet our revenue targets as described in the risk factors below.

Revenue, cost of revenue and gross profit

The table below sets forth the fluctuations in revenue, cost of revenue and gross profit data for the three and six months ended October 2, 2005 and September 30, 2004 (in thousands, except percentage data):

	October 2, 2005		% of Revenue		September 30, 2004		% of Revenue		Dollar Change			% Change
Three Months Ended:
Revenue:
Licenses	$	32,704	82	%	$	31,275	85	%	$	1,429		5	%
Services		7,182	18	%		5,653	15	%		1,529		27	%
Total revenue		39,886	100	%		36,928	100	%		2,958		8	%
Cost of revenue:
Licenses		6,483	16	%		1,695	5	%		4,788		282	%
Services		4,525	11	%		3,815	10	%		710		19	%
Total cost of revenue		11,008	27	%		5,510	15	%		5,489		100	%
Gross profit	$	28,878	73	%	$	31,418	85	%	$	(2,540	)	(8	)%
Six Months Ended:
Revenue:
Licenses	$	66,614	85	%	$	62,167	85	%	$	4,447		7	%
Services		12,104	15	%		10,790	15	%		1,314		12	%
Total revenue		78,718	100	%		72,957	100	%		5,761		8	%
Cost of revenue:
Licenses		10,897	14	%		3,003	4	%		7,894		263	%
Services		8,382	11	%		7,549	10	%		833		11	%
Total cost of revenue		19,279	25	%		10,552	14	%		8,727		83	%
Gross profit	$	59,439	75	%	$	62,405	86	%	$	(2,966	)	(5	)%

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We market our products and related services to customers in four geographic regions: North America, Europe (Europe, the Middle East and Africa), Japan, and Asia-Pacific. Internationally, we market our products and services primarily through our subsidiaries and various distributors. Revenue is attributed to geographic areas based on the country in which the customer is domiciled. The table below sets forth geographic distribution of revenue data for the three and six months ended October 2, 2005 and September 30, 2004 (in thousands, except percentage data):

	October 2, 2005		% of Revenue		September 30, 2004		% of Revenue		Dollar Change			% Change
Three Months Ended:
Domestic	$	29,344	74	%	$	20,137	55	%	$	9,207		46	%
International:
Europe		4,495	11	%		5,415	15	%		(920	)	(17	)%
Japan		3,739	9	%		9,705	26	%		(5,966	)	(61	)%
Asia-Pacific (excluding Japan)		2,308	6	%		1,671	4	%		637		38	%
Total International		10,542	26	%		16,791	45	%		(6,249	)	(37	)%
Total revenue	$	39,886	100	%	$	36,928	100	%	$	2,958		8	%
Six Months Ended:
Domestic	$	57,505	73	%	$	43,115	59	%	$	14,390		33	%
International:
Europe		8,696	11	%		10,265	14	%		(1,569	)	(15	)%
Japan		7,975	10	%		15,271	21	%		(7,296	)	(48	)%
Asia-Pacific (excluding Japan)		4,542	6	%		4,306	6	%		236		6	%
Total International		21,213	27	%		29,842	41	%		(8,629	)	(29	)%
Total revenue	$	78,718	100	%	$	72,957	100	%	$	5,761		8	%

Revenue

• Revenue for the three and six months ended October 2, 2005 was $39.9 million and $78.7 million, respectively, both up 8% from the comparable periods in the prior year.

• License revenue increased in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year primarily due to large orders executed during fiscal 2006 in North America. These orders came from existing customers who extended license periods and added license capacity due to the continued proliferation of existing and new Magma products, amongst their design group designers. The increase in domestic revenue was partially offset by a decrease in revenue from Japan for both the three and six months ended October 2, 2005 compared to the comparable periods in fiscal 2005. Two customers each accounted for greater than 10% of the revenue for the quarter ended October 2, 2005 and one customer accounted for greater than 10% of the revenue for the six months ended October 2, 2005. License revenue as a percentage of revenue was lower in the second quarter of fiscal 2006 as compared to the second quarter in fiscal 2005 due to higher services and retro maintenance revenue, and was fairly consistent in the six months ended October 2, 2005 as compared to the comparable period in fiscal 2005.

• Service revenue increased in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year primarily due to a $1.2 million and $1.7 million, respectively, increase in maintenance revenue, and a $0.8 million and $62,000, respectively, increase in revenue from consulting service. The increase in maintenance revenue was primarily due to our large customers accelerating their deployment of our licenses and placing additional service orders.

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• Domestic revenue increased in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year primarily due to a one time, non recurring payment for the termination of an existing customer’s license agreement. The payment arose from sale of this customer’s semiconductor division to a third party. The third party, also an existing Magma customer, purchased additional software licenses for use by engineers transferred in the acquisition. For the six months ended October 2, 2005, domestic revenue increased compared to the comparable period in the prior year also due to a single customer in North America purchasing additional capacity of existing licenses and licenses to new technology products. Domestic revenue as a percentage of total revenue increased by 19% and 14%, respectively, in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year.

• International revenue decreased in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year primarily due to our existing customers in Japan and Europe demanding less capacity of existing licenses and licenses to new technology products.

Cost of Revenue

• Cost of license revenue primarily consists of amortization of acquired developed technology and other intangible assets, software maintenance costs, royalties and allocated outside sale representative expenses. Cost of license revenue increased by $4.8 million and $7.9 million, respectively, in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year primarily due to an increase of $4.0 million and $6.0 million, respectively, amortization relating to certain licensed technologies, as the Company began recognizing revenue from products based on these licensed technologies during the first and second quarter of fiscal 2006. The amortization expense on these technologies was included in operating expense in prior year periods. The remainder of the increase in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year was due to amortization on new intangibles, such as earnouts related to previous acquisitions.

• Cost of service revenue primarily consists of personnel and related costs to provide product support, consulting services and training. Cost of service revenue also includes asset depreciation, allocated outside sale representative expenses and amortization of deferred stock-based compensation. Cost of service revenue increased by $0.7 million and $0.8 million, respectively, in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year primarily due to an increase of personnel and related costs for application engineers that corresponded to higher consulting and maintenance activities in the fiscal 2006 periods.

Operating expenses

The table below sets forth operating expense data for the three and six months ended October 2, 2005 and September 30, 2004 (in thousands, except percentage data):

	October 2, 2005		% of Revenue		September 30, 2004			% of Revenue		Dollar Change			% Change
Three Months Ended:
Operating expenses:
Research and development	$	11,381	29	%	$	10,524		28	%	$	857		8	%
In-process research and development		—	—	%		—		—	%		—		—	%
Sales and marketing		10,658	27	%		11,679		32	%		(1,021	)	(9	)%
General and administrative		9,842	25	%		3,455		9	%		6,387		185	%
Amortization of intangible assets		2,882	7	%		4,093		11	%		(1,211	)	(30	)%
Amortization of stock-based compensation		1,273	3	%		116		—	%		1,157		997	%
Restructuring costs		—	—	%		(63	)	—	%		63		100	%
Total operating expenses	$	36,036	90	%	$	29,804		81	%	$	6,232		21	%

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	October 2, 2005		% of Revenue		September 30, 2004		% of Revenue		Dollar Change			% Change
Six Months Ended:
Operating expenses:
Research and development	$	22,356	28	%	$	20,093	28	%	$	2,263		11	%
In-process research and development		—	—	%		4,009	5	%		(4,009	)	(100	)%
Sales and marketing		21,860	28	%		22,946	31	%		(1,086	)	(5	)%
General and administrative		18,455	23	%		7,080	10	%		11,375		161	%
Amortization of intangible assets		6,470	8	%		8,568	12	%		(2,098	)	(24	)%
Amortization of stock-based compensation		2,945	4	%		574	1	%		2,371		413	%
Restructuring costs		—	—	%		439	1	%		(439	)	100	%
Total operating expenses	$	72,086	92	%	$	63,709	87	%	$	8,377		13	%

• Research and development expense increased in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year primarily due to an increase in payroll related expenses of $1.6 million and $3.0 million, respectively, which included an increase in bonus expense of $1.5 million and $2.0 million, respectively, and an increase in salaries and related expenses of $0.1 million and $0.9 million, respectively, due to the increase of senior and experienced staff in research and development through direct hiring and business acquisitions. For the six months ended October 2, 2005, the increase in research and development expense was also caused by higher allocated common expenses (e.g., facility related expenses) of $0.4 million compared to the same period in the prior year. The increases in research and development expense in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year were partially offset by a decrease in software maintenance costs of $0.6 million and $1.2 million, respectively, due to the fact that a major software maintenance contract expired in the last quarter of fiscal 2005. The remainder of the fluctuation in research and development expense was accounted for by other individually insignificant items. We expect our quarterly research and development expense in each of the remaining two quarters of fiscal 2006 to increase moderately compared with the amount in the first and second quarter of fiscal 2006 as our research and development headcount will increase driving up both fixed and variable compensation levels.

• In-process research and development (“IPR&D”) expense of $4.0 million for the six months ended September 30, 2004 consisted of a charge recorded in connection with our acquisition of Mojave, Inc. in April 2004. The charge was recorded based on management’s final purchase price allocation. There has been no material change to the IPR&D project schedule as of October 2, 2005. Revenue resulting from the IPR&D project commenced around the end of the first quarter of fiscal 2006.

• Sales and marketing expense decreased in the three months ended October 2, 2005 compared to the comparable period in the prior year primarily due to a decrease in commission expense of $0.7 million, an increase in expenses allocated to cost of service revenue (primarily application engineering costs) of $0.7 million and a decrease in marketing communications of $0.3 million. Sales and marketing expense decreased in the six months ended October 2, 2005 compared to the comparable period in the prior year primarily due to a decrease in commission expense of $0.7 million, an increase in expenses allocated to cost of service revenue (primarily application engineering costs) of $0.3 million, a decrease in travel and entertainment expense of $0.4 million, and a decrease in professional services of $0.2 million. The decreases in sales and marketing in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year were partially offset by an increase in payroll related expenses of $0.5 million and $0.6 million, respectively, which consisted of an increase in bonus expense of $1.3 million and $1.1 million, respectively, partially offset by a decrease in salaries and related expenses of $0.7 million and $0.5 million, respectively, due to the transfer of certain application engineers to research and development. We expect our quarterly sales and marketing expenses in each of the remaining two quarters of fiscal 2006 to increase moderately compared with the amount in the first and second quarter of fiscal 2006 primarily as a function of increased variable compensation costs driven by bookings and revenue growth.

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• General and administrative expense increased in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year primarily due to increases in professional service fees of $5.2 million and $9.2 million, respectively, payroll related expenses of $0.9 million and $1.5 million, respectively, and asset depreciation of $0.6 million and $1.3 million, respectively, partially offset by an increase in allocated cost to other functional areas of $0.1 million and $0.8 million, respectively, due to higher common expenses in the first and second quarters of fiscal 2006 compared to the same periods in the prior year. The increase in professional service fees in the three and six months ended October 2, 2005 primarily consisted of legal expenses, which were accrued for as incurred, related to patent litigation with Synopsys, Inc. and other law suits. The remainder of the fluctuation in general and administrative expense was accounted for by other individually insignificant items. We expect that our quarterly general and administrative expense in each of the remaining two quarters of fiscal 2006 will be consistent with the amount in the first and second quarter of fiscal 2006 as our general and administrative head count growth will be moderate, legal expenses and professional services related to litigation will increase slightly and variable compensation will grow moderately driven by increased revenue.

• Restructuring costs in the fiscal 2005 periods consisted of employee termination charges resulting from the Company’s realignment to current business conditions in the first quarter of fiscal 2005.

• Amortization of intangible assets decreased in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year primarily due to the change in classification, from operating expenses to cost of license revenue, of a $4.0 million and $6.0 million, respectively, amortization relating to certain developed technologies . The Company began recognizing revenues from products based on these developed technologies during the first and second quarter of fiscal 2006. The decrease was partially offset by amortization of new intangible assets acquired subsequent to the first and second quarter of fiscal 2005. The intangible assets being amortized include technology licenses, trademarks, customer contracts, customer relationships, no shop rights and non-competition agreements that were identified in the purchase price allocation for each business combination and asset purchase transaction.

• Amortization of deferred stock-based compensation increased in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year primarily due to an increase in amortization of deferred stock-based compensation of $0.8 million and $1.6 million, respectively, related to deferred stock compensation recorded in connection with the Company’s 2005 Key Contributor Incentive Plan, and also due to a stock-based compensation expense of $0.2 million related to the option exchange in August 2005. For the six months ended October 2, 2005, the increase was also due to an increase in amortization of deferred stock-based compensation of $0.6 million and $0.2 million related to the acquisitions of Mojave and VeraTest, respectively. The increases in the three and six months ended October 2, 2005 were partially offset by a decrease in amortization of deferred stock-based compensation of $0.1 million and $0.3 million, respectively, related to deferred stock compensation recorded in connection with our IPO in November 2001.

During the second quarter of 2005, we offered a voluntary stock option exchange program to our employees which resulted in variable accounting treatment for, at the time of the exchange, options to purchase an aggregate of approximately 5.5 million shares of its common stock. We are accounting for all replacement stock options, as well as all options that were subject to the exchange program but were retained by employees, using variable accounting until adoption of SFAS 123R. Under variable accounting, cumulative stock compensation expense at any balance sheet date must equal accumulated amortization of the current intrinsic value of the outstanding variable stock awards over their vesting periods. Upon adoption of SFAS 123R, in accordance with its rules, the amount of stock compensation expense will be fixed based on initial estimated fair values of the replacement stock options and amortized over the remaining vesting periods of these options. Stock compensation expense recognized until adoption of SFAS 123R using variable accounting will not be reversed upon adoption. Variable accounting treatment may result in unpredictable and potentially significant charges or credits recorded to stock-based compensation, which will be dependent upon fluctuations in the quoted market prices of our common stock.

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Other items

The table below sets forth other data for the three and six months ended October 2, 2005 and September 30, 2004 (in thousands, except percentage data):

	October 2, 2005			% of Revenue		September 30, 2004			% of Revenue		Dollar Change			% Change
Three Months Ended:
Other income (expense), net:
Interest income	$	586		1	%	$	556		2	%	$	30		5	%
Interest expense		(224	)	(1	)%		(251	)	(1	)%		27		(11	)%
Other expense, net		(352	)	(1	)%		(642	)	(2	)%		290		(45	)%
Total other income (expense), net	$	10		—	%	$	(337	)	(1	)%	$	347
Benefit from (provision for) income taxes	$	528		1	%	$	(990	)	(3	)%	$	(1,518	)
Six Months Ended:
Other income (expense), net:
Interest income	$	1,246		2	%	$	1,109		2	%	$	137		12	%
Interest expense		(432	)	(1	)%		(497	)	(1	)%		65		(13	)%
Other income (expense), net		7,098		9	%		(1,204	)	(2	)%		8,302		(690	)%
Total other income (expense), net	$	7,912		10	%	$	(592	)	(1	)%	$	8,504
Provision for income taxes	$	(1,908	)	(2	)%	$	(352	)	—	%	$	(1,556	)

• Interest income increased in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year primarily due to higher interest rate on our cash and investments balance during the fiscal 2006 periods. Even though our total cash and investment balance was lower in fiscal 2006 periods, the combination of higher short-term interest rates, together with the liquidation of long-term instruments during fiscal 2006 which were purchased at much lower rates and the subsequent reinvestment of maturing funds into higher short-term yielding instruments produced higher interest income in the three and six months ended October 2, 2005 compared to the comparable periods in fiscal 2005.

• Interest expense primarily represents amortization of debt discount and issuance costs, which were recorded in connection with our convertible subordinated debt offering completed in May 2003. In May 2005, we repurchased approximately 29.7% of the convertible subordinated debt. In connection with the repurchase, we wrote off $0.9 million of the unamortized debt issuance costs related to the repurchased portion of the convertible subordinated debt. As a result, amortization of debt issuance costs decreased by $73,000 and $119,000, respectively, in the three and six months ended October 2, 2005 compared to the comparable periods in the prior year. The decrease was partially offset by increase of interest expense on capital leases in fiscal 2006 periods.

• Other income (expense), net in the three and six months ended October 2, 2005 consisted of a charge of $0.1 million and $0.5 million, respectively, associated with other than temporary impairment in our strategic investments and a foreign exchange loss of $0.2 million and $0.5 million, respectively. Other income, net in the six months ended October 2, 2005 also included a $9.7 million gain on repurchase of $44.5 million of the convertible subordinated debt, partially offset by a $0.9 million write-off of the debt issuance costs related to the repurchase and a $0.7 million of loss on sale of short-term investments. Other expense, net in the three and six months ended September 30, 2004 consisted of a charge of $0.3 million and $0.7 million, respectively, associated with other than temporary impairment in our strategic

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investments and $0.3 million and $0.5 million, respectively, of foreign exchange loss. The impairment charge was determined based on our periodic review of the investee company’s financial performance, financial conditions and near-term prospects. The slight increase of foreign exchange loss in the fiscal 2006 periods was caused by an unfavorable exchange rate fluctuation between the U.S. Dollar and the Japanese Yen.

• Benefit from (provision for) income taxes. The income tax provided for the three months ended October 2, 2005 is a benefit of $528,000, compared to an expense of $1.0 million for the three months ended September 30, 2004. The tax benefit of $528,000 consists primarily of the adjustment to the federal and state taxes provided in the prior quarter for certain discrete items, such as gain on the partial retirement of the convertible bond, impairment of certain equity investments and loss on disposal of certain investments due to the change in Company’s forecasts, as well as the federal, state and foreign taxes provided for the income derived from our normal operations. The income tax provisions are $1.9 million and $352,000 for the six months ended October 5, 2005 and September 30, 2004, respectively. Our effective tax rates vary from the U.S. statutory rate primarily due to changes in our valuation allowance, state taxes, foreign income at other than U.S. rates, deferred compensation, in-process research and development, research and development credits, and foreign withholding taxes.

We are in a net deferred tax asset position, for which a full valuation allowance has been recorded. We will continue to provide a valuation allowance on our net deferred tax assets until it becomes more likely than not that the deferred tax assets will be realizable. The Company will continue to evaluate the realizability of the deferred tax assets on a quarterly basis.

In the event of a future change in ownership, as defined under federal and state tax laws, our net operating loss and tax credit carryfowards may be subject to an annual limitation. The annual limitations may result in an increase to our current income tax provision and/or the expiration of the net operating loss and tax credit carryforwards before realization.

Liquidity and Capital Resources

(Dollar in Thousands)	October 2, 2005			March 31, 2005
Cash, cash equivalents and short-term investments	$	88,471		$	135,518
	Six Months Ended
	October 2, 2005			September 30, 2004
Net cash provided by operating activities	$	23,426		$	18,900
Net cash provided by (used in) investing activities	$	56,872		$	(3,066	)
Net cash used in financing activities	$	(47,375	)	$	(11,143	)

During the fourth quarter of fiscal 2005, we reclassified auction rate securities of $31.5 million and $55.1 million as of September 30, 2004 and March 31, 2004, respectively, from cash and cash equivalents to short-term investments. We have reclassified the purchases and sales of these auction rate securities in our condensed consolidated statements of cash flows, which decreased our cash used in investing activities by $23.6 million for the six months ended September 30, 2004.

Our cash, cash equivalents and short-term investments, excluding restricted cash, were approximately $88.5 million at October 2, 2005, a decrease of $47.0 million or 35% from March 31, 2005. The decrease primarily reflected cash generated from operations and proceeds from common stock issuances, which in fiscal 2006 were more than offset by cash used for repurchase of a portion of the convertible subordinated notes, repurchase of common stock, purchases of intangible assets, equity investments and capital investments. Our investment portfolio consists of high-grade fixed-income securities diversified among corporate, US agency and municipal issuers with maturities of two years or less. A portion of the portfolio is allocated to auction rate securities which provide liquidity at par every 28 days with underlying longer-term maturities.

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On April 13, 2005, we announced that our Board of Directors authorized Magma to repurchase up to 2.0 million shares of our common stock. The stock repurchase program was completed in May 2005. We used approximately $16.0 million to repurchase 2.0 million shares of common stock. The repurchased shares are to be used for general corporate purposes.

In early May 2005, we repurchased, in privately negotiated transactions, $44.5 million face amount (or approximately 29.7 percent of the total) of these notes at an average discount to face value of approximately 22 percent. We spent an aggregate of approximately $34.8 million on the repurchase. The repurchase leaves approximately $105.5 million aggregate principal amount of convertible subordinated notes outstanding. At the same time we terminated a portion (approximately 29.7 percent) of the hedging arrangements.

Net cash provided by operating activities

Net cash provided by operating activities was $23.4 million in the six months ended October 2, 2005 compared to $18.9 million in the comparable period in the prior year. The $4.5 million increase was primarily due to a $9.3 million increase in cash from customers, a $9.7 million decrease in payments associated with accounts payable and accrued liabilities and a $1.0 million increase in cash from interest income. These increases in cash flow were partially offset by a $13.6 million increase in costs and expenses, and a $1.9 million increase in payments associated with prepaid and other assets balances. The increase in cash from customers was primarily due to higher cash collection on accounts receivable during the six months ended October 2, 2005 compared to the comparable period in fiscal 2005. The payment of accrued liabilities during the six months ended September 30, 2004 was primarily related to a payout of accrued bonuses during the period. The increase in payments associated with prepaid expenses during the six months ended October 2, 2005 was primarily caused by an increase of $1.5 million payment on prepaid software maintenance expense.

Net cash provided by (used in) investing activities

Net cash provided by investing activities was $56.9 million in the six months ended October 2, 2005. We had net proceeds of $80.1 million from sales of marketable securities as we liquidated these investments to repurchase a portion of the convertible subordinated notes. Partially offsetting the cash inflow, we used a total of $20.4 million in cash to purchase a technology license and make earnout payments relating to prior asset purchases. We also made an investment of $0.8 million in a privately held technology company for business and strategic purposes. We may make additional strategic equity investments in the future by using our cash, cash equivalents and/or investments. In addition, we acquired property and equipment totaling $2.0 million in cash and $2.0 million through capital leases. We expect to make capital expenditures of approximately $5.2 million for the remainder of fiscal 2006. These capital expenditures will be used to support selling, marketing and product development activities. We will use capital lease financing as well as our cash and cash equivalents and/or investments to fund these purchases.

Net cash used in investing activities was $3.1 million in the six months ended September 30, 2004. We used cash to complete the Mojave and Lemmatis asset purchase transactions during the six months ended September 30, 2004 in order to broaden our product offerings and to incorporate certain key technologies into our existing products and paid a total of $9.1 million in cash, net of cash acquired. We also made investments of $1.1 million in two privately held technology companies for business and strategic purposes. In August 2004, we made a total of $2.8 million milestone payment relating to prior asset purchases. During the six months ended September 30, 2004, we acquired property and equipment totaling $9.2 million. The property and equipment expenditures were primarily for purchases of computer equipment and research and development tools to support our growing operations. The primary source of cash from investing activities was net proceeds of $19.1 million from maturities of short-term investments.

Net cash used in financing activities

Net cash used in financing activities was $47.4 million in the six months ended October 2, 2005. We used $34.8 million to repurchase a portion of our convertible subordinated notes and received net proceeds of

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$140,000 from termination of the related portion of the bond hedge and warrant. In addition, we used $16.0 million to repurchase 2,000,000 shares of common stock on the open market, as authorized by the board of directors in April 2005, and made payments of $0.3 million on our capital leases. The primary source of cash was $3.6 million in cash received from the exercise of stock options and shares purchased under the employee stock purchase plan during the period.

Net cash used in financing activities was $11.1 million in the six months ended September 30, 2004. The primary source of cash was $5.5 million of cash received from the exercise of stock options and the purchase of shares under the employee stock purchase plan. We used $16.6 million to repurchase 1,000,000 shares of common stock on the open market, as authorized by the board of directors in July 2004.

Capital resources

We believe that our existing cash and cash equivalents and short-term investments 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.

Our acquisition agreements related to certain business combination and asset purchase transactions obligate us to pay certain contingent cash and stock considerations based on meeting certain booking or project milestones and continued employment. Total amount of cash and stock contingent considerations that could be paid or issued under our acquisition agreements assuming all contingencies are met is $46.6 million and $45.6 million, respectively, as of October 2, 2005. The number of contingent shares to be issued is dependent on the market price of our common stock near when the milestones are achieved.

Contractual obligations

As of October 2, 2005, our principal commitments consisted of operating leases, with an aggregated future amount of $12.1 million through fiscal 2011 for office facilities, and repayment of the convertible subordinated notes of $105.5 million due in fiscal 2009. During the six months ended October 2, 2005, other than the decrease of $44.5 million in the convertible subordinated notes, there were no material changes in our reported payments due under contractual obligations at March 31, 2005. Although we have no material commitments for capital expenditures, we anticipate a substantial increase in our capital expenditures and lease commitments with our anticipated growth in operations, infrastructure, and personnel. In addition, we have other obligations for goods and services entered into in the normal course of business. These obligations, however, either are not enforceable or legally binding or are subject to change based on our business decisions.

Off-balance Sheet Arrangements

As of October 2, 2005, we did not have any significant “off-balance sheet arrangements,” as defined in Item 303(a)(4)(ii) of Regulation S-K.

Indemnification Obligations

We enter into standard license agreements in the ordinary course of business. Pursuant to these agreements, we agree to indemnify our customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to our products. These indemnification obligations have perpetual terms. Our normal business practice is to limit the maximum amount of indemnification to the amount received from the customer. On occasion, the maximum amount of indemnification we may be required to make may exceed its normal business practices. We estimate the fair

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value of its indemnification obligations as insignificant, based on our historical experience concerning product and patent infringement claims. Accordingly, we had no liabilities recorded for indemnification under these agreements as of October 2, 2005.

We have agreements whereby our officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a directors and officers insurance policy that reduces our exposure under these agreements. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, no liabilities have been recorded for these agreements as of October 2, 2005.

In connection with recent business acquisitions, we agreed to assume, or cause our subsidiaries to assume, indemnification obligations to the officers and directors of acquired companies.

Warranties

We offer our customers a warranty that our products will conform to the documentation provided with the products. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, we have no liabilities recorded for these warranties as of October 2, 2005. We assess the need for a warranty accrual on a quarterly basis, and there can be no guarantee that a warranty accrual will not become necessary in the future.

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. We have a limited history of generating revenue from our software products, and the revenue and income potential of our business and market is still unproven. As a result of our short operating history, we have limited financial data that can be used to evaluate our business. We have only been profitable for eight of the last thirteen fiscal quarters, and we were not profitable prior to fiscal 2003. 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.

We have a history of losses, except for fiscal 2003 and fiscal 2004, and have an accumulated deficit of approximately $122.3 million as of October 2, 2005; if we do not increase profitability, the public trading price of our stock would be likely to decline.

We had an accumulated deficit of approximately $122.3 million as of October 2, 2005. Although we achieved profitability in fiscal 2003 and fiscal 2004, we incurred losses in other fiscal years and the first and second quarter of fiscal 2006. If we continue to incur losses, or if we fail to achieve profitability at levels 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.

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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 fluctuate from quarter to quarter and are difficult to predict. 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;

• higher than anticipated costs in connection with patent litigation with Synopsys, Inc.;

• timing of customer license payments;

• 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;

• size and timing of revenue recognized in advance of actual customer billings and customers with graduated payment schedules which may result in higher accounts receivable balances and days sales outstanding (“DSO”);

• the relative mix of our license and services revenue;

• 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;

• variability in stock-based compensation charges related to our option exchange program;

• 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.

We currently face lawsuits brought by Synopsys, Inc. related to patent infringement, and we may face additional intellectual property infringement claims or other litigation. Lawsuits can be costly to defend, can take the time of our management and employees away from day-to-day operations, and could result in our losing important rights and paying significant damages.

On September 17, 2004, Synopsys, Inc., filed suit against us for patent infringement, and it subsequently filed patent related litigation in Germany and Japan (please see the discussion in Part II. Item 1.—“Legal Proceedings” below for further detail). Other related litigation may follow. In the future other parties may assert intellectual property infringement claims against us or our customers. We may have acquired or may in the future acquire software as a result of our acquisitions, and we could be subject to claims that such software infringes the intellectual property rights of third parties. In addition, we are often involved in or threatened with commercial litigation unrelated to intellectual property infringement claims such as labor litigation and contract claims, and we may acquire companies that are actively engaged in such litigation.

Our products may be found to infringe intellectual property rights of third parties, including third-party patents. In addition, many of our contracts contain provisions in which we agree to indemnify our customers from third-party intellectual property infringement claims that are brought against them based on their use of our

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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.

The outcome of intellectual property litigation, such as the pending Synopsys litigation (discussed herein), could be our loss of critical proprietary rights and 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 ordered to pay substantial monetary damages (including punitive damages), we may be prevented from distributing all or some of our products, and 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.

In June, 2005, a putative shareholder class action lawsuit was filed against us in federal court as further identified in Part II, Item 1.—“Legal Proceedings.” Generally, the complaint in this lawsuit alleges that we and some of our executive officers failed to disclose information about the risk of Magma infringing intellectual property rights of Synopsys, Inc..

In July, 2005, a putative derivative lawsuit was filed against us in state court as further identified in Part II, Item 1.—“Legal Proceedings.” The complaint in this lawsuit seeks unspecified damages purportedly on behalf of the Company for alleged breaches of fiduciary duties by various directors and officers, as well as for alleged violations of insider trading laws by executives.

On September 26, 2005, Synopsys, Inc. filed an action against the Company in the Superior Court of the State of California alleging that Magma committed unfair business practices by asserting defenses of non-infringement and invalidity to patent infringement allegations brought by Synopsys in the September 17, 2004 patent infringement action. On the Company’s motion, the action was removed to the United States District Court and related to the September 17, 2004 action. (See also Item II, Part I—“Legal Proceedings”)

On September 26, 2005, Synopsys, Inc. filed an action against the Company in Delaware federal court, alleging infringement of U.S. Patent Nos. 6,434,733 (“the ‘733 Patent”), 6,766,501 (“the ‘501 Patent”), and 6,192,508 (“the ‘508 Patent”) and seeks unspecified monetary damages, injunctive relief, trebling of damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys over benefits allegedly obtained by the Company as a result of its alleged infringement. On October 19, 2005, the Company filed its answer and counterclaims to Synopsys’ Complaint. On October 25, 2005, the Company filed an Amended Answer, adding a counterclaim for infringement of U.S. Patent No. 6,505,328 (“the ‘328 Patent”). The Company seeks treble damages and an injunction against Synopsys for the sale and manufacture of products the Company alleges infringe the ‘328 Patent.

With respect to the above-referenced lawsuits, , we are currently unable to assess the possible extent of damages or other relief, if any, that might be awarded and no contingent liability was recorded as of October 2, 2005.

Publicly announced developments in our litigation matters may cause our stock price to decline sharply and suddenly. Other factors may reduce the market price of our common stock, and we are subject to ongoing risks of securities class action litigation related to volatility in the market price for our common stocks.

We may not be successful in defending some or all claims that may be brought against us. Regardless of the outcome, litigation can result in substantial expense and could divert the efforts of our management and technical personnel from our business. In addition, the ultimate resolution of the lawsuits could have a material adverse effect on our financial position, results of operations and cash flows and harm our ability to execute our business plan.

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We may not be able to hire and/or retain the number of qualified personnel required for our business, particularly engineering personnel, which would harm the development and sales of our products and limit our ability to grow.

Competition in our industry for senior management, technical, sales, marketing and other key personnel is intense. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to a lack of capacity to develop and market our products.

In particular, 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 continue 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 is located.

Retaining our employees has become more challenging due to the decline in our stock price over the past several years. Many of the stock options held by our employees may have an exercise price that is significantly higher than the current trading price of our stock, and these “underwater” options do not serve their purpose as incentives for our employees to remain with Magma. Although, as discussed below, we have attempted to address this problem in part via a stock option exchange program that allowed eligible employees to exchange existing underwater options for options exercisable for a smaller number of shares at the price of $9.20 per share, we cannot guarantee that this program will satisfy our employees. In addition, the increased volatility of our stock price due to the pendency of, and developments in, the Synopsys litigation and above-referenced shareholder litigation may affect employee morale. If we lose the services of a significant number of our employees and/or if we cannot hire additional employees, we will be unable to increase our sales or implement or maintain our growth strategy.

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 certain key research and development and 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. Furthermore, our larger competitors may be able to offer more generous compensation packages to executives and key employees, and therefore we risk losing key personnel to those competitors. If we lose the services of any of our key personnel, 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 our senior executives to search for their replacements. The integration of our new executives or any new personnel could disrupt our ongoing operations.

Customer payment defaults may cause us to be unable to recognize revenue from backlog, and changes in the type of orders comprising backlog could affect the proportion of revenue recognized from backlog each quarter, which could have a material adverse effect on our financial condition and results of operations and on investor expectations.

A portion of our revenue backlog is variable based on volume of usage of our products by the customers or includes specific future deliverables or is recognized in revenue on a cash receipts basis. Management has estimated variable usage based on customers’ forecasts, but there can be no assurance that these estimates will be realized. In addition, it is possible that customers from whom we expect to derive revenue from backlog will default and as a result we may not be able to recognize expected revenue from backlog. If a customer defaults and fails to pay amounts owed, or if the level of defaults increases, our bad debt expense is likely to increase. Any material payment default by our customers 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. We had one customer that accounted for 22% of our revenue in the six months ended October 2, 2005, as compared to 19% in the comparable period of prior year.

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 license 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 license 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.

We compete against companies that hold a large share of the electronic design automation market and competition is increasing among EDA vendors as customers tightly control their EDA spending and use fewer vendors to meet their needs. If we cannot compete successfully, we will not gain market share and our revenue could decline.

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

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greater financial, technical and marketing 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, 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.

Competition in the EDA Market has increased as customers rationalized their EDA spending by using products from fewer EDA vendors and continued consolidation in the electronic design automation market could intensify this trend. Also, 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. Competitive pressures may prevent us from obtaining new customers and gaining market share, may 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 our efforts 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. In addition, the earnout arrangements we use, and expect to continue to use, to consummate some of our acquisitions, pursuant to which we agreed to pay additional amounts of contingent consideration based on the achievement of certain revenue, bookings or product development milestones, can sometimes complicate integration efforts. We cannot be sure 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 and Mojave, Inc., 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 key employees of the acquired company;

• the risk that earnouts based on revenue will prove difficult to administer due to the complexities of revenue recognition accounting;

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• the risk that actions incentivized by earnout provisions will ultimately prove not to be in Magma’s best interest as its interests may change over time;

• 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;

• diversion of management attention;

• 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.

Our operating results may be harmed if our customers do not adopt, or are slow to adopt, 65-nanometer design geometries.

Many Magma customers are currently working on 90-nanometer designs. Magma continues to work toward developing and enhancing its product line in anticipation of increased customer demand for 65-nanometer (sub-90 nanometer) design geometries. Similarly, Magma has acquired Mojave personnel and technology to better address customers’ needs for designing and verifying semiconductors that are manufacturable with higher yield and performance, which is a key design parameter when moving to 65-nanometer geometries. Notwithstanding our efforts to support 65-nanometer geometries, customers may fail to adopt or may be slower to adopt 65-nanometer geometries and we may be unable to convince our customers to purchase our related software products. Accordingly, any revenues we receive from enhancements to our products or acquired technologies may be less than the development or acquisition costs. If customers fail to adopt 65-nanometer design geometries or are slow to adopt 65-nanometer design geometries, our operating results may be harmed.

Our operating results will be harmed if chip designers do not adopt Blast Fusion and products released under our Cobra initiative.

Blast Fusion has accounted for a significant majority of our revenue since our inception and we believe that revenue from Blast Fusion and related products will account for most of our revenue for the foreseeable future. In addition, we have dedicated significant resources to developing and marketing products developed under our Cobra development initiative. We must gain market penetration of Blast Fusion and products released under our Cobra initiative in order to achieve our growth strategy and financial success. Moreover, if integrated circuit designers do not continue to adopt Blast Fusion, our operating results will be significantly harmed.

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 likely result in lower demand for our products and services and could harm our

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business. For example, the United States economy, including the semiconductor industry, experienced a slowdown starting in 2000, which negatively impacted and may continue to impact our business and operating results. While the semiconductor industry experienced a moderate recovery in recent years, our customers have remained cautious, and it is not yet clear when increased R&D spending will occur. The continuing threat of terrorist attacks in the United States, the ongoing events in Iraq and other worldwide events including those in the Middle East have increased uncertainty in the United States economy. If the economy declines as a result of this 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 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. Expanding into new technologies or extending our product line into areas we have not previously addressed may be more costly or difficult than anticipated. 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 products in 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 services revenue we generate or if we reduce prices in response to competitive pressure.

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;

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• 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 claims that are not covered by insurance, a successful claim could harm our business. We currently carry insurance coverages and limits that we believe are consistent with similarly situated companies within the EDA industry.

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 27% of our total revenue from sales outside North America for the six months of fiscal 2006, compared to 41% for the same period in the prior year. 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;

• on-going events in Iraq; and

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

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. Implementation of internal controls reporting and attestation requirements, as further described below, will impose additional financial and administrative obligations on us and will cause us to incur substantial implementation costs from third party consultants, which could adversely affect our results.

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Changes in laws and regulations that affect the governance of public companies have increased our operating expenses and will continue to do so.

Recently enacted changes in the laws and regulations affecting public companies, including the provisions of the Public Company Accounting Reform and Investor Protection Act of 2002 (the “Sarbanes-Oxley Act of 2002”) and the listing requirements for The Nasdaq Stock Market have imposed new duties on us and on our executives, directors, attorneys and independent registered public accounting firms. In order to comply with these new rules, we have hired additional personnel and use additional outside legal, accounting and advisory services, all of which have increased and may continue to increase our operating expenses over time. In particular, we have incurred and will continue to incur additional administrative expenses relating to the implementation of Section 404 of the Sarbanes-Oxley Act of 2002, which requires the implementation and maintenance of an effective system of internal control over financial reporting, and, annual certification of Section 404 compliance by our independent registered public accounting firm. For example, we have incurred significant expenses and will continue to incur expenses in connection with the implementation, documentation and continued testing of our internal control systems. Management time associated with these compliance efforts necessarily reduces time available for other operating activities, which could adversely affect operating results. For the year ended March 31, 2005, our independent registered public accounting firm certified that we were in compliance with the provision of Section 404 relating to effective internal control over financial reporting, however, our internal control obligations are ongoing and subject to continued review and testing. If we are unable to maintain full and timely compliance with the foregoing regulatory requirements, we could be required to incur additional costs, expend additional management time on remedial efforts and make related public disclosures that could adversely affect our stock price and result in securities litigation.

The effectiveness of disclosure controls is inherently limited.

We do not expect that our disclosure controls and procedures, or our internal control over financial reporting, will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system objectives will be met. The design of a control system must also reflect applicable resource constraints, and the benefits of controls must be considered relative to their costs. As a result of these inherent limitations, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Magma have been detected. Failure of the control systems to prevent error or fraud could materially adversely impact our financial results and our business. Management assessed the effectiveness of our internal control over financial reporting as of October 2, 2005, and this assessment identified a material weakness in our internal control over financial reporting related to the completeness and accuracy of our accounting for stock-based compensation expenses incurred during the second quarter ended October 2, 2005. As of the date of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective because of this material weakness in our internal control over financial reporting. Failing to remedy this material weakness could have a material adverse effect on our business, and could adversely affect the price of our common stock and lead to expensive litigation. Our efforts to remedy this material weakness could cause us to incur significant additional costs and expend significant additional management time on remedial efforts, which could also impact our financial performance.

Forecasting the Company’s tax rates is complex and subject to uncertainty.

Management must make significant assumptions, judgments and estimates to determine our current provision for income taxes, deferred tax assets and liabilities, and any valuation allowance that may be recorded against our deferred tax assets. These assumptions, judgments and estimates are difficult to make due to their complexity and the relevant tax law is often changing. Our future effective tax rates could be adversely affected by the following:

• an increase in expenses not deductible for tax purposes, including deferred stock-based compensation and write-offs of acquired in-process research and development;

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

• future changes in ownership as defined by Internal Revenue Code Sections 382 and 383 which may limit realization of certain assets;

• changes in forecasts of pre-tax profits and losses by jurisdiction used to estimate tax expense by jurisdiction;

• assessment of additional taxes as a result of federal, state, or foreign tax examinations; 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.

If we fail to offer and 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. Our stock price has declined significantly over the past several years due to market conditions and has recently been negatively affected by uncertainty surrounding the outcome of our patent litigation with Synopsys, Inc. (discussed below under Part II, Item 1, “Legal Proceedings”). As a result, many of the options held by our non-executive employees have an exercise price significantly above the current trading price of our stock; on October 2, 2005 approximately 85% of the options held by our non-executive employees were “underwater.”

On June 22, 2005, our stockholders approved a stock option exchange program (“Exchange Program”) allowing non-executive employees holding options to purchase our common stock at exercise prices greater than or equal to $10.50 to exchange those options for a smaller number of new options at an exercise price equal to fair market value on the date of grant. Magma implemented this Exchange Program, and the date of grant was August 22, 2005, at which date the closing trading price of our stock was $9.20 per share. Therefore, the exercise price for new options under this Exchange Program is $9.20 per share. If this exercise price of $9.20 per share or the terms of the Exchange Program are not satisfactory to employees who participate in the Exchange Program, or, if our stock price drops after August 22, 2005, our ability to retain employees could be affected.

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If our stock price continues to decline in the future due to market conditions, investors’ perceptions of the technology industry or managerial or performance problems we have, we may be forced to grant additional options to retain employees. This in turn could result in:

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

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

In addition, the new accounting requirements for employee stock options discussed below may adversely affect our option grant practices and our ability to recruit and retain employees.

When the accounting treatment for employee stock options changes, our reported results of operations will likely be adversely affected and we may be forced to change our employee compensation and benefits practices.

We currently account for the issuance of employee stock options under principles that do not require us to record compensation expense for options granted at fair market value. In December 2004, the FASB issued SFAS 123R, “Share-Based Payment,” which eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for using a fair-value based method. Under SFAS 123R, companies are required to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. We will be required to adopt the new rules no later than the first quarter of our fiscal year 2007. We are currently assessing the impact of the adoption of SFAS 123R on our business practices; however, this change in accounting treatment will likely adversely affect our reported results of operations and hinder our ability to achieve profitability. Accordingly, we may consider changing our employee compensation practices, and those changes could make it harder for us to retain existing employees and attract qualified candidates.

If our sales force compensation arrangements are not designed effectively, 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 revenue or potential revenue.

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 fiscal year 2005 and the third quarter of fiscal year 2003, we decreased our workforce by 23 and 32 employees, respectively. 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 hinder our efforts to adequately manage our growth, disrupt operations, lead to deficiencies under the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, and ultimately harm to our business.

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

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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, 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 software 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.

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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.

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, in a combined vote, 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.

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;

• 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 advance 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.

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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 October 2, 2005, we had no hedging contracts outstanding. We do not currently use financial instruments to hedge operating expenses denominated in Euro, British Pounds and Japanese Yen. 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 $150.0 million principal amount of our zero coupon convertible notes due May 2008. In May 2005, we repurchased, in privately negotiated transactions, $44.5 million face amount (or approximately 29.7 percent of the total) of these notes at an average discount to face value of approximately 22 percent. Magma spent an aggregate of approximately $34.8 million on the repurchases. The repurchase leaves approximately $105.5 million aggregate principal amount of convertible subordinated notes outstanding. 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. At the time of our May 2005 repurchase of our zero coupon convertible notes, a portion of the hedging arrangements were retired. 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

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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.

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 further 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, 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.

Failure to obtain export licenses could harm our business by preventing us from transferring our technology outside of the United States.

We are required to comply with U.S. Department of Commerce regulations when shipping our software products and/or transferring our technology outside of the United States or to certain foreign nationals. We believe we have complied with applicable export regulations, however, these regulations are subject to change, and, future difficulties in obtaining export licenses for current, future developed and acquired products and technology could harm our business, financial conditions and operating results.

Our business operations may be adversely affected in the event of an earthquake or other natural disaster.

Our corporate headquarters and much of our research and development operations are located in Silicon Valley, California, which is an area known for its seismic activity. An earthquake, fire or other significant natural disaster could have a material adverse impact on our business, financial condition and/or operating results.

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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. As of October 2, 2005, a hypothetical 100 basis point increase in interest rates would result in approximately a $24,000 decline in the fair value of our available-for-sale securities.

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 $150.0 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.

In April 2005, the Company repurchased $44.5 million face value of its convertible notes for $34.8 million. In doing so, the Company liquidated investments that generated a realized loss of approximately $0.7 million. A portion of the hedge and warrant transactions entered into by Magma in 2003 was terminated in connection with the repurchase. The Company believes that it was in the best interests of the stockholders to reduce the balance sheet debt despite the one-time loss resulting from the liquidation of marketable securities.

Foreign Currency Exchange Rate Risk

A majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, we transact some portions of our business in various foreign currencies, primarily related to a portion of revenue in Japan and operating expenses in Europe, Japan and Asia-Pacific. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. As of October 2, 2005, we had no currency hedging contracts outstanding. We do not currently use financial instruments to hedge revenue and operating expenses denominated in foreign currencies. 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

We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required financial disclosures.

As of the end of the period covered by this report, we performed an evaluation, under the supervision of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). As of the date of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective because of the material weakness in our internal control over financial reporting described below. Notwithstanding the existence of this material weakness, our management, including our Chief Executive Officer and Chief Financial Officer, believes that the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed 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 (“GAAP”). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of October 2, 2005, we did not maintain effective controls over the completeness and accuracy of our accounting for stock-based compensation. Specifically, supervisory review and approval controls over stock-based compensation expenses for our stock option exchange program and the Mojave earn-outs compensation were not effective to ensure that the amounts were in accordance with GAAP. This control deficiency resulted in adjustments to stock-based compensation expense for the quarter ended October 2, 2005. Additionally, this control deficiency could result in a misstatement of stock-based compensation expense that would result in a material misstatement to the Company’s annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, we have concluded that this control deficiency constitutes a material weakness.

Changes in Internal Control over Financial Reporting

We assign a high priority to the improvement of our internal control over financial reporting. We will consider contracting additional technical accounting staff/outside consultants in our accounting and reporting function as we believe appropriate, and we have updated our accounting checklist to enhance our internal controls.

Other than as described above, there have been no changes in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during the quarter ended October 2, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Synopsys, Inc. v. Magma Design Automation, Inc., Civil Action No. C04-03923 (“MMC”), United States District Court, Northern District of California. In this action, filed September 17, 2004, Synopsys has sued the Company for alleged infringement of U.S. Patent Nos. 6,378,114 (“the ‘114 Patent”), 6,453,446 (“the ‘446 Patent”), and 6,725,438 (“the ‘438 Patent”). The patents-in-suit relate to methods for designing integrated circuits. The Complaint seeks unspecified monetary damages, injunctive relief, trebling of damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged infringement of the patents-in-suit.

On October 21, 2004, the Company filed its answer and counterclaims (“Answer”) to the Complaint. On November 10, 2004 Synopsys filed motions to strike and dismiss certain affirmative defenses and counterclaims in the Answer. On November 24, 2004 the Company filed an Amended Answer and Counterclaims (“Amended Answer”). By order dated November 29, 2004, the Court denied Synopsys’ motions as moot in light of the Amended Answer. On December 10, 2004, Synopsys moved to strike and dismiss certain affirmative defenses and counterclaims in the Amended Answer. By order dated January 20, 2005, the Court denied in part and granted in part Synopsys’ motion. In its pretrial preparation order dated January 21, 2005, the Court set forth a schedule for the case which, among other things, sets trial for April 24, 2006. Discovery is ongoing.

On February 3, 2005, Synopsys filed its Reply to the Amended Answer. On March 17, 2005, Synopsys filed a First Amended Complaint, which asserts seven causes of action against the Company and/or Lukas van Ginneken: (1) patent infringement (against both defendants), (2) breach of contract (against van Ginneken), (3) inducing breach of contract (against the Company), (4) fraud (against the Company), (5) conversion (against both defendants), (6) unjust enrichment/constructive trust (against both defendants), and (7) unfair competition (against both defendants). Synopsys seeks injunctive relief, declaratory relief, at least $100 million in damages, trebling of damages, punitive damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged exploitation of the alleged inventions in the patents-in-suit. On April 1, 2005, the Company filed a motion to dismiss the third through seventh causes of action. This motion was granted in part and denied in part by order dated May 18, 2005.

On April 11, 2005, Synopsys voluntarily dismissed van Ginneken from the lawsuit without prejudice. Also on April 11, 2005, Synopsys filed against the Company a motion for partial summary judgment establishing unfair competition and a motion for partial summary judgment based on the doctrine of assignor estoppel.

On June 7, 2005, Synopsys filed a Second Amended Complaint that asserts six causes of action against the Company: (1) patent infringement, (2) inducing breach of contract/interference with contractual relations, (3) fraud, (4) conversion, (5) unjust enrichment/constructive trust/quasi-contract, and (6) unfair competition. Synopsys seeks injunctive relief, declaratory relief, at least $100 million in damages, trebling of damages, punitive damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged exploitation of the alleged inventions in the patents-in-suit. On June 10, 2005, Magma moved for summary judgment as to the second through sixth causes of action in the Second Amended Complaint. On June 21, 2005, the Company moved to dismiss the third cause of action for fraud in the Second Amended Complaint and moved to strike certain allegations in the Second Amended Complaint. The court granted the Company’s motion to dismiss and strike by order dated July 15, 2005.

On July 1, 2005, the Court granted Synopsys’s motion for partial summary judgment regarding assignor estoppel, dismissing Magma’s affirmative defenses and counterclaim alleging the invalidity of the ‘114 Patent. On July 14, 2005, the court vacated the hearings on Magma’s motion for summary judgment on the second through sixth causes of action in the Second Amended Complaint and Synopsys’s motion for partial summary

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judgment establishing unfair competition. The court stated that it would reset the motions for hearing, if necessary, after the claims construction hearing scheduled for August 15, 2005.

On July 29, 2005, Synopsys moved to preliminarily enjoin the Company from abandoning or dedicating to the public the ‘446 Patent or the ‘438 Patent. Also on July 29, 2005, Synopsys moved for partial summary judgment seeking dismissal of certain counterclaims and defenses asserted by the Company on the grounds of estoppel by contract. On September 16, 2005, Synopsys filed a revised motion for preliminary injunction. On September 30, 2005, the Company filed its oppositions to Synopsys’s preliminary injunction motion and estoppel by contract motion. Both motions are scheduled to be heard December 2, 2005.

On August 3, 2005, Synopsys filed a Third Amended Complaint that asserts six causes of action against the Company: (1) patent infringement, (2) inducing breach of contract/interference with contractual relations, (3) fraud, (4) conversion, (5) unjust enrichment/constructive trust/quasi-contract, and (6) unfair competition. Synopsys seeks injunctive relief, declaratory relief, at least $100 million in damages, trebling of damages, punitive damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged exploitation of the alleged inventions in the patents-in-suit.

On August 30, 2005, the Court issued a temporary restraining order against the Company restraining and enjoining the Company from taking any steps in the United States Patent and Trademark Office to abandon, suspend or disclaim the ‘446 and ‘438 Patents, failing or refusing to pay the maintenance fees for the ‘446 and ‘438 Patents, or seeking reexamination of the ‘446 and ‘438 Patents. The temporary restraining order will remain in effect until the hearing on Synopsys’s motion for a preliminary injunction scheduled for December 2, 2005.

On September 2, 2005, the Company filed an Answer and Counterclaims to Synopsys’s Third Amended Complaint. In that pleading, the Company alleges, inter alia, that IBM is a joint owner of the patents-in-suit and that, as a result, the Company cannot be liable for infringement because (1) Synopsys lacks standing to assert the patents-in-suit against Magma, and (2) the patents-in-suit are licensed to Magma by IBM.

On October 19, 2005, the Court granted in part and denied in part Synopsys’s motion to strike certain affirmative defenses and to dismiss certain counterclaims in the Company’s Answer and Counterclaims to Synopsys’s Third Amended Complaint. The Court dismissed without leave to amend the Company’s counterclaims seeking correction of inventorship of the ‘446 and ‘438 Patents. The Court also struck without leave to amend the Company’s affirmative defenses of (1) invalidity of the ‘446 and ‘438 Patents based on failure to name all inventors, (2) unenforceability of the ‘446 and ‘438 patents due to inequitable conduct, and (3) unclean hands. The Court struck with leave to amend the Company’s affirmative defenses of invalidity of the ‘446 and ‘438 Patents based on 35 U.S.C. §§ 102, 103 and 112, as well as the Company’s affirmative defense that Synopsys is not the owner of any invention defined by the claims of the ‘446 and ‘438 Patents.

On October 24, 2005, the Company filed a motion for summary judgment as to the first cause of action (for patent infringement) in Synopsys’s Third Amended Complaint on the grounds that IBM is an owner of all the patents-in-suit. Also on October 24, 2005, Synopsys filed (1) a motion for partial summary judgment to dismiss the Company’s joint ownership defenses and counterclaims, and (2) a motion for partial summary judgment to dismiss allegations of co-ownership based on judicial and quasi-estoppel. All three motions are scheduled to be heard on December 2, 2005.

The Company intends to vigorously defend against the claims asserted by Synopsys and to fully enforce its rights against Synopsys. However, the results of any litigation are inherently uncertain and the Company can not assure that it will be able to successfully defend against the Complaint. A favorable outcome for Synopsys could have a material adverse effect on the Company’s financial position, results of operations or cash flows. The Company is currently unable to assess the extent of damages and/or other relief, if any, that could be awarded to Synopsys; therefore, no contingent liability has been recorded on the Company’s condensed consolidated balance sheet as of October 2, 2005.

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On April 18, 2005, Synopsys, Inc. filed an action against the Company in Germany at the Landgericht München I (District Court in Munich) seeking to obtain ownership of the European patent application corresponding to the Company’s ‘446 Patent. The action has been stayed pending the outcome of the above-referenced Synopsys action filed in the United States.

On July 29, 2005, Synopsys, Inc. filed an action against the Company in Japan in Civil Department No. 40 of the Tokyo District Court seeking to obtain ownership of the Japanese patent application corresponding to the Company’s ‘446 Patent. The Company has engaged counsel in Japan and will seek to stay this action pending the outcome of the above-referenced Synopsys action filed in the United States.

On June 13, 2005, a putative shareholder class action lawsuit captioned The Cornelia I. Crowell GST Trust vs. Magma Design Automation, Inc., Rajeev Madhavan, Gregory C. Walker and Roy E. Jewell., No. C 05 02394, was filed in U.S. District Court, Northern District of California. The complaint alleges that defendants failed to disclose information regarding the risk of Magma infringing intellectual property rights of Synopsys, Inc., in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and prays for unspecified damages. The Company is currently unable to assess the possible range or extent of damages and/or other relief, if any, that could be awarded to the shareholder class; therefore, no contingent liability has been recorded on the Company’s condensed consolidated balance sheet as of October 2, 2005. The ultimate resolution of this matter or other third party assertions could have a material adverse effect on the Company’s financial position, results of operations or cash flows.

On July 26, 2005, a putative derivative complaint captioned Susan Willis v. Magma Design Automation, Inc. et al., No. 1-05-CV-045834, was filed in the Superior Court of the State of California for the County of Santa Clara. The Complaint seeks unspecified damages purportedly on behalf of the Company for alleged breaches of fiduciary duties by various directors and officers, as well as for alleged violations of insider trading laws by executives during a period between October 23, 2002 and April 12, 2005. Defendants have demurred to the Complaint, and a hearing is scheduled for December 2005. The Company is currently unable to assess the possible range or extent of damages and/or other relief, if any, that could be awarded; therefore, no contingent liability has been recorded on the Company’s condensed consolidated balance sheet as of October 2, 2005. The ultimate resolution of this matter or other third party assertions could have a material adverse effect on the Company’s financial position, results of operations or cash flows.

On September 26, 2005, Synopsys, Inc. filed an action against the Company in the Superior Court of the State of California in and for the County of Santa Clara, entitled Synopsys, Inc. v. Magma Design Automation, Inc., et al., Case Number 105 CV 049638. Synopsys alleges that Magma committed unfair business practices by asserting defenses of non-infringement and invalidity to patent infringement allegations brought by Synopsys in the patent infringement action already pending against Magma in the Northern District of California. On October 19, 2005, the Company removed the action to the United States District Court for the Northern District of California. On October 26, 2005, the Company moved to strike and dismiss the complaint. On October 27, 2005, the Court granted the Company’s motion to relate the removed action with the preexisting patent infringement action, and both actions are now assigned to Judge Maxine M. Chesney.

On September 26, 2005, Synopsys, Inc. filed an action against the Company in Delaware federal court, Synopsys, Inc. v. Magma Design Automation, Inc., Civil Action No. 05-701. The Complaint alleges infringement of U.S. Patent Nos. 6,434,733 (“the ‘733 Patent”), 6,766,501 (“the ‘501 Patent”), and 6,192,508 (“the ‘508 Patent”) and seeks unspecified monetary damages, injunctive relief, trebling of damages, fees and costs, and the imposition of a constructive trust for the benefit of Synopsys over any profits, revenues or other benefits allegedly obtained by the Company as a result of its alleged infringement of the patents-in-suit.

On October 19, 2005, the Company filed its answer and counterclaims (“Answer”) to Synopsys’s Complaint. The Answer asserts that Magma’s products do not infringe the patents-in-suit, that the patents-in-suit are unenforceable, and that the ‘733 Patent and the ‘501 Patent were fraudulently obtained by Synopsys and are

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therefore unenforceable. The Answer also asserts antitrust counterclaims based on Synopsys’s assertion of the ‘733 and ‘501 Patents, as well as claims for product disparagement and trade libel, statutory and common law unfair competition, and tortuous interference with business relations. The counterclaims seek treble damages and other equitable relief for Synopsys’s anticompetitive and tortuous conduct.

On October 25, 2005, the Company filed an Amended Answer, adding a counterclaim for infringement of U.S. Patent No. 6,505,328 (“the ‘328 Patent”). The Company seeks treble damages and an injunction against Synopsys for the sale and manufacture of products the Company alleges infringe the ‘328 Patent.

In addition to the above, from time to time, the Company is involved in 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 it 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, financial condition, results of operations or cash flows.

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

At Magma’s annual meeting of stockholders, held on August 30, 2005, the following matters were considered and voted upon:

Proposal 1. To elect two Class I directors, to hold office until the 2008 annual meeting of stockholders. The votes cast and withheld for such nominees were as follows:

Nominee	For	Withheld
Roy E. Jewell	28,934,626	316,555
Thomas M. Rohrs	27,925,424	1,325,757

Proposal 2. To ratify the appointment of PricewaterhouseCoopers LLP as Magma’s independent registered public accounting firm for the fiscal year ending April 2, 2006.

For	Against	Abstain
29,010,283	30,601	210,297

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ITEM 6. EXHIBITS

The following documents are filed as Exhibits to this report:

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
4.1	Amended and Restated Certificate of Incorporation	10-K	000-33213	3.1	June 28, 2002
4.2	Certificate of Correction to the Amended and Restated Certificate of Incorporation	10-K	000-33213	3.2	June 28, 2002
4.3	Amended and Restated Bylaws	10-K	000-33213	3.3	June 28, 2002
4.4	Amended and Restated Investors’ Rights Agreement dated July 31, 2001, by and among the Registrant and the parties that are signatories thereto	10-K	000-33213	4.2	June 28, 2002
4.5	Form of Common Stock Certificate	S-1/A	333-60838	4.1	November 15, 2001
10.1	Form of Notice of Grant of Stock Options and Stock Option Agreement pursuant to Magma’s 2001 Stock Incentive Plan for U.S. Employees (other than Executive Officers)					X
10.2	Form Notice of Grant of Stock Options pursuant to Magma’s 2001 Stock Incentive Plan for Executive Officers					X
10.3	Form of Notice of Grant of Stock Options and Stock Option Agreement pursuant to Magma’s 2001 Stock Incentive Plan for Employees residing in countries other than the United States, China, Israel, Italy and the United Kingdom					X
10.4	Form of Notice of Grant of Stock Options and Stock Option Agreement pursuant to Magma’s 2001 Stock Incentive Plan for Employees residing in China, Israel, and Italy					X
10.5	Notice of Grant of Stock Options and Stock Option Agreement pursuant to Magma’s 2001 Stock Incentive Plan for Employees residing in the United Kingdom					X
10.6	Notice of Restricted Share Award and Restricted Share Agreement pursuant to Magma’s 2001 Stock Incentive Plan for non-Executive Employees					X
10.7	Notice of Restricted Share Award and Restricted Share Agreement pursuant to Magma’s 2001 Stock Incentive Plan for Executive Officers					X
10.8	2005 Key Contributor Long-Term Incentive Plan					X

60

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer					X
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer					X
32.1	Section 1350 Certification of Principal Executive Officer					X
32.2	Section 1350 Certification of Principal Financial Officer					X

61

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, 2005	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)

62

EXHIBIT INDEX

TO

MAGMA DESIGN AUTOMATION, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED OCTOBER 2, 2005

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
4.1	Amended and Restated Certificate of Incorporation	10-K	000-33213	3.1	June 28, 2002
4.2	Certificate of Correction to the Amended and Restated Certificate of Incorporation	10-K	000-33213	3.2	June 28, 2002
4.3	Amended and Restated Bylaws	10-K	000-33213	3.3	June 28, 2002
4.4	Amended and Restated Investors’ Rights Agreement dated July 31, 2001, by and among the Registrant and the parties that are signatories thereto	10-K	000-33213	4.2	June 28, 2002
4.5	Form of Common Stock Certificate	S-1/A	333-60838	4.1	November 15, 2001
10.1	Form of Notice of Grant of Stock Options and Stock Option Agreement pursuant to Magma’s 2001 Stock Incentive Plan for U.S. Employees (other than Executive Officers)					X
10.2	Form Notice of Grant of Stock Options pursuant to Magma’s 2001 Stock Incentive Plan for Executive Officers					X
10.3	Form of Notice of Grant of Stock Options and Stock Option Agreement pursuant to Magma’s 2001 Stock Incentive Plan for Employees residing in countries other than the United States, China, Israel, Italy and the United Kingdom					X
10.4	Form of Notice of Grant of Stock Options and Stock Option Agreement pursuant to Magma’s 2001 Stock Incentive Plan for Employees residing in China, Israel, and Italy					X
10.5	Notice of Grant of Stock Options and Stock Option Agreement pursuant to Magma’s 2001 Stock Incentive Plan for Employees residing in the United Kingdom					X
10.6	Notice of Restricted Share Award and Restricted Share Agreement pursuant to Magma’s 2001 Stock Incentive Plan for non-Executive Employees					X

63

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
10.7	Notice of Restricted Share Award and Restricted Share Agreement pursuant to Magma’s 2001 Stock Incentive Plan for Executive Officers					X
10.8	2005 Key Contributor Long-Term Incentive Plan					X
31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer					X
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer					X
32.1	Section 1350 Certification of Principal Executive Officer					X
32.2	Section 1350 Certification of Principal Financial Officer					X

64

EX-10.1

Exhibit 10.1

Notice of Grant of Stock Options and Option Agreement	Magma Design Automation, Inc. ID: 77-0454924 5460 Bayfront Plaza Santa Clara, CA 95054-3600
Name	Option Number:	000XXXX
Address 1	Plan:	2001
Address 2
City, State, Zip	ID:	xxx-xx-xxxx

Effective mm/dd/yyyy, you have been granted a(n) [Incentive] [Nonstatutory] Stock Option to buy xxx shares of Magma Design Automation, Inc. (the Company) stock at $xx.xx per share.

The total option price of the shares granted is $xx,xxx.xx.

Shares in each period will become fully vested on the date shown.

Shares	Vest Type	Full Vest	Expiration
xxx	On Vest Date	mm/dd/yyyy	mm/dd/yyyy
x,xxx	Monthly	mm/dd/yyyy	mm/dd/yyyy

By your signature and the Company’s signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company’s Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document.

Magma Design Automation, Inc.	Date
Optionee Name	Date

[For U.S. Employees]

STOCK OPTION AGREEMENT

TERMS AND CONDITIONS

MAGMA DESIGN AUTOMATION, INC.

2001 Stock Incentive Plan

THIS STOCK OPTION AGREEMENT TERMS AND CONDITIONS (the “Agreement”), together with the Notice of Stock Option Grant (the “Notice of Grant”) to which this Agreement is attached, constitute the Stock Option Agreement referred to in the Magma Design Automation, Inc. 2001 Stock Incentive Plan (the “Plan”) with respect to the option granted to you pursuant to the Notice of Grant (the “Option”). This Option is intended to be an Incentive Stock Option or a Nonstatutory Stock Option, as provided in the Notice of Grant.

1. Exercise

The Option evidenced by this Agreement becomes exercisable [insert vesting schedule], as summarized in the Notice of Grant. Your rights to exercise the Option accrue only for the time period you render Service to the Company following your vesting commencement date. Your vesting commencement date is [insert].

2. Term The Option expires on the date shown in the Notice of Grant, but in no event later than the fifth anniversary of the Date of Grant set forth in the Notice of Grant. The Option may expire earlier in connection with the termination of your Service, as described below.

3. Regular Termination If your Service with the Company or a Subsidiary terminates for any reason excluding death, Total and Permanent Disability or Cause (as defined below), this Option will expire on the date three months after your Termination Date. Your “Termination Date” will be the date you are no longer actively providing Service to the Company.

4. Death or Disability If your Service with the Company or a Subsidiary terminates as a result of your Total and Permanent Disability or death, this Option will expire on the date six months after your Termination Date. If the Option is an Incentive Stock Option, the Option will cease to be treated as an Incentive Stock Option if not exercised within three months after termination of Service.

5. Cause If your Service with the Company or a Subsidiary terminates for Cause, this Option will expire on the date seven days following your Termination Date. For purposes of this section, “Cause” shall mean (i) continued failure to perform substantially your duties, which standard of duties shall be referenced to the standards set by the Company at the date of this Agreement (other than as a result of sickness, accident or similar cause beyond your reasonable control) after receipt of a written warning and your being given thirty (30) days to cure the failure; (ii) willful misconduct or gross negligence, which is demonstrably injurious to the Company or any of its Subsidiaries, including without limitation willful or grossly negligent failure to perform your material duties as an officer or employee of the Company or any of its Subsidiaries or a material breach of this Agreement, your employment agreement (if any) or your Proprietary Information and Inventions Agreement with the Company; (iii) conviction of or plea of nolo contendere to a felony; or (iv) commission of an act of fraud against, or the misappropriation of property belonging to, the Company or any affiliated company, employee, customer or supplier of the Company.

6. Leaves of Absence For purposes of this Option, your Service does not terminate when you go on a military leave of absence, a sick leave of absence or another bona fide leave of absence, if the leave of absence was approved by the Company in writing and if continued crediting of Service is required by the terms of the leave or by applicable law. Your Service will terminate when the approved leave of absence ends unless you immediately return to active employment. Except as provided by applicable law, or unless expressly provided in writing pursuant to a Company-approved leave of absence, the period of the approved leave of absence will not be credited as Service to the Company for the purposes of determining when your Option vests. In accordance with the preceding sentence, the dates on which the Option would otherwise vest will be postponed by the number of days of the approved leave of absence.

7. Restrictions on Exercise The Company will not permit you to exercise this Option if the issuance of Shares at that time would violate any law or regulation. The exercise of this Option and the issuance of the Shares upon such exercise is subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. No Shares will be issued or delivered to you under the Plan unless and until there has been compliance with such applicable laws.

8. Notice of Exercise When you wish to exercise this Option you must notify the Company by completing the Notice of Stock Option Exercise in the form attached to this Agreement (or such other form approved by the Company) (the “Notice of Exercise”) and filing it with the Treasury Department of the Company. The exercise of your Option will be effective when the Notice of Exercise and payment of the Exercise Price is received by the Company. In the case of a cashless exercise through a securities broker approved by the Company, the Notice of Exercise form must be filed in advance and approved by the Company prior to placing the order with the broker. This Notice of Exercise form may be superseded by a Company-sponsored web-based trading program that includes security measures sufficient to ensure your identification, such that your entry of a web-based exercise or cashless exercise constitutes your request and authorization to exercise the Option. If someone else wants to exercise this Option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.

9. Form of Payment. Payment may be made (i) by personal check, a cashier’s check or a money order, (ii) in shares of Company Stock which have been owned by you or your representative for more than twelve (12) months and which are surrendered to the Company in good form for transfer, or (iii) by delivering a Committee-approved form of irrevocable direction to a securities broker approved by the Company to sell all or part of the Shares subject to the Option and to deliver to the Company from the sale proceeds an amount sufficient to pay the aggregate Exercise Price and any federal, state or local withholding taxes. In the case of a cashless exercise, the balance of the sale proceeds will be delivered to you and you will not receive any Shares. In the case of any other exercise method described herein, as soon as practicable after the date you exercise your Option, the Company shall issue to you the purchased Shares, (as evidenced by the appropriate entry in the books of the Company or a duly authorized transfer agent of the Company). Notwithstanding the foregoing, a form of payment will not be available if the Committee determines, in its sole and absolute discretion, that such form of payment could violate any law or regulation.

10. Withholding Taxes and Stock Withholding. You will not be allowed to exercise this Option unless you make arrangements acceptable to the Company to pay any federal, state or local withholding taxes that may be due as a result of the Option exercise. These arrangements may include withholding Shares of Company Stock that otherwise would be issued to you when you exercise this Option. The value of these Shares, determined as of the effective date of Option exercise, will be applied to the withholding taxes.

11. Restrictions on Resale. By entering into this Stock Option Agreement Terms and Conditions, you agree not to sell any Shares at a time when applicable laws or Company policies prohibit a sale. This restriction will apply as long as you are providing Service to the Company or a Subsidiary.

12. Transfer of Option. Prior to your death, only you can exercise this Option. You cannot sell, transfer, assign, pledge or otherwise alienate this Option. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may in any event dispose of this Option in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your Option in any other way.

13. Retention Rights. Neither your Option nor this Agreement gives you the right to be retained by the Company or a Subsidiary in any capacity. The Company and its Subsidiaries reserve the right to terminate your Service at any time, with or without Cause.

14. Stockholder Rights. You have no rights as a stockholder of the Company until you have exercised this Option by giving the required Notice of Exercise to the Company and paying the Exercise Price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this Option, except as described in the Plan.

15. Adjustments. In the event of a stock split, a stock dividend or a similar change in Company Stock, the number of Shares subject to this Option and the Exercise Price per share may be adjusted pursuant to the Plan.

16. Applicable Law. This Option grant and the provisions of this Agreement will be interpreted and enforced under the laws of the State of California (without regard to choice-of-law provisions).

17. The Plan and Other Agreements. The text of the Plan is incorporated in this Agreement by reference. Capitalized terms used herein and not defined shall have the meanings set forth in the Plan. This Agreement, the Notice of Grant, the Notice of Exercise and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning the Option are superseded. This Agreement, the Notice of Grant and the Notice of Exercise may be amended only by another written agreement, signed by both you and the Company.

18. Severability The provisions of this Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

19. Electronic Delivery The Company may, in its sole discretion, decide to deliver any documents related to the Option granted under the Plan or future Options that may be granted under the Plan by electronic means or to request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

BY SIGNING THE NOTICE OF GRANT, YOU AGREE TO ALL OF THE

TERMS AND CONDITIONS DESCRIBED IN THE NOTICE OF GRANT, THE

AGREEMENT, THE NOTICE OF EXERCISE AND THE PLAN, AND ACKNOWLEDGE

RECEIPT OF A COPY OF THE PLAN

EX-10.2

Exhibit 10.2

Notice of Grant of Stock Options and Option Agreement	Magma Design Automation, Inc.
(Executive Officers)	5460 Bayfront Plaza
	Santa Clara, CA 95054-3600
Name	Option Number:
Address	Plan:	2001
	ID:

Effective mm/dd/yyyy, you (the Optionee) have been granted a(n) [Incentive] [Nonstatutory] Stock Option to purchase xxx shares of Magma Design Automation, Inc. (the Company) stock at $xx.xx per share pursuant to the terms of the Magma Design Automation, Inc. 2001 Stock Incentive Plan (the Plan).

The total option price of the shares granted is $xx,xxx.xx

Shares in each period will become fully vested on the date shown.

Shares	Vest Type	Full Vest	Expiration
xxx	On Vest Date	mm/dd/yyyy	mm/dd/yyyy
x,xxx	Monthly	mm/dd/yyyy	mm/dd/yyyy

Notwithstanding the vesting schedule above, upon the occurrence of a Change of Control (as defined in the Plan), 25% of the remaining unvested options shall immediately vest. Further, in the event of your Involuntary Termination (as defined below) prior to the first anniversary of the Change of Control, 50% of the then remaining unvested options shall immediately vest, and provided that such acceleration would not result in the underlying options becoming subject to variable award accounting or in any other adverse accounting effects. “Involuntary Termination” shall mean any termination without Cause (as defined below) as well as any instance of “Constructive Termination.” “Constructive Termination^” shall be deemed to occur when the only position available at the successor or surviving company entails (i) a relocation of more than 50 miles, (ii) a reduction in base pay, or (iii) a unilateral change by the successor or surviving company (or its parent) in your duties to non-executive level duties; provided, however, that your duties shall not be deemed non-executive if they involve duties as to the Magma division or subsidiary of the successor or surviving company (or its parent) that are comparable in scope to your duties at the Company immediately prior to the related Change of Control. For purposes of this section, “Cause” shall mean (i) continued failure to perform substantially your duties, which standard of duties shall be referenced to the standards set by the Company at the date of this Agreement (other than as a result of sickness, accident or similar cause beyond your reasonable control) after receipt of a written warning and your being given thirty (30) days to cure the failure; (ii) willful misconduct or gross negligence, which is demonstrably injurious to the Company or any of its subsidiaries, including without limitation willful or grossly negligent failure to perform your material duties as an officer or employee of the Company or any of its subsidiaries or a material breach of this Agreement, your employment agreement (if any) or your Proprietary Information and Inventions Agreement with the Company; (iii) conviction of or plea of nolo contendere to a felony; or (iv) commission of an act of fraud against, or the misappropriation of property belonging to, the Company or any affiliated company, employee, customer or supplier of the Company.

By your signature and the Company’s signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Plan and the Option Agreement, all of which are attached and made a part of this document.

Magma Design Automation, Inc.	Date
Optionee	Date

EX-10.3

Exhibit 10.3

Notice of Grant of Stock Options and Option Agreement	Magma Design Automation, Inc. ID: 77-0454924 5460 Bayfront Plaza Santa Clara, CA 95054-3600
Name	Option Number:	000XXXX
Address 1	Plan:	2001
Address 2
City, State, Zip	ID:	xxx-xx-xxxx

Effective mm/dd/yyyy, you have been granted a Nonstatutory Stock Option to buy xxx shares of Magma Design Automation, Inc. (the Company) stock at $xx.xx per share.

The total option price of the shares granted is $xx,xxx.xx.

Shares in each period will become fully vested on the date shown.

Shares	Vest Type	Full Vest	Expiration
xxx	On Vest Date	mm/dd/yyyy	mm/dd/yyyy
x,xxx	Monthly	mm/dd/yyyy	mm/dd/yyyy

By your signature and the Company’s signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company’s Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document.

Magma Design Automation, Inc.	Date
Optionee Name	Date

[For Employees residing in countries other than the United States, China, Israel, Italy and the United Kingdom]

STOCK OPTION AGREEMENT

TERMS AND CONDITIONS

MAGMA DESIGN AUTOMATION, INC.

2001 Stock Incentive Plan

THIS STOCK OPTION AGREEMENT TERMS AND CONDITIONS (the “Agreement”), together with the Notice of Stock Option Grant (the “Notice of Grant”) to which this Agreement is attached, constitute the Stock Option Agreement referred to in the Magma Design Automation, Inc. 2001 Stock Incentive Plan (the “Plan”) with respect to the option granted to you pursuant to the Notice of Grant (the “Option”). This Option is intended to be a Nonstatutory Stock Option, as provided in the Notice of Grant.

1. Exercise

The Option evidenced by this Agreement becomes exercisable [vesting schedule], as summarized in the Notice of Grant. Your rights to exercise the Option accrue only for the time period you render Service to the Company following your vesting commencement date. Your vesting commencement date is [insert].

2. Term The Option expires on the date shown in the Notice of Grant, but in no event later than the fifth anniversary of the Date of Grant set forth in the Notice of Grant. The Option may expire earlier in connection with the termination of your Service, as described below.

3. Regular Termination If your Service with the Company or a Subsidiary terminates for any reason excluding death, Total and Permanent Disability or Cause (as defined below), and whether or not in breach of local labor law, this Option will expire on the date three months after your Termination Date. Your “Termination Date” will be the date you are no longer actively providing Service to the Company (not extended by any notice period mandated under local law).

4. Death or Disability If your Service with the Company or a Subsidiary terminates as a result of your Total and Permanent Disability or death, this Option will expire on the date six months after your Termination Date.

5. Cause If your Service with the Company or a Subsidiary terminates for Cause, this Option will expire on the date seven days following your Termination Date. For purposes of this section, “Cause” shall mean (i) continued failure to perform substantially your duties, which standard of duties shall be referenced to the standards set by the Company at the date of this Agreement (other than as a result of sickness, accident or similar cause beyond your reasonable control) after receipt of a written warning and your being given thirty (30) days to cure the failure; (ii) willful misconduct or gross negligence, which is demonstrably injurious to the Company or any of its Subsidiaries, including without limitation willful or grossly negligent failure to perform your material duties as an officer or employee of the Company or any of its Subsidiaries or a material breach of this Agreement, your employment agreement (if any) or your Proprietary Information and Inventions Agreement with the Company; (iii) conviction of or plea of nolo contendere to a felony; or (iv) commission of an act of fraud against, or the misappropriation of property belonging to, the Company or any affiliated company, employee, customer or supplier of the Company.

6. Leaves of Absence For purposes of this Option, your Service does not terminate when you go on a military leave of absence, a sick leave of absence or another bona fide leave of absence, if the leave of absence was approved by the Company in writing and if continued crediting of Service is required by the terms of the leave or by applicable law. Your Service will terminate when the approved leave of absence ends unless you immediately return to active employment. Except as provided by applicable law, or unless expressly provided in writing pursuant to a Company-approved leave of absence, the period of the approved leave of absence will not be credited as Service to the Company for the purposes of determining when your Option vests. In accordance with the preceding sentence, the dates on which the Option would otherwise vest will be postponed by the number of days of the approved leave of absence.

7. Restrictions on Exercise The Company will not permit you to exercise this Option if the issuance of Shares at that time would violate any law or regulation. The exercise of this Option and the issuance of the Shares upon such exercise is subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. No Shares will be issued or delivered to you under the Plan unless and until there has been compliance with such applicable laws.

8. Notice of Exercise When you wish to exercise this Option you must notify the Company by completing the Notice of Stock Option Exercise in the form attached to this Agreement (or such other form approved by the Company) (the “Notice of Exercise”) and filing it with the Treasury Department of the Company. The exercise of your Option will be effective when the Notice of Exercise and payment of the Exercise Price is received by the Company. In the case of a cashless exercise through a securities broker approved by the Company, the Notice of Exercise form must be filed in advance and approved by the Company prior to placing the order with the broker. This Notice of Exercise form may be superseded by a Company-sponsored web-based trading program that includes security measures sufficient to ensure your identification, such that your entry of a web-based exercise or cashless exercise constitutes your request and authorization to exercise the Option. If someone else wants to exercise this Option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.

9. Form of Payment Payment may be made (i) by personal check, a cashier’s check or a money order, or (ii) by delivering a Committee-approved form of irrevocable direction to a securities broker approved by the Company to sell all or part of the Shares subject to the Option and to deliver to the Company from the sale proceeds an amount sufficient to pay the aggregate Exercise Price and any withholding taxes (including social insurance contributions and payment on account obligations). In the case of a cashless exercise, the balance of the sale proceeds will be delivered to you and you will not receive any Shares. In the case of any other exercise method described herein, as soon as practicable after the date you exercise your Option, the Company shall issue to you the purchased Shares, (as evidenced by the appropriate entry in the books of the Company or a duly authorized transfer agent of the Company). Notwithstanding the foregoing, a form of payment will not be available if the Committee determines, in its sole and absolute discretion, that such form of payment could violate any law or regulation.

10. Withholding Taxes and Stock Withholding

Regardless of any action the Company or your employer (the “Employer”) takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), you acknowledge that the ultimate liability for all Tax-Related Items legally due by you is and remains your responsibility and that the Company and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option grant, including the grant, vesting or exercise of the Option, the subsequent sale of Shares acquired pursuant to such exercise and the receipt of any dividends; and (2) do not commit to structure the terms of the grant or any aspect of the Option to reduce or eliminate your liability for Tax-Related Items.

Prior to exercise of the Option, you will pay or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all withholding and payment on account obligations for Tax-Related Items of the Company and/or the Employer. In this regard, you authorize the Company and/or the Employer to withhold all applicable Tax-Related Items legally payable by you from your wages or other cash compensation paid to you by the Company and/or the Employer or from proceeds of the sale of Shares. Alternatively, or in addition, if permissible under local law, the Company may (1) sell or arrange for the sale of Shares that you acquire to meet the withholding obligation for Tax-Related Items, and/or (2) withhold in Shares, provided that the Company only withholds the amount of Shares necessary to satisfy the minimum withholding amount. Finally, you will pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of your participation in the Plan or your purchase of Shares that cannot be satisfied by the means previously described. The Company may refuse to honor the exercise and refuse to deliver the Shares if you fail to comply with your obligations in connection with the Tax-Related Items as described in this section.

11. Restrictions on Resale By entering into this Agreement, you agree not to sell any Shares at a time when applicable laws or Company policies prohibit a sale. This restriction will apply as long as you are providing Service to the Company or a Subsidiary.

12. Transfer of Option Prior to your death, only you can exercise this Option. You cannot sell, transfer, assign, pledge or otherwise alienate this Option. For instance, you may not sell this Option or use it as security for a loan. If

you attempt to do any of these things, this Option will immediately become invalid. You may in any event dispose of this Option in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your Option in any other way.

13. Retention Rights Neither your Option nor this Agreement give you the right to be retained by the Company or a Subsidiary in any capacity. The Company and its Subsidiaries reserve the right to terminate your Service at any time, with or without Cause.

14. Nature of Grant

In accepting the grant, you acknowledge that:

1) the Plan is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement;

2) the grant of the Option is voluntary and occasional and does not create any contractual or other right to receive future grants of options, or benefits in lieu of options, even if options have been granted repeatedly in the past;

3) all decisions with respect to future option grants, if any, will be at the sole discretion of the Company;

4) you are voluntarily participating in the Plan;

5) the Option is an extraordinary item that does not constitute compensation of any kind for services of any kind rendered to the Company or the Employer, and which is outside the scope of your employment contract, if any;

6) the Option is not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or the Employer;

7) in the event that you are not an employee of the Company, the Option grant will not be interpreted to form an employment contract or relationship with the Company; and furthermore, the Option grant will not be interpreted to form an employment contract with the Employer or any Subsidiary or affiliate of the Company;

8) the future value of the underlying Shares is unknown and cannot be predicted with certainty;

9) if the underlying Shares do not increase in value, the Option will have no value;

10) if you exercise your Option and obtain Shares, the value of those Shares acquired upon exercise may increase or decrease in value, even below the exercise price;

11) in consideration of the grant of the Option, no claim or entitlement to compensation or damages shall arise from termination of the Option or diminution in value of the Option or Shares purchased through exercise of the Option resulting from termination of your employment by the Company or the Employer (for any reason whatsoever and whether or not in breach of local labor laws) and you irrevocably release the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, you shall be deemed irrevocably to have waived your entitlement to pursue such claim; and

12) in the event of termination of your employment (whether or not in breach of local labor laws), your right to receive additional Options and to vest in the Option under the Plan, if any, will terminate effective as of your Termination Date (e.g., active employment would not include a period of “garden leave” or similar period pursuant to local law); the Committee shall have the exclusive discretion to determine when you are no longer actively employed for purposes of your Option grant.

15. Stockholder Rights You have no rights as a stockholder of the Company until you have exercised this Option by giving the required Notice of Exercise to the Company and paying the Exercise Price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this Option, except as described in the Plan.

16. Adjustments In the event of a stock split, a stock dividend or a similar change in Company Stock, the number of Shares subject to this Option and the Exercise Price per share may be adjusted pursuant to the Plan.

17. Applicable Law This Option grant and the provisions of this Agreement will be interpreted and enforced under the laws of the State of California (without regard to choice-of-law provisions).

18. Data Privacy.

You hereby explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your personal data as described in this document by and among, as applicable, the Employer, and the Company and its Subsidiaries for the exclusive purpose of implementing, administering and managing your participation in the Plan.

You understand that the Company and the Employer may hold certain personal information about you, including, but not limited to, your name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all options or any other entitlement to shares awarded, canceled, exercised, vested, unvested or outstanding in your favor, for the purpose of implementing, administering and managing the Plan (“Data”). You understand that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in your country or elsewhere, and that the recipients’ country may have different data privacy laws and protections than your country. You understand that you may request a list with the names and addresses of any potential recipients of the Data by contacting your local human resources representative. You authorize the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing your participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom you may elect to deposit any Shares acquired upon exercise of the Option. You understand that Data will be held only as long as is necessary to implement, administer and manage your participation in the Plan. You understand that you may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing your local human resources representative. You understand, however, that refusing or withdrawing your consent may affect your ability to participate in the Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact your local human resources representative.

19. The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. Capitalized terms used herein and not defined shall have the meanings set forth in the Plan. This Agreement, the Notice of Grant, the Notice of Exercise and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning the Option are superseded. This Agreement, the Notice of Grant and the Notice of Exercise may be amended only by another written agreement, signed by both you and the Company.

20. Severability

The provisions of this Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

21. Language

If you have received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different than the English version, the English version will control.

22. Electronic Delivery

The Company may, in its sole discretion, decide to deliver any documents related to the Option granted under the Plan or future Options that may be granted under the Plan by electronic means or to request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

BY SIGNING THE NOTICE OF GRANT, YOU AGREE TO ALL OF THE

TERMS AND CONDITIONS DESCRIBED IN THE NOTICE OF GRANT, THE

AGREEMENT, THE NOTICE OF EXERCISE AND THE PLAN, AND ACKNOWLEDGE

RECEIPT OF A COPY OF THE PLAN

EX-10.4

Exhibit 10.4

Notice of Grant of Stock Options and Option Agreement	Magma Design Automation, Inc. ID: 77-0454924 5460 Bayfront Plaza Santa Clara, CA 95054-3600
Name	Option Number:	000XXXX
Address 1	Plan:	2001
Address 2
City, State, Zip	ID:	xxx-xx-xxxx

Effective mm/dd/yyyy, you have been granted a Nonstatutory Stock Option to buy xxx shares of Magma Design Automation, Inc. (the Company) stock at $xx.xx per share.

The total option price of the shares granted is $xx,xxx.xx.

Shares in each period will become fully vested on the date shown.

Shares	Vest Type	Full Vest	Expiration
xxx	On Vest Date	mm/dd/yyyy	mm/dd/yyyy
x,xxx	Monthly	mm/dd/yyyy	mm/dd/yyyy

By your signature and the Company’s signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company’s Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document.

Magma Design Automation, Inc.	Date
Optionee Name	Date

[For Employees residing in China, Israel and Italy]

STOCK OPTION AGREEMENT

TERMS AND CONDITIONS

MAGMA DESIGN AUTOMATION, INC.

2001 Stock Incentive Plan

THIS STOCK OPTION AGREEMENT TERMS AND CONDITIONS (the “Agreement”), together with the Notice of Stock Option Grant (the “Notice of Grant”) to which this Agreement is attached, constitute the Stock Option Agreement referred to in the Magma Design Automation, Inc. 2001 Stock Incentive Plan (the “Plan”) with respect to the option granted to you pursuant to the Notice of Grant (the “Option”). This Option is intended to be a Nonstatutory Stock Option, as provided in the Notice of Grant.

1. Exercise

The Option evidenced by this Agreement becomes exercisable [vesting schedule], as summarized in the Notice of Grant. Your rights to exercise the Option accrue only for the time period you render Service to the Company following your vesting commencement date. Your vesting commencement date is [insert].

2. Term The Option expires on the date shown in the Notice of Grant, but in no event later than the fifth anniversary of the Date of Grant set forth in the Notice of Grant. The Option may expire earlier in connection with the termination of your Service, as described below.

3. Regular Termination If your Service with the Company or a Subsidiary terminates for any reason excluding death, Total and Permanent Disability or Cause (as defined below), and whether or not in breach of local labor law, this Option will expire on the date three months after your Termination Date. Your “Termination Date” will be the date you are no longer actively providing Service to the Company (not extended by any notice period mandated under local law).

4. Death or Disability If your Service with the Company or a Subsidiary terminates as a result of your Total and Permanent Disability or death, this Option will expire on the date six months after your Termination Date.

5. Cause If your Service with the Company or a Subsidiary terminates for Cause, this Option will expire on the date seven days following your Termination Date. For purposes of this section, “Cause” shall mean (i) continued failure to perform substantially your duties, which standard of duties shall be referenced to the standards set by the Company at the date of this Agreement (other than as a result of sickness, accident or similar cause beyond your reasonable control) after receipt of a written warning and your being given thirty (30) days to cure the failure; (ii) willful misconduct or gross negligence, which is demonstrably injurious to the Company or any of its Subsidiaries, including without limitation willful or grossly negligent failure to perform your material duties as an officer or employee of the Company or any of its Subsidiaries or a material breach of this Agreement, your employment agreement (if any) or your Proprietary Information and Inventions Agreement with the Company; (iii) conviction of or plea of nolo contendere to a felony; or (iv) commission of an act of fraud against, or the misappropriation of property belonging to, the Company or any affiliated company, employee, customer or supplier of the Company.

6. Leaves of Absence For purposes of this Option, your Service does not terminate when you go on a military leave of absence, a sick leave of absence or another bona fide leave of absence, if the leave of absence was approved by the Company in writing and if continued crediting of Service is required by the terms of the leave or by applicable law. Your Service will terminate when the approved leave of absence ends unless you immediately return to active employment. Except as provided by applicable law, or unless expressly provided in writing pursuant to a Company-approved leave of absence, the period of the approved leave of absence will not be credited as Service to the Company for the purposes of determining when your Option vests. In accordance with the preceding sentence, the dates on which the Option would otherwise vest will be postponed by the number of days of the approved leave of absence.

7. Restrictions on Exercise The Company will not permit you to exercise this Option if the issuance of Shares at that time would violate any law or regulation. The exercise of this Option and the issuance and immediate sale of the

Shares upon such exercise is subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. No Shares will be issued to you under the Plan unless and until there has been compliance with such applicable laws.

8. Notice of Exercise When you wish to exercise this Option you must notify the Company by completing the Notice of Stock Option Exercise in the form attached to this Agreement (or such other form approved by the Company) (the “Notice of Exercise”) and filing it with the Treasury Department of the Company. Because you will be required to exercise your Option via a cashless exercise through a securities broker approved by the Company, the Notice of Exercise form must be filed in advance and approved by the Company prior to placing the order with the broker. The exercise of your Option will be effective when the Notice of Exercise and payment of the Exercise Price is received and approved by the Company. This Notice of Exercise form may be superseded by a Company-sponsored web-based trading program that includes security measures sufficient to ensure your identification, such that your entry of a cashless exercise constitutes your request and authorization to exercise the Option. If someone else wants to exercise this Option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.

9. Form of Payment Due to local regulatory issues in your country, payment may be made only by means of by delivering a Committee-approved form of irrevocable direction to a securities broker approved by the Company to issue to you and immediately sell all the Shares subject to the Option and to deliver to the Company from the sale proceeds an amount sufficient to pay the aggregate Exercise Price and any withholding taxes (including social insurance contributions and payment on account obligations). The balance of the sale proceeds will be delivered to you. You will not receive any Shares. The Company reserves the right to eliminate the requirement to use a cashless exercise method of exercise and, in its sole discretion, to permit other methods of exercise and forms of payment should local regulatory requirements change.

10. Withholding Taxes and Stock Withholding

Regardless of any action the Company or your employer (the “Employer”) takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), you acknowledge that the ultimate liability for all Tax-Related Items legally due by you is and remains your responsibility and that the Company and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option grant, including the grant, vesting or exercise of the Option and the immediate sale of Shares acquired pursuant to such exercise; and (2) do not commit to structure the terms of the grant or any aspect of the Option to reduce or eliminate your liability for Tax-Related Items.

In exercising your Options through the cashless exercise method, you will pay or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all withholding and payment on account obligations for Tax-Related Items of the Company and/or the Employer. In this regard, you authorize the Company and/or the Employer to withhold all applicable Tax-Related Items legally payable by you from your wages or other cash compensation paid to you by the Company and/or the Employer or from proceeds of the sale of Shares. Finally, you will pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of your participation in the Plan or your exercise of Options that cannot be satisfied by the means previously described. The Company may refuse to honor the exercise of the Option if you fail to comply with your obligations in connection with the Tax-Related Items as described in this section.

11. Transfer of Option

Prior to your death, only you can exercise this Option. You cannot sell, transfer, assign, pledge or otherwise alienate this Option. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may in any event dispose of this Option in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your Option in any other way.

12. Retention Rights

Neither your Option nor this Agreement give you the right to be retained by the Company or a Subsidiary in any capacity. The Company and its Subsidiaries reserve the right to terminate your Service at any time, with or without Cause.

13. Nature of Grant

In accepting the grant, you acknowledge that:

1) the Plan is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement;

2) the grant of the Option is voluntary and occasional and does not create any contractual or other right to receive future grants of options, or benefits in lieu of options, even if options have been granted repeatedly in the past;

3) all decisions with respect to future option grants, if any, will be at the sole discretion of the Company;

4) you are voluntarily participating in the Plan;

5) the Option is an extraordinary item that does not constitute compensation of any kind for services of any kind rendered to the Company or the Employer, and which is outside the scope of your employment contract, if any;

6) the Option is not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or the Employer;

7) in the event that you are not an employee of the Company, the Option grant will not be interpreted to form an employment contract or relationship with the Company; and furthermore, the Option grant will not be interpreted to form an employment contract with the Employer or any Subsidiary or affiliate of the Company;

8) the future value of the underlying Shares is unknown and cannot be predicted with certainty;

9) if the underlying Shares do not increase in value, the Option will have no value;

10) in consideration of the grant of the Option, no claim or entitlement to compensation or damages shall arise from termination of the Option or diminution in value of the Option resulting from termination of your employment by the Company or the Employer (for any reason whatsoever and whether or not in breach of local labor laws) and you irrevocably release the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, you shall be deemed irrevocably to have waived your entitlement to pursue such claim; and

11) in the event of termination of your employment (whether or not in breach of local labor laws), your right to receive additional Options and to vest in the Option under the Plan, if any, will terminate effective as of your Termination Date (e.g., active employment would not include a period of “garden leave” or similar period pursuant to local law); the Committee shall have the exclusive discretion to determine when you are no longer actively employed for purposes of your Option grant.

14. Stockholder Rights

You have no rights as a stockholder of the Company until you have exercised this Option by giving the required Notice of Exercise to the Company and paying the Exercise Price.

15. Adjustments

In the event of a stock split, a stock dividend or a similar change in Company Stock, the number of Shares subject to this Option and the Exercise Price per share may be adjusted pursuant to the Plan.

16. Applicable Law

This Option grant and the provisions of this Agreement will be interpreted and enforced under the laws of the State of California (without regard to choice-of-law provisions).

17. Data Privacy.

You hereby explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your personal data as described in this document by and among, as applicable, the Employer, and the Company and its Subsidiaries for the exclusive purpose of implementing, administering and managing your participation in the Plan.

You understand that the Company and the Employer may hold certain personal information about you, including, but not limited to, your name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all options or any other entitlement to shares awarded, canceled, exercised, vested, unvested or outstanding in your favor, for the purpose of implementing, administering and managing the Plan (“Data”). You understand that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in your country or elsewhere, and that the recipients’ country may have different data privacy laws and protections than your country. You understand that you may request a list with the names and addresses of any potential recipients of the Data by contacting your local human resources representative. You authorize the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing your participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party. You understand that Data will be held only as long as is necessary to implement, administer and manage your participation in the Plan. You understand that you may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing your local human resources representative. You understand, however, that refusing or withdrawing your consent may affect your ability to participate in the Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact your local human resources representative.

18. The Plan and Other Agreements The text of the Plan is incorporated in this Agreement by reference. Capitalized terms used herein and not defined shall have the meanings set forth in the Plan. This Agreement, the Notice of Grant, the Notice of Exercise and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning the Option are superseded. This Agreement, the Notice of Grant and the Notice of Exercise may be amended only by another written agreement, signed by both you and the Company.

19. Severability

The provisions of this Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

20. Language

If you have received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different than the English version, the English version will control.

21. Electronic Delivery

The Company may, in its sole discretion, decide to deliver any documents related to the Option granted under the Plan or future Options that may be granted under the Plan by electronic means or to request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

BY SIGNING THE NOTICE OF GRANT, YOU AGREE TO ALL OF THE

TERMS AND CONDITIONS DESCRIBED IN THE NOTICE OF GRANT, THE

AGREEMENT, THE NOTICE OF EXERCISE AND THE PLAN, AND ACKNOWLEDGE

RECEIPT OF A COPY OF THE PLAN

EX-10.5

Exhibit 10.5

Notice of Grant of Stock Options and Option Agreement	Magma Design Automation, Inc. ID: 77-0454924 5460 Bayfront Plaza Santa Clara, CA 95054-3600
Name	Option Number:	000XXXX
Address 1	Plan:	2001
Address 2
City, State, Zip	ID:	xxx-xx-xxxx

Effective mm/dd/yyyy, you have been granted a Nonstatutory Stock Option to buy xxx shares of Magma Design Automation, Inc. (the Company) stock at $xx.xx per share.

The total option price of the shares granted is $xx,xxx.xx.

Shares in each period will become fully vested on the date shown.

Shares	Vest Type	Full Vest	Expiration
xxx	On Vest Date	mm/dd/yyyy	mm/dd/yyyy
x,xxx	Monthly	mm/dd/yyyy	mm/dd/yyyy

By your signature and the Company’s signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company’s Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document.

Magma Design Automation, Inc.	Date
Optionee Name	Date

[For Employees residing in the United Kingdom]

STOCK OPTION AGREEMENT

For U.K. EMPLOYEES

TERMS AND CONDITIONS

MAGMA DESIGN AUTOMATION, INC.

2001 Stock Incentive Plan

THIS U.K. STOCK OPTION AGREEMENT TERMS AND CONDITIONS (the “Agreement”), together with the Notice of Stock Option Grant (the “Notice of Grant”) to which this Agreement is attached, constitute the Stock Option Agreement referred to in the Magma Design Automation, Inc. 2001 Stock Incentive Plan (the “Plan”) with respect to the option granted to you pursuant to the Notice of Grant (the “Option”). This Option is intended to be a Nonstatutory Stock Option, as provided in the Notice of Grant.

1. Exercise.

The Option evidenced by this Agreement becomes exercisable with respect to [vesting schedule], as summarized in the Notice of Grant. Your rights to exercise the Option accrue only for the time period you render Service to the Company following your vesting commencement date. Your vesting commencement date is [insert].

2. Term. The Option expires on the date shown in the Notice of Grant, but in no event later than the fifth anniversary of the Date of Grant set forth in the Notice of Grant. The Option may expire earlier in connection with the termination of your Service, as described below.

3. Regular Termination. If your Service with the Company or a Subsidiary terminates for any reason excluding death, Total and Permanent Disability or Cause (as defined below), and whether or not in breach of local labor law, this Option will expire on the date three months after your Termination Date. Your “Termination Date” will be the date you are no longer actively providing Service to the Company (not extended by any notice period mandated under local law).

4. Death or Disability. If your Service with the Company or a Subsidiary terminates as a result of your Total and Permanent Disability or death, this Option will expire on the date six months after your Termination Date.

5. Cause. If your Service with the Company or a Subsidiary terminates for Cause, this Option will expire on the date seven days following your Termination Date. For purposes of this section, “Cause” shall mean (i) continued failure to perform substantially your duties, which standard of duties shall be referenced to the standards set by the Company at the date of this Agreement (other than as a result of sickness, accident or similar cause beyond your reasonable control) after receipt of a written warning and your being given thirty (30) days to cure the failure; (ii) willful misconduct or gross negligence, which is demonstrably injurious to the Company or any of its Subsidiaries, including without limitation willful or grossly negligent failure to perform your material duties as an officer or employee of the Company or any of its Subsidiaries or a material breach of this Agreement, your employment agreement (if any) or your Proprietary Information and Inventions Agreement with the Company; (iii) conviction of or plea of nolo contendere to a felony; or (iv) commission of an act of fraud against, or the misappropriation of property belonging to, the Company or any affiliated company, employee, customer or supplier of the Company.

6. Leaves of Absence. For purposes of this Option, your Service does not terminate when you go on a military leave of absence, a sick leave of absence or another bona fide leave of absence, if the leave of absence was approved by the Company in writing and if continued crediting of Service is required by the terms of the leave or by applicable law. Your Service will terminate when the approved leave of absence ends unless you immediately return to active employment. Except as provided by applicable law, or unless expressly provided in writing pursuant to a Company-approved leave of absence, the period of the approved leave of absence will not be credited as Service to the Company for the purposes of determining when your Option vests. In accordance with the preceding sentence, the dates on which the Option would otherwise vest will be postponed by the number of days of the approved leave of absence.

7. Restrictions on Exercise. The Company will not permit you to exercise this Option if the issuance of Shares at that time would violate any law or regulation. The exercise of this Option and the issuance of the Shares upon such exercise is subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. No Shares will be issued or delivered to you under the Plan unless and until there has been compliance with such applicable laws.

8. Notice of Exercise. When you wish to exercise this Option you must notify the Company by completing the Notice of Stock Option Exercise in the form attached to this Agreement (or such other form approved by the Company) (the “Notice of Exercise”) and filing it with the Treasury Department of the Company. The exercise of your Option will be effective when the Notice of Exercise and payment of the Exercise Price is received by the Company. In the case of a cashless exercise through a securities broker approved by the Company, the Notice of Exercise form must be filed in advance and approved by the Company prior to placing the order with the broker. This Notice of Exercise form may be superseded by a Company-sponsored web-based trading program that includes security measures sufficient to ensure your identification, such that your entry of a web-based exercise or cashless exercise constitutes your request and authorization to exercise the Option. If someone else wants to exercise this Option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.

9. Form of Payment. Payment may be made (i) by personal check, a cashier’s check or a money order, or (ii) by delivering a Committee-approved form of irrevocable direction to a securities broker approved by the Company to sell all or part of the Shares subject to the Option and to deliver to the Company from the sale proceeds an amount sufficient to pay the aggregate Exercise Price and any withholding taxes (including social insurance contributions and payment on account obligations). In the case of a cashless exercise, the balance of the sale proceeds will be delivered to you and you will not receive any Shares. In the case of any other exercise method described herein, as soon as practicable after the date you exercise your Option, the Company shall issue to you the purchased Shares, (as evidenced by the appropriate entry in the books of the Company or a duly authorized transfer agent of the Company). Notwithstanding the foregoing, a form of payment will not be available if the Committee determines, in its sole and absolute discretion, that such form of payment could violate any law or regulation.

10. Withholding Taxes and Stock Withholding. Regardless of any action the Company or your employer (the “Employer”) takes with respect to any or all income tax, social insurance including primary and secondary Class 1 National Insurance Contributions, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), you acknowledge that the ultimate liability for all Tax-Related Items is and remains your responsibility and that the Company and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option grant, including the grant, vesting or exercise of the Option, the subsequent sale of Shares acquired pursuant to such exercise and the receipt of any dividends; and (2) do not commit to structure the terms of the grant or any aspect of the Option to reduce or eliminate your liability for Tax-Related Items.

Prior to exercise of the Option, you will pay or make adequate arrangements satisfactory to the Company and/or the Employer to satisfy all withholding and payment on account obligations for Tax-Related Items of the Company and/or the Employer. In this regard, you authorize the Company and/or the Employer to withhold all applicable Tax-Related Items from your wages or other cash compensation paid to you by the Company and/or the Employer or from proceeds of the sale of Shares. Alternatively, or in addition, if permissible under local law, the Company may (1) sell or arrange for the sale of Shares that you acquire to meet the withholding obligation for Tax-Related Items, and/or (2) withhold in Shares, provided that the Company only withholds the amount of Shares necessary to satisfy the minimum withholding amount. Finally, you will pay to the Company or the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of your participation in the Plan or your purchase of Shares that cannot be satisfied by the means previously described. The Company may refuse to honor the exercise and refuse to deliver the Shares if you fail to comply with your obligations in connection with the Tax-Related Items as described in this section.

11. Joint Election. You consent and agree to satisfy any liability for any Secondary Class 1 National Insurance Contribution (“Employer NICs”) that may be payable by the Company and/or the Employer in connection with the Option, including on the exercise, assignment or release of the Option, the acquisition of Shares pursuant to the exercise of the Option, and the receipt of any other benefit in money or money’s worth in connection with the Option. You further consent and agree that the vesting of the Option is conditional on you entering into a joint election with the Company and/or the Employer (the “Election”), the form of such Election being formally approved

by HM Revenue and Customs and such approval remaining in force to provide for the transfer of Employer NICs. You also agree that the Company and/or the Employer may collect the Employer NICs from you by any of the means set forth in section 10 above. You agree that if any other consents or elections are required by the Company and/or the Employer to accomplish the above, you will provide them promptly upon request.

12. Restrictions on Resale. By entering into this Agreement, you agree not to sell any Shares at a time when applicable laws or Company policies prohibit a sale. This restriction will apply as long as you are providing Service to the Company or a Subsidiary.

13. Transfer of Option. Prior to your death, only you can exercise this Option. You cannot sell, transfer, assign, pledge or otherwise alienate this Option. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may in any event dispose of this Option in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your Option in any other way.

14. Retention Rights. Neither your Option nor this Agreement give you the right to be retained by the Company or a Subsidiary in any capacity. The Company and its Subsidiaries reserve the right to terminate your Service at any time, with or without Cause.

15. Nature of Grant. In accepting the grant, you acknowledge that:

1) the Plan is established voluntarily by the Company, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement;

2) the grant of the Option is voluntary and occasional and does not create any contractual or other right to receive future grants of options, or benefits in lieu of options, even if options have been granted repeatedly in the past;

3) all decisions with respect to future option grants, if any, will be at the sole discretion of the Company;

4) you are voluntarily participating in the Plan;

5) the Option is an extraordinary item that does not constitute compensation of any kind for services of any kind rendered to the Company or the Employer, and which is outside the scope of your employment contract, if any;

6) the Option is not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or the Employer;

7) in the event that you are not an employee of the Company, the Option grant will not be interpreted to form an employment contract or relationship with the Company; and furthermore, the Option grant will not be interpreted to form an employment contract with the Employer or any Subsidiary or affiliate of the Company;

8) the future value of the underlying Shares is unknown and cannot be predicted with certainty;

9) if the underlying Shares do not increase in value, the Option will have no value;

10) if you exercise your Option and obtain Shares, the value of those Shares acquired upon exercise may increase or decrease in value, even below the exercise price;

11) in consideration of the grant of the Option, no claim or entitlement to compensation or damages shall arise from termination of the Option or diminution in value of the Option or Shares purchased through exercise of the Option resulting from termination of your employment by the Company or the Employer (for any reason whatsoever and whether or not in breach of local labor laws) and you irrevocably release the

Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, you shall be deemed irrevocably to have waived your entitlement to pursue such claim; and

12) in the event of termination of your employment (whether or not in breach of local labor laws), your right to receive additional Options and to vest in the Option under the Plan, if any, will terminate effective as of your Termination Date (e.g., active employment would not include a period of “garden leave” or similar period pursuant to local law); the Committee shall have the exclusive discretion to determine when you are no longer actively employed for purposes of your Option grant.

16. Stockholder Rights. You have no rights as a stockholder of the Company until you have exercised this Option by giving the required Notice of Exercise to the Company and paying the Exercise Price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this Option, except as described in the Plan.

17. Adjustments. In the event of a stock split, a stock dividend or a similar change in Company Stock, the number of Shares subject to this Option and the Exercise Price per share may be adjusted pursuant to the Plan.

18. Applicable Law. This Option grant and the provisions of this Agreement will be interpreted and enforced under the laws of the State of California (without regard to choice-of-law provisions).

19. Data Privacy. You hereby explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your personal data as described in this document by and among, as applicable, the Employer, and the Company and its Subsidiaries for the exclusive purpose of implementing, administering and managing your participation in the Plan.

You understand that the Company and the Employer may hold certain personal information about you, including, but not limited to, your name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all options or any other entitlement to shares awarded, canceled, exercised, vested, unvested or outstanding in your favor, for the purpose of implementing, administering and managing the Plan (“Data”). You understand that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in your country or elsewhere (including outside the European Economic Area), and that the recipients’ country may have different data privacy laws and protections than your country. You understand that you may request a list with the names and addresses of any potential recipients of the Data by contacting your local human resources representative. You authorize the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing your participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom you may elect to deposit any Shares acquired upon exercise of the Option. You understand that Data will be held only as long as is necessary to implement, administer and manage your participation in the Plan. You understand that you may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing your local human resources representative. You understand, however, that refusing or withdrawing your consent may affect your ability to participate in the Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact your local human resources representative.

20. The Plan and Other Agreements. The text of the Plan is incorporated in this Agreement by reference. Capitalized terms used herein and not defined shall have the meanings set forth in the Plan. This Agreement, the Notice of Grant, the Notice of Exercise and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning the Option are superseded. This Agreement, the Notice of Grant and the Notice of Exercise may be amended only by another written agreement, signed by both you and the Company.

21. Severability. The provisions of this Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

22. Language. If you have received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different than the English version, the English version will control.

23. Electronic Delivery. The Company may, in its sole discretion, decide to deliver any documents related to the Option granted under the Plan or future Options that may be granted under the Plan by electronic means or to request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

BY SIGNING THE NOTICE OF GRANT, YOU AGREE TO ALL OF THE

TERMS AND CONDITIONS DESCRIBED IN THE NOTICE OF GRANT, THE

AGREEMENT, THE NOTICE OF EXERCISE AND THE PLAN, AND ACKNOWLEDGE

RECEIPT OF A COPY OF THE PLAN

Appendix A

MAGMA DESIGN AUTOMATION, INC.

2001 STOCK INCENTIVE PLAN

Election to Transfer the Employer’s National Insurance Liability to the Employee

1. Parties

This Election is between:

(A) [INSERT NAME OF EMPLOYEE] (the “Employee”), who is eligible to receive options (“Options”) granted by Magma Design Automation, Inc., 5460 Bayfront Plaza, Santa Clara, California, CA 95054 (the “Company”) pursuant to the Magma Design Automation, Inc., 2001 Stock Incentive Plan (the “Plan”), and

(B) [Magma Design Automation Ltd. (insert address) (insert registration number)] (the “Employer”), which employs the Employee.

2. Purpose of Election

2.1 This Election relates to the employer’s secondary Class 1 National Insurance Contributions (the “Employer’s Liability”) which may arise on:

(i) the acquisition of securities pursuant to the Options; and/or

(ii) the assignment (if applicable) or release of the Options in return for consideration; and/or

(iii) the receipt of any other benefit in money or money’s worth in connection with the Options,

(each, a “Taxable Event”) pursuant to section 4(4)(a) of the Social Security Contributions and Benefits Act 1992.

2.2 This Election applies to all Options granted to the Employee under the Plan on or after 1 August, 2005 up to 1 August, [insert year].

3. The Election

The Employee and the Employer jointly elect that the entire liability of the Employer to pay the Employer’s Liability on the Taxable Event is hereby transferred to the Employee. The Employee understands that by signing this Election he or she will become personally liable for the Employer’s Liability covered by this Election.

4. Payment of the Employer’s Liability

4.1 The Employee hereby authorises the Company and/or the Employer to collect the Employer’s Liability from the Employee at any time after the Taxable Event:

(i) by deduction from salary or any other payment payable to the Employee at any time on or after the date of the Taxable Event; and/or

(ii) directly from the Employee by payment in cash or cleared funds; and/or

(iii) by arranging, on behalf of the Employee, for the sale of some of the securities which the Employee acquires following the exercise of the Option(s).

4.2 The Employer hereby reserves for itself and the Company the right to withhold the transfer of any securities to the Employee until full payment of the Employer’s Liability is received.

4.3 The Employer agrees to remit the Employer’s Liability to the Inland Revenue on behalf of the Employee within 14 days after the end of the UK tax month during which the Taxable Event occurs.

5. Duration of Election

5.1 The Employee and the Employer agree to be bound by the terms of this Election regardless of whether the Employee is transferred abroad or is not employed by the Employer on the date on which the Employer’s Liability becomes due.

5.2 This Election will continue in effect until the earliest of the following:

(i) the Employee and the Employer agree in writing that it should cease to have effect;

(ii) on the date the Employer serves written notice on the Employee terminating its effect;

(iii) on the date the Inland Revenue withdraws approval of this Election; or

(iv) after due payment of the Employer’s Liability in respect of the entirety of the Options to which this Election relates, such the Election ceases to have effect in accordance with its terms.

Signed by [INSERT NAME OF EMPLOYEE]

The Employee

Date

Signed for and on behalf of [Magma Design Automation Ltd.]

BY [INSERT NAME OF DIRECTOR]

Position

Date

EX-10.6

Exhibit 10.6

MAGMA DESIGN AUTOMATION, INC.

2001 STOCK INCENTIVE PLAN

NOTICE OF RESTRICTED SHARE AWARD

(other than Executive Officers)

You have been granted an award of Restricted Shares of Common Stock of Magma Design Automation, Inc. (the “Company”) under the Company’s 2001 Stock Incentive Plan (the “Plan”) on the following terms:

1.	Name of Grantee:	____________________________________________________________________________________
2.	Total Number of Restricted Shares Awarded:	____________________________________________________________________________________
3.	Fair Market Value per Restricted Share:	$___________________________________________________________________________________
4.	Total Fair Market Value of Award:	$___________________________________________________________________________________
5.	Purchase Price per Restricted Share:	$___________________________________________________________________________________
6.	Total Purchase Price for all Restricted Shares:	$___________________________________________________________________________________
7.	Date of Award:	____________________________________________________________________________________
8.	Vesting Commencement Date:	____________________________________________________________________________________
9.	Vesting Schedule:	____________________________________________________________________________________

[Vesting schedule to be provided here.]

[OPTIONAL][Notwithstanding the foregoing vesting schedule, the Shares shall be subject to acceleration as provided for in Section 9 hereof.]

By your signature and the signature of the Company’s representative below, you and the Company agree that the Award of Restricted Shares is governed by the terms and conditions of the Plan and the Restricted Share Agreement, which is attached hereto.

MAGMA DESIGN AUTOMATION, INC.

By:

Its:

RECIPIENT:

Signature

Please Print Name

MAGMA DESIGN AUTOMATION, INC.

2001 Stock Incentive Plan

RESTRICTED SHARE AGREEMENT

(other than Executive Officers)

THIS RESTRICTED SHARE AGREEMENT (this “Agreement”) is made as of                     , 20     by and between Magma Design Automation, Inc., a Delaware corporation (the “Company”), and                                           (“Purchaser”) pursuant to the Company’s 2001 Stock Incentive Plan (the “Plan”). To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Plan.

1. Sale of Stock. Subject to the terms and conditions of this Agreement, on the Purchase Date (as defined below) the Company will issue and sell to Purchaser, and Purchaser agrees to purchase from the Company,                  Shares at a purchase price of $             per Share for a total purchase price of $            . The per Share purchase price of the Shares shall be not less than the par value of the Shares as of the date of the offer of such Shares to the Purchaser. The term “Shares” refers to the purchased Shares and all securities received in replacement of or in connection with the Shares pursuant to stock dividends or splits, all securities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Purchaser is entitled by reason of Purchaser’s ownership of the Shares.

2. Time and Place of Exercise. The purchase and sale of the Shares under this Agreement shall occur at the principal office of the Company simultaneously with the execution of this Agreement by the parties, or on such other date as the Company and Purchaser shall agree (the “Purchase Date”). On the Purchase Date, the Company will deliver to Purchaser a certificate representing the Shares to be purchased by Purchaser (which shall be issued in Purchaser’s name) against payment of the purchase price therefor by Purchaser by (a) check made payable to the Company, (b) cancellation of indebtedness of the Company to Purchaser, or (c) a combination of the foregoing.

3. Restrictions on Resale. By signing this Agreement, Purchaser agrees not to sell any Shares acquired pursuant to the Plan and this Agreement at a time when applicable laws, regulations or Company or underwriter trading policies prohibit exercise or sale.

4. Restrictive Legends and Stop Transfer Orders.

4.1 Legends. The certificate or certificates representing the Shares shall bear the following legend (as well as any legends required by applicable state and federal corporate and securities laws):

THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS Of AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

4.2 Stop-Transfer Notices. Purchaser agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

4.3 Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as the owner or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.

5. [IF SHARES ARE SUBJECT TO THE COMPANY’S LAPSING RIGHT OF REPURCHASE:]

[5.1 Repurchase Right on Termination. For purposes of this Agreement, a “Repurchase Event” shall mean an occurrence of one of: (a) termination of Purchaser’s service to the Company, whether voluntary or involuntary and with or without cause or (b) resignation or retirement of Purchaser as an employee of the Company or death of Purchaser. Upon the occurrence of a Repurchase Event, the Company shall have the right (but not an

obligation) to repurchase the Shares at a price per Share equal to the price per Share paid by Purchaser (the “Repurchase Right”). The Repurchase Right shall lapse in accordance with the vesting schedule set forth in the Notice of Restricted Share Award that is attached to this Agreement.

5.2 Exercise of Repurchase Right. The Company may notify Purchaser at any time within 90 days after the date of the Repurchase Event that it is exercising its Repurchase Right with respect to some or all of the Shares, or that it is not exercising its Repurchase Right. If the Company does not so notify Purchaser within 90 days after the date of the Repurchase Event, the Repurchase Right shall be deemed automatically exercised by the Company as of the 90th day following such date. By executing this Agreement Purchaser agrees that it has received written notice of the Company’s intention to exercise its Repurchase Right with respect to all Shares to which such Repurchase Right applies. The Company, at its choice, may satisfy its payment obligation to Purchaser with respect to exercise of the Repurchase Right by (i) delivering a check to Purchaser in the amount of the purchase price for the Shares being repurchased, or (ii) in the event Purchaser is indebted to the Company, by canceling an amount of such indebtedness equal to the purchase price for the Shares being repurchased, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals such purchase price. In the event of any deemed automatic exercise of the Repurchase Right, any such cancellation of indebtedness shall be deemed automatically to occur as of the 90th day following the date of the Repurchase Event unless the Company otherwise satisfies its payment obligations. As a result of any repurchase of Shares pursuant to the Repurchase Right, the Company shall become the legal and beneficial owner of the repurchased Shares and shall have all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased by the Company, without further action by Purchaser.]

6. No Employment Rights. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent or Subsidiary of the Company, to terminate Purchaser^’s employment, for any reason, with or without cause.

7. Market Standoff Agreement. Upon request of the Company or the underwriters managing any underwritten public offering of the Company’s securities, Purchaser agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute such agreement reflecting the foregoing as may be requested by the underwriters at the time of the underwritten public offering.

8. Miscellaneous.

8.1 Governing Law. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law.

8.2 The Plan and Other Agreements; Enforcement of Rights. The text of the Plan and the Notice of Restricted Share Award to which this Agreement is attached are incorporated into this Agreement by reference. This Agreement, the Plan and the Notice of Restricted Share Award to which this Agreement is attached constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning the purchase of the Restricted Shares hereunder are superseded. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing and signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.

8.3 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i)such provision shall be excluded from this Agreement, (ii) the balance of this Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of this Agreement shall be enforceable in accordance with its terms.

8.4 Construction. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto.

8.5 Notices. Any notice to be given under the terms of the Plan shall be addressed to the Company in care or its principal office, and any notice to be given to the Purchaser shall be addressed to such Purchaser at the address maintained by the Company for such person or at such other address as the Purchaser may specify in writing to the Company.

8.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall he deemed an original and all of which together shall constitute one instrument.

8.7 Successors and Assigns. The rights and benefits of this Agreement shall inure to the benefit of_., and be enforceable by, the Company’s successors and assigns. The rights and obligations of Purchaser under this Agreement may only be assigned with the prior written consent of the Company.

[OPTIONAL] 9. Acceleration Upon Change in Control. Upon a Change of Control (as defined in the Plan), 25% of the remaining unvested Shares shall immediately vest. Further, in the event of your Involuntary Termination (as defined below) prior to the first anniversary of the Change of Control, 50% of the then remaining unvested Shares shall immediately vest, provided that such acceleration would not result in the underlying options becoming subject to variable award accounting or in any other adverse accounting effects. “Involuntary Termination” shall mean any termination without Cause (as defined below) as well as any instance of “Constructive Termination.” “Constructive Termination^” shall be deemed to occur when the only position available at the successor or surviving company entails (i) a relocation of more than 50 miles, (ii) a reduction in base pay, or (iii) (in the case on of a managerial level employee) a unilateral change by the successor or surviving company (or its parent) in Participant’s duties to non-managerial level duties; provided, however, that Participant’s duties shall not be deemed non-managerial if they involve duties as to the Magma division or subsidiary of the successor or surviving company (or its parent) that are comparable in scope to Participant’s duties at the Company immediately prior to the related Change of Control. For purposes of this section, “Cause” shall mean (i) continued failure to perform substantially Participant’s duties, which standard of duties shall be referenced to the standards set by the Company at the date of this Agreement (other than as a result of sickness, accident or similar cause beyond Participant’s reasonable control) after receipt of a written warning and Participant being given thirty (30) days to cure the failure; (ii) willful misconduct or gross negligence, which is demonstrably injurious to the Company or any of its subsidiaries, including without limitation willful or grossly negligent failure to perform Participant’s material duties as an officer or employee of the Company or any of its subsidiaries or a material breach of this Agreement, Participant’s employment agreement (if any) or Participant’s Proprietary Information and Inventions Agreement with the Company; (iii) conviction of or plea of nolo contendere to a felony; or (iv) commission of an act of fraud against, or the misappropriation of property belonging to, the Company or any affiliated company, employee, customer or supplier of the Company.

[Signature Page follows.]

The parties have executed this Agreement as of the date first set forth above.

MAGMA DESIGN AUTOMATION, INC.

By:

Its:

RECIPIENT: 

(Signature) 

(Please Print Name) 

I,                                         , spouse of                                          , have read and hereby approve the foregoing Agreement. In consideration of the Company’s granting my spouse the right to purchase the Shares set forth in the Agreement, I hereby agree to be irrevocably bound by the Agreement and further agree that any community property or other such interest shall be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement.

Spouse of

RECEIPT

Magma Design Automation, Inc. hereby acknowledges receipt of (check as applicable):

¨ A check in the amount of $            

¨ The cancellation of indebtedness in the amount of $            

given by                              as consideration for Certificate No. CS-              for              shares of Common Stock of Magma Design Automation, Inc.

Dated:                     

MAGMA DESIGN AUTOMATION, INC.

By:

Its:

RECEIPT AND CONSENT

The undersigned hereby acknowledges receipt of a photocopy of Certificate No. CS-                  for              shares of Common Stock of Magma Design Automation, Inc. (the “Company”)

The undersigned further acknowledges that the Secretary of the Company, or his or her designee, is acting as escrow holder pursuant to the Restricted Shares Agreement that Purchaser has previously entered into with the Company. As escrow holder, the Secretary of the Company, or his or her designee, holds the original of the aforementioned certificate issued in the undersigned’s name.

Dated:                         

Signature

Please Print Name

EX-10.7

Exhibit 10.7

MAGMA DESIGN AUTOMATION, INC.

2001 STOCK INCENTIVE PLAN

NOTICE OF RESTRICTED SHARE AWARD

(Executive Officers)

You have been granted an award of Restricted Shares of Common Stock of Magma Design Automation, Inc. (the “Company”) under the Company’s 2001 Stock Incentive Plan (the “Plan”) on the following terms:

1.	Name of Grantee:	____________________________________________________________________________________
2.	Total Number of Restricted Shares Awarded:	____________________________________________________________________________________
3.	Fair Market Value per Restricted Share:	$___________________________________________________________________________________
4.	Total Fair Market Value of Award:	$___________________________________________________________________________________
5.	Purchase Price per Restricted Share:	$___________________________________________________________________________________
6.	Total Purchase Price for all Restricted Shares:	$___________________________________________________________________________________
7.	Date of Award:	____________________________________________________________________________________
8.	Vesting Commencement Date:	____________________________________________________________________________________
9.	Vesting Schedule:	____________________________________________________________________________________

[Vesting schedule to be provided here.]

[Notwithstanding the foregoing vesting schedule, the Shares shall be subject to acceleration as provided for in Section 9 hereof.]

By your signature and the signature of the Company’s representative below, you and the Company agree that the Award of Restricted Shares is governed by the terms and conditions of the Plan and the Restricted Share Agreement, which is attached hereto.

MAGMA DESIGN AUTOMATION, INC.

By:

Its:

RECIPIENT:

Signature

Please Print Name

MAGMA DESIGN AUTOMATION, INC.

2001 Stock Incentive Plan

RESTRICTED SHARE AGREEMENT

(Executive Officers)

THIS RESTRICTED SHARE AGREEMENT (this “Agreement”) is made as of                                 , 20     by and between Magma Design Automation, Inc., a Delaware corporation (the “Company”), and                  (“Purchaser”) pursuant to the Company’s 2001 Stock Incentive Plan (the “Plan”). To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Plan.

1. Sale of Stock. Subject to the terms and conditions of this Agreement, on the Purchase Date (as defined below) the Company will issue and sell to Purchaser, and Purchaser agrees to purchase from the Company,              Shares at a purchase price of $             per Share for a total purchase price of $            . The per Share purchase price of the Shares shall be not less than the par value of the Shares as of the date of the offer of such Shares to the Purchaser. The term “Shares” refers to the purchased Shares and all securities received in replacement of or in connection with the Shares pursuant to stock dividends or splits, all securities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Purchaser is entitled by reason of Purchaser’s ownership of the Shares.

2. Time and Place of Exercise. The purchase and sale of the Shares under this Agreement shall occur at the principal office of the Company simultaneously with the execution of this Agreement by the parties, or on such other date as the Company and Purchaser shall agree (the “Purchase Date”). On the Purchase Date, the Company will deliver to Purchaser a certificate representing the Shares to be purchased by Purchaser (which shall be issued in Purchaser’s name) against payment of the purchase price therefor by Purchaser by (a) check made payable to the Company, (b) cancellation of indebtedness of the Company to Purchaser, or (c) a combination of the foregoing.

3. Restrictions on Resale. By signing this Agreement, Purchaser agrees not to sell any Shares acquired pursuant to the Plan and this Agreement at a time when applicable laws, regulations or Company or underwriter trading policies prohibit exercise or sale.

4. Restrictive Legends and Stop Transfer Orders.

4.1 Legends. The certificate or certificates representing the Shares shall bear the following legend (as well as any legends required by applicable state and federal corporate and securities laws):

THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS Of AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

4.2 Stop-Transfer Notices. Purchaser agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

4.3 Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as the owner or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.

5. [IF SHARES ARE SUBJECT TO THE COMPANY’S LAPSING RIGHT OF REPURCHASE:]

[5.1 Repurchase Right on Termination. For purposes of this Agreement, a “Repurchase Event” shall mean an occurrence of one of: (a) termination of Purchaser’s service to the Company, whether voluntary or involuntary and with or without cause or (b) resignation or retirement of Purchaser as an employee of the Company or death of Purchaser. Upon the occurrence of a Repurchase Event, the Company shall have the right (but not an obligation) to repurchase the Shares at a price per Share equal to the price per Share paid by Purchaser (the “Repurchase Right”). The Repurchase Right shall lapse in accordance with the vesting schedule set forth in the Notice of Restricted Share Award that is attached to this Agreement.

5.2 Exercise of Repurchase Right. The Company may notify Purchaser at any time within 90 days after the date of the Repurchase Event that it is exercising its Repurchase Right with respect to some or all of the Shares, or that it is not exercising its Repurchase Right. If the Company does not so notify Purchaser within 90 days after the date of the Repurchase Event, the Repurchase Right shall be deemed automatically exercised by the Company as of the 90th day following such date. By executing this Agreement Purchaser agrees that it has received written notice of the Company’s intention to exercise its Repurchase Right with respect to all Shares to which such Repurchase Right applies. The Company, at its choice, may satisfy its payment obligation to Purchaser with respect to exercise of the Repurchase Right by (i) delivering a check to Purchaser in the amount of the purchase price for the Shares being repurchased, or (ii) in the event Purchaser is indebted to the Company, by canceling an amount of such indebtedness equal to the purchase price for the Shares being repurchased, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals such purchase price. In the event of any deemed automatic exercise of the Repurchase Right, any such cancellation of indebtedness shall be deemed automatically to occur as of the 90th day following the date of the Repurchase Event unless the Company otherwise satisfies its payment obligations. As a result of any repurchase of Shares pursuant to the Repurchase Right, the Company shall become the legal and beneficial owner of the repurchased Shares and shall have all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased by the Company, without further action by Purchaser.]

6. No Employment Rights. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent or Subsidiary of the Company, to terminate Purchaser^’s employment, for any reason, with or without cause.

7. Market Standoff Agreement. Upon request of the Company or the underwriters managing any underwritten public offering of the Company’s securities, Purchaser agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute such agreement reflecting the foregoing as may be requested by the underwriters at the time of the underwritten public offering.

8. Miscellaneous.

8.1 Governing Law. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law.

8.2 The Plan and Other Agreements; Enforcement of Rights. The text of the Plan and the Notice of Restricted Share Award to which this Agreement is attached are incorporated into this Agreement by reference. This Agreement, the Plan and the Notice of Restricted Share Award to which this Agreement is attached constitute the entire agreement and understanding of the parties relating to the subject matter herein and supersede all prior discussions between them. Any prior agreements, commitments or negotiations concerning the purchase of the Restricted Shares hereunder are superseded. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing and signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.

8.3 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i)such provision shall be excluded from this Agreement, (ii) the balance of this Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of this Agreement shall be enforceable in accordance with its terms.

8.4 Construction. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto.

8.5 Notices. Any notice to be given under the terms of the Plan shall be addressed to the Company in care or its principal office, and any notice to be given to the Purchaser shall be addressed to such Purchaser at the address maintained by the Company for such person or at such other address as the Purchaser may specify in writing to the Company.

8.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall he deemed an original and all of which together shall constitute one instrument.

8.7 Successors and Assigns. The rights and benefits of this Agreement shall inure to the benefit of_., and be enforceable by, the Company’s successors and assigns. The rights and obligations of Purchaser under this Agreement may only be assigned with the prior written consent of the Company.

9. Acceleration Upon Change in Control. Upon a Change of Control (as defined in the Plan), 25% of the remaining unvested Shares shall immediately vest. Further, in the event of your Involuntary Termination (as defined below) prior to the first anniversary of the Change of Control, 50% of the then remaining unvested Shares shall immediately vest, provided that such acceleration would not result in the underlying options becoming subject to variable cost accounting or in any other adverse accounting effects. “Involuntary Termination” shall mean any termination without Cause (as defined below) as well as any instance of “Constructive Termination.” “Constructive Termination^” shall be deemed to occur when the only position available at the successor or surviving company entails (i) a relocation of more than 50 miles, (ii) a reduction in base pay, or (iii) a unilateral change by the successor or surviving company (or its parent) in your duties to non-executive level duties; provided, however, that your duties shall not be deemed non-executive if they involve duties as to the Magma division or subsidiary of the successor or surviving company (or its parent) that are comparable in scope to your duties at the Company immediately prior to the related Change of Control. For purposes of this section, “Cause” shall mean (i) continued failure to perform substantially your duties, which standard of duties shall be referenced to the standards set by the Company at the date of this Agreement (other than as a result of sickness, accident or similar cause beyond your reasonable control) after receipt of a written warning and your being given thirty (30) days to cure the failure; (ii) willful misconduct or gross negligence, which is demonstrably injurious to the Company or any of its subsidiaries, including without limitation willful or grossly negligent failure to perform your material duties as an officer or employee of the Company or any of its subsidiaries or a material breach of this Agreement, your employment agreement (if any) or your Proprietary Information and Inventions Agreement with the Company; (iii) conviction of or plea of nolo contendere to a felony; or (iv) commission of an act of fraud against, or the misappropriation of property belonging to, the Company or any affiliated company, employee, customer or supplier of the Company.

[Signature Page follows]

The parties have executed this Agreement as of the date first set forth above.

MAGMA DESIGN AUTOMATION, INC.

By:

Its:

RECIPIENT: 

(Signature) 

(Please Print Name) 

I,                                         , spouse of                                          , have read and hereby approve the foregoing Agreement. In consideration of the Company’s granting my spouse the right to purchase the Shares set forth in the Agreement, I hereby agree to be irrevocably bound by the Agreement and further agree that any community property or other such interest shall be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement.

Spouse of

RECEIPT

Magma Design Automation, Inc. hereby acknowledges receipt of (check as applicable):

¨ A check in the amount of $             

¨ The cancellation of indebtedness in the amount of $            

given by                              as consideration for Certificate No. CS-             for              shares of Common Stock of Magma Design Automation, Inc.

Dated:                     

MAGMA DESIGN AUTOMATION, INC.

By:

Its:

RECEIPT AND CONSENT

The undersigned hereby acknowledges receipt of a photocopy of Certificate No. CS-              for              shares of Common Stock of Magma Design Automation, Inc. (the “Company”)

The undersigned further acknowledges that the Secretary of the Company, or his or her designee, is acting as escrow holder pursuant to the Restricted Shares Agreement that Purchaser has previously entered into with the Company. As escrow holder, the Secretary of the Company, or his or her designee, holds the original of the aforementioned certificate issued in the undersigned’s name.

Dated:                     

Signature

Please Print Name

EX-10.8

Exhibit 10.8

Magma Design Automation, Inc.

2005 Key Contributor Long-Term Incentive Plan

(As amended October 25, 2005)

I. Plan Objective

The objective of Magma’s 2005 Key Contributor Long-Term Incentive Plan (“KC Incentive Plan”) is to retain and reward Magma’s key technology contributors.

II. Plan Details

A. Participants: Members of Magma’s senior management may nominate eligible individuals for participation in the KC Incentive Plan. Magma’s Chief Executive Officer and the President will determine which nominated individuals will participate in the KC Incentive Plan (“Participants”) and the amount of their awards. However, eligible employees who are executive officers of Magma must be nominated by Magma’s Chief Executive Officer and Magma’s President and their appointments as Participants, in addition to the amounts of their awards under the KC Incentive Plan, must be approved by the Compensation Committee of the Board of Directors.

B. Awards: Awards under the KC Incentive Plan are made under an Award Statement in substantially the form attached hereto as Attachment A. Awards may be for cash bonuses (“Cash Awards”), for restricted stock (“Restricted Stock Awards”), for stock units (“Stock Units”), each granted pursuant to Magma’s 2001 Stock Incentive Plan (which has been approved by Magma’s stockholders) or for a combination of any of the above. Awards are earned pursuant to vesting schedules set forth in the Award Statement.

C. Eligibility and Performance Standards: Only full-time employees of Magma are eligible to participate in the KC Incentive Plan. Eligibility for the KC Incentive Plan is in the sole discretion of Magma’s management. Continued participation in the KC Incentive Plan by any Participant, and payment or vesting of all incentive awards to that Participant, may be suspended if, and for so long as, Participant is placed on a formal Correction Action Plan or other disciplinary procedure. Reinstatement of eligibility will be subject to management’s sole discretion and written approval. Compensation Committee approval is required with respect to any suspension or reinstatement of any Participant who is an executive officer of Magma.

D. Single Plan Participation: If the Award Statement so states, a Participant who receives a Cash Award, a Restricted Stock Award or a Stock Unit Award (collectively, “Award(s)”) under the KC Incentive Plan will not be eligible to receive equity grants under Magma’s 2001 Stock Incentive Plan, or cash awards under other Magma cash variable pay programs, until Participant’s Award under the KC Incentive Plan is fully vested.

E. Accelerated Vesting in the event of Change of Control: All executive officers participating in the KC Incentive Plan and certain other participants who receive a Restricted Stock Award will have the following Change in Control provision in his/her Award Statement:

In the event of a Change of Control, 25% of the remaining shares of unvested restricted stock and Stock Unit Awards issued under this Award Statement shall immediately vest. Further, in the event that the Participant is Involuntarily Terminated prior to the first anniversary of the Change of Control, 50% of the remaining shares of unvested restricted stock and Stock Unit Awards issued under this Award Statement shall immediately vest, provided that such acceleration would not result in the underlying Awards becoming subject to variable award accounting or in any other adverse accounting effects.

“Change of Control” has the same meaning that such term has in Magma’s 2001 Stock Incentive Plan.

“Involuntary Termination” means any termination without Cause as well as any instance of Constructive Termination.

“Constructive Termination” shall be deemed to occur when the only position available at the successor or surviving company entails (i) a relocation of more than 50 miles, (ii) a reduction in base pay, or (iii) a unilateral change by the successor or surviving company (or its parent) in Participant’s duties to non-executive level duties (in the case of an executive officers) or non-management level duties (in the case of other management employees); provided, however, that a Participant’s duties shall not be deemed non-executive (in the case of executive officers), or non-management (in the case of management employees), level duties if they involve duties as to the Magma division or subsidiary of the successor or surviving company (or its parent) that are comparable in scope to Participant’s duties at Magma immediately prior to the related Change of Control and in the case of managerial level employees, a Participant’s duties shall not be deemed non-managerial if they involve duties as to the Magma division or subsidiary of the successor or surviving company (or its parent) that are comparable in scope to Participant’s duties at Magma immediately prior to the related Change of Control.

“Cause” means termination of a Participant’s employment for: (i) continued failure to substantially perform Participant’s duties, which standard duties shall be referenced to the standards set by Magma at the date of Participant’s Award Statement (other than as a result of Participant’s sickness, accident or similar cause beyond Participant’s

control) after receipt of a written warning and Participant being given thirty (30) days to cure such failure; (ii) willful misconduct or gross negligence, which is demonstrably injurious to the Magma or any of its subsidiaries, including without limitation willful or grossly negligent failure to perform Participant’s material duties as an officer or employee of Magma or any of its subsidiaries or a material breach of the KC Incentive Plan, Participant’s employment agreement (if any) or Participant’s Proprietary Information and Inventions Agreement with Magma; (iii) conviction of or plea of nolo contendere to a felony; or (iv) commission of an act of fraud against, or the misappropriation of property belonging to, Magma or any affiliated company, employee, customer or supplier of Magma.

No provision of any Award Statement may be inconsistent with applicable law and to the extent a provision of any such Award Statement is determined by Magma’s Board of Directors, or a committee thereof, to violate the law or create material adverse legal, financial, or regulatory problems, such provision shall not apply.

F. Recoverable Cash Advances: Cash Awards or portions thereof, are earned as of the date set forth in the Award Statement. Cash Awards, or portions thereof, if received by the Participant prior to the date earned, are deemed recoverable by Magma (“Recoverable Advances”). If Participant’s employment with Magma terminates for any reason before the date that a Cash Award, or a portion thereof is earned, Recoverable Advances will be deducted from the employee’s final paycheck(s), including base pay/salary, vacation and/or other earnings due to employees at the time of termination. Should Participant’s final paycheck(s) not cover the amounts due to Magma, Participant and Magma will work towards a mutually agreeable repayment plan. In any event, Participant shall be personally liable for Recoverable Advances.

G. Amendment or Termination of Plan: The KC Incentive Plan may be amended or terminated by Magma’s Board of Directors or the Committee at any time.

H. No Obligation to Employ: Eligibility for participation in KC Incentive Plan is not evidence of, nor does it constitute, a contract of employment between Magma and any Participant. Nothing in this KC Incentive Plan will confer or be deemed to confer on any individual any right to continue in the employ of Magma or limit in any way the right of Magma to terminate an individual’s employment at any time, with or without Cause.

I. Headings: The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof.

J. Withholding of Taxes: To the extent that Magma is required to withhold federal, state, local or foreign taxes in connection with any benefit realized by a Participant under the KC Incentive Plan, and the amounts available to Magma for such

withholding are insufficient, it will be a condition to the realization of such benefit that such Participant make arrangements satisfactory to Magma for payment of the balance of such taxes required or requested to be withheld.

K. Choice of Law: All questions concerning the construction, validity and interpretation of the KC Incentive Plan or any Award Statement will be governed by the law of the State of California. Any Award granted under the KC Incentive Plan will not be effective unless such Award is made in compliance with all applicable laws, rules and regulations.

III. Confidential Compensation Policy

Magma is committed to fair and competitive compensation practices, and to protection of confidential employee information. All compensation information discussed, presented or agreed upon during the hiring, promotion and retention of employees are strictly confidential except to the extent disclosure is required by law or regulation. Any unauthorized discussion or dissemination of confidential compensation information by an employee will immediately disqualify that employee from participation in the KC Incentive Plan and can subject the employee to appropriate disciplinary action, up to and including termination of employment.

ATTACHMENT A

Magma Design Automation

2005 Key Contributor Long-Term Incentive Plan Award Statement

Additional terms of this Award Statement are set forth in the 2005 Key Contributor Long-Term Incentive Plan. All capitalized terms not defined herein shall have the same meaning as set forth in the KC Incentive Plan.

I. Award Summary

A. Participant: [name]

B. Award Effective Date: [date]

C. Award Details: As a participant in the KC Incentive Plan, Participant is eligible to receive the following incentive award over the vesting and payment schedule set forth below:

CASH AWARD: Subject to the terms of the KC Incentive Plan and this Award Statement, the following amounts of incentive compensation shall be paid in cash on the dates indicated below [OPTIONAL, USED IF AWARDS ARE PAID BEFORE EARNED], [subject to recovery of Recoverable Advances].

DATE EARNED	DATE PAYABLE	PAYMENT
		$

RESTRICTED STOCK AWARD: Subject to the terms of the KC Incentive Plan and this Award Statement, the following quantity of restricted stock shall be granted to Participant under Magma’s 2001 Stock Incentive Plan. The grant date shall be [month, date 200 ]. The number of shares to be granted to Participant shall be determined by dividing the total value below by the closing price per share of Magma common stock as quoted on the NASDAQ stock market on the grant date. Vesting schedule and date are set forth below; all other terms shall be as set forth in the restricted stock agreement under Magma’s 2001 Equity Incentive Plan.

TOTAL VALUE Vesting Schedule VESTING DATE

STOCK UNIT AWARD: [NON-U.S. PARTICIPANTS ONLY] Subject to the terms of the KC Incentive Plan and this Award Statement, the following quantity of Stock Unit

Awards shall be granted to Participant under Magma’s 2001 Stock Incentive Plan. The grant date shall be [month, date 200 ]. A Stock Unit Award is an award to a Participant covering a number of Shares that may be settled in cash, or by issuance of Shares, for services to be rendered or for past services already rendered to the Company. The vesting schedule and date are set forth below; all other terms shall be as set forth in the Stock Unit agreement under Magma’s 2001 Equity Incentive Plan.

TOTAL VALUE Vesting Schedule VESTING DATE

II. Plan Conditions

A. [OPTIONAL ALTERNATIVE PROVISIONS]

[Alternative 1] [Single Plan Participation: Participant will not be eligible to receive equity grants under Magma’s 2001 Stock Incentive Plan, or cash awards under other Magma cash variable pay programs, until all Awards summarized above are fully vested].

[Alternative 2] [Eligibility for Other Compensation Plans: Participant acknowledges that, until all Awards summarized above are fully vested, Participant may not be eligible to receive equity grants under Magma’s 2001 Stock Incentive Plan, or cash awards under other Magma cash variable pay programs].

B. [OPTIONAL] Change of Control Provisions: The following provisions will apply to Restricted Stock Awards upon a Change of Control:

In the event of a Change of Control, 25% of the remaining shares of unvested restricted stock and Stock Unit Awards issued under this Award Statement shall immediately vest. Further, in the event that the Participant is Involuntarily Terminated prior to the first anniversary of the Change of Control, 50% of the remaining shares unvested restricted stock and Stock Unit Awards issued under this Award Statement shall immediately vest, provided that such acceleration would not result in the underlying options becoming subject to variable award accounting or in any other adverse accounting effects.

“Change of Control” has the same meaning that such term has in Magma’s 2001 Stock Incentive Plan.

“Involuntary Termination” means any termination without Cause as well as any instance of Constructive Termination.

“Constructive Termination^” shall be deemed to occur when the only position available at the successor or surviving company entails (i) a relocation of more than 50 miles, (ii) a reduction in base pay, or (iii) a unilateral change by the successor or

surviving company (or its parent) in Participant’s duties to non-executive level duties (in the case of an executive officers) or non-management level duties (in the case of other management employees); provided, however, that a Participant’s duties shall not be deemed non-executive (in the case of executive officers), or non-management (in the case of management employees), level duties if they involve duties as to the Magma division or subsidiary of the successor or surviving company (or its parent) that are comparable in scope to Participants duties at Magma immediately prior to the related Change of Control and in the case of managerial level employees, a Participant’s duties shall not be deemed non-managerial if they involve duties as to the Magma division or subsidiary of the successor or surviving company (or its parent) that are comparable in scope to Participant’s duties at Magma immediately prior to the related Change of Control.

“Cause” means termination of a Participant’s employment for: (i) continued failure to substantially perform Participant’s duties, which standard duties shall be referenced to the standards set by Magma at the date of Participant’s Award Statement (other than as a result of Participant’s sickness, accident or similar cause beyond Participant’s control) after receipt of a written warning and Participant being given thirty (30) days to cure such failure; (ii) willful misconduct or gross negligence, which is demonstrably injurious to the Magma or any of its subsidiaries, including without limitation willful or grossly negligent failure to perform Participant’s material duties as an officer or employee of Magma or any of its subsidiaries or a material breach of the KC Incentive Plan, Participant’s employment agreement (if any) or Participant’s Proprietary Information and Inventions Agreement with Magma; (iii) conviction of or plea of nolo contendere to a felony; or (iv) commission of an act of fraud against, or the misappropriation of property belonging to, Magma or any affiliated company, employee, customer or supplier of Magma.

No provision of any Award Statement may be inconsistent with applicable law and to the extent a provision of any such Award Statement is determined by Magma’s Board of Directors, or a committee thereof, to violate the law or create material adverse legal, financial, or regulatory problems, such provision shall not apply.

C. [OPTIONAL, USED IF AWARDS ARE PAID BEFORE EARNED] Recoverable Cash Advances: Cash Awards or portions thereof, are earned as of the date set forth in the Award Statement. Cash Awards, or portions thereof, if received by the Participant prior to the date earned, are deemed recoverable by Magma (“Recoverable Advances”). If Participant’s employment with Magma terminates for any reason before the date that a Cash Award, or a portion thereof is earned, Recoverable Advances will be deducted from the employee’s final paycheck(s), including base pay/salary, vacation and/or other earnings due to employees at the time of termination. Should Participant’s final paycheck(s) not cover the amounts due to Magma, Participant and Magma will work towards a mutually agreeable repayment plan. In any event, Participant shall be personally liable for Recoverable Advances.

III. Confidential Compensation Policy

Magma is committed to fair and competitive compensation practices, and to protection of confidential employee information. All compensation information discussed, presented or agreed upon during the hiring, promotion and retention of employees are strictly confidential except to the extent disclosure is required by law or regulation. Any unauthorized discussion or dissemination of confidential compensation information by an employee will immediately disqualify that employee from participation in the KC Plan Incentive Plan and can subject the employee to appropriate disciplinary action, up to and including termination of employment.

By signing below, Participant acknowledges that he/she (i) understands that this Award Statement are confidential and agrees not to disclose the terms of this Award Statement and

(ii) acknowledges that he/she has received a copy of the KC Incentive Plan and that the KC Incentive Plan governs the terms of this Award Statement.

AGREED:

Participant
On behalf of Magma Design Automation, Inc.	Date
Print Name and Title

[Signature page to Award Statement of KC Incentive Plan.]

EX-31.1

Exhibit 31.1

Rule 13a-14(a)/15d-14(a) Certification,

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) 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

(d) 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, 2005

/s/    RAJEEV MADHAVAN        

Rajeev Madhavan

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Rule 13a-14(a)/15d-14(a) Certification,

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) 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

(d) 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, 2005

/s/    GREGORY C. WALKER        

Gregory C. Walker

Senior Vice President—Finance and Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Section 1350 Certification,

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 October 2, 2005, 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, 2005

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

Section 1350 Certification,

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 October 2, 2005, 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, 2005

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.