10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended April 1, 2007

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 No.)

1650 Technology Drive

San Jose, California 95110

(408) 565-7500

(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class:	Name of Each Exchange on Which Registered:
COMMON STOCK, par value $.0001 per share	Nasdaq Global Market

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on September 29, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the Nasdaq Global Market, was $280,432,852. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose.

As of May 31, 2007 Registrant had outstanding 39,783,930 shares of Common Stock, $0.0001 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement to be delivered to the stockholders in connection with Registrant’s 2007 Annual Meeting of Stockholders to be held on August 29, 2007, are incorporated by reference into Part III of this Form 10-K. The Registrant’s definitive proxy statement is expected to be filed within 120 days after the Registrant’s fiscal year end.

MAGMA DESIGN AUTOMATION, INC.

ANNUAL REPORT ON FORM 10-K

Year ended April 1, 2007

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	2
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	28
Item 2.	Properties	28
Item 3.	Legal Proceedings	29
Item 4.	Submission of Matters to a Vote of Security Holders	31
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
Item 6.	Selected Financial Data	35
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	57
Item 8.	Financial Statements and Supplementary Data	58
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	109
Item 9A.	Controls and Procedures	109
Item 9B.	Other Information	110
PART III
Item 10.	Directors and Executive Officers of the Registrant	111
Item 11.	Executive Compensation	111
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	111
Item 13.	Certain Relationships and Related Transactions	111
Item 14.	Principal Accountant Fees and Services	111
PART IV
Item 15.	Exhibits and Financial Statement Schedules	112
Signatures		113
Exhibit Index		114

Magma, Blast Fusion, Blast Noise, QuickCap, SiliconSmart and YieldManager are registered trademarks, and ArchEvaluator, Blast Power, Blast Plan, Blast Rail, Blast Create, Quartz, Blast Yield, FineSim, Talus, Camelot, Native Parallel Technology, “The Fastest Path from RTL to Silicon,” and “Sign-off in the Loop” are trademarks of Magma Design Automation, Inc. All other product and company names are trademarks and registered trademarks of their respective companies.

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PART I

ITEM 1.    BUSINESS

Overview

Magma Design Automation, Inc. 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 comprise a digital integrated solution for the chip development cycle, from initial design through physical implementation.

Our software products allow chip designers to meet critical time-to-market objectives, improve chip performance and handle chip designs involving millions of components. Our flagship Blast and Talus family of products and our Quartz family of sign-off and verification tools combine into one integrated chip design and verification flow, from what traditionally had been separate logic design, physical design, and analysis and sign-off processes. This integrated flow significantly reduces design iterations, allowing our customers to accelerate the time it takes to design and produce deep submicron integrated circuits.

We provide consulting, training and services to help our customers more rapidly adopt our technology. We also provide post-contract support, or maintenance, for our products.

We have a single operating segment as set forth in Note 13 to Consolidated Financial Statements—”Segment Information” in Item 8 of this Annual Report. Revenues, profits and losses and total assets for fiscal 2007, fiscal 2006 and fiscal 2005 for this segment are set forth in Item 6.

Evolution of the Electronic Design Automation Market

The trend toward deep submicron and system-on-chip designs has driven demand for improved electronic design automation software that enables the efficient design and implementation of these complex chips. Limitations in traditional electronic design automation technology could slow the adoption of deep submicron processes due to the difficulty in implementing designs at these small feature sizes. Historically, electronic design automation companies developed software for use by separate engineering groups to address either the front-end chip design or back-end chip implementation processes.

In the front-end design process, the chip design is conceptualized and written as a register transfer level computer program, or RTL file, that describes the required functionality of the chip. For large chips, the design is often divided into a number of individual blocks, each with its own associated RTL file. This is often done because of capacity limitations in existing electronic design automation tools. The designer also develops constraints for the design that are used to describe the desired timing performance of the chip. Finally, a target library is specified that contains detailed information about the basic functional building blocks, or logic gates, that will be used in the design. This library is typically provided by the semiconductor vendor or a third-party library vendor. The next step is to run the RTL files through synthesis software that generates a netlist. The netlist describes the circuit in terms of logic gates selected from the target library and connected such that the functionality specified in the RTL files is realized. The synthesis software also performs optimizations to attempt to meet the timing constraints specified by the designer.

A critical objective of chip design is to minimize total circuit delay, which is comprised of gate delay and wire delay. Front-end software was initially developed when the gate delay, or the time it takes for an electrical signal to travel through a logic gate, was the most significant component of total circuit delay. Wire delay, or the time it takes for a signal to travel through a wire connecting two or more gates, was negligible and designers could use simple estimates and still meet targeted circuit speeds.

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In the back-end implementation process, physical design software is used to transform the netlist generated by the front-end process into a physical layout of the chip. The resulting physical layout is usually output in a binary file format, commonly referred to as GDSII, that is used to generate the photomasks used to manufacture the integrated circuit. The two primary functions provided by traditional physical design software are placement and routing. Placement determines the optimal physical location for the logic gates on the integrated circuit. After placement is completed, routing connects the logic gates with wires to achieve the desired circuit functionality. After the layout is completed, the final step in the back-end process is to run timing analysis to verify that the chip will run at the desired circuit speed. If circuit speeds are slower than the speeds reported by the synthesis software, the design must often be iterated back through the synthesis step in an attempt to improve the timing. Since each timing closure iteration cycle can take one or more weeks, successive iterations of the design process can significantly lengthen the time it takes to design and produce new chips.

Integrated circuit (“IC”) designs which are both large and highly integrated require a fundamental new technology to create and maintain chip floorplans. Creating hierarchical chip floorplans traditionally has been a manual error-prone task with less optimal quality of results in terms of chip die area and performance. Alternative flat chip design methodologies simplify floorplan creation but suffer from a long turn around time making it unacceptable.

Deep Submicron Challenges

The trend toward deep submicron technology has rendered traditionally separate front-end and back-end electronic design automation processes less effective for rapid, cost-effective and reliable chip designs. As integrated circuits have increased in complexity and feature sizes have dropped, the problems faced by chip designers have changed. Wire delay now accounts for the majority of total circuit delay and has become the most significant factor in circuit performance for deep submicron technologies. Front-end estimates of wire delay may vary considerably from actual wire delays measured in the final layout. As a result, the front-end timing might meet the design requirements, but the final layout timing at the completion of the back-end process may be unacceptable, requiring time-consuming iterations back through the front-end process.

Deep submicron process technologies bring additional complexities to the design and implementation process that can cause chip failures. These complexities include, among others, signal integrity problems such as electrical interference from wires in close proximity, commonly referred to as crosstalk or noise, that can affect both circuit performance and functionality. Using existing design flows and software, designers must contend with analyzing and fixing these problems manually after the layout is completed. These adjustments often change the chip timing and further contribute to the timing closure problem.

These deep submicron challenges make it difficult to efficiently design chips using separate front-end and back-end processes. Semiconductor manufacturers and electronic products companies are currently seeking alternatives to older generation electronic design automation software to shorten design time, improve circuit speed, and handle larger chip designs. As a result, we believe that a significant opportunity exists for a new electronic design automation approach to chip design that can enable the design of more complex deep submicron integrated circuits, improve performance, and significantly reduce the time it takes to design and produce next-generation electronic products.

Our Solution

The important technical foundations for our software products are found within our unified data model architecture, platform logic synthesis, interconnect synthesis, automated chip creation, physical verification, design-for-manufacturability (“DFM”) and silicon sign-off (known to us as our “Sign-off in the Loop^™” flow), which allow our customers to reduce the number of iterations that are often required in conventional integrated circuit design processes.

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Logic Design

Our fast, high-capacity logic synthesis provides a common front-end to standard cell application specific integrated circuit (“ASIC”) and structured ASIC IC implementation platforms. A single RTL representation of the design is synthesized to technology-independent netlist and taken through architecture-specific mapping and physical synthesis to predict the area, performance, power, testability and routability during physical implementation.

Design Implementation

Unified Data Model Architecture

Conventional electronic design automation flows are typically based on a collection of software programs that have their own associated data models, often resulting in cumbersome design flows. We believe that we are the only electronic design automation vendor that offers a complete integrated circuit design implementation flow based on a unified data model. Our unified data model architecture is a key enabler for our ability to deliver automated signal integrity detection and correction, integrated power analysis and Sign-off in the Loop. The unified data model contains all the logical and physical information about the design and is resident in core memory during execution. The various functional elements of our software such as the implementation engines for synthesis, placement and routing, and our analysis software for timing, RC and delay extraction, power, and signal integrity, all operate directly on this data model. Because the data model is concurrently available to all the engines and analysis software, it is possible to analyze the design and make rapid tradeoff decisions during the physical design process, thereby reducing design iterations.

Interconnect Synthesis

Interconnect Synthesis is a recent addition to our integrated circuit implementation design flow. With Interconnect Synthesis, optimization for timing, crosstalk, on-chip variation (“OCV”), power and yield are performed in the routing phase, rather than relying on logic optimization during logic synthesis as has historically been done. Optimization in logic synthesis alone was insufficient as wireload models started failing at 0.18 micron and below. At 90 nanometers and below, wire delay and the effect of their neighbors contribute to almost all deep-submicron effects. Accordingly, optimization has to be done as wires are assigned to tracks and are being routed. This move to combine optimization and routing requires a new flow with a new approach—Interconnect Synthesis. We believe we are currently the only IC implementation vendor to enable the above-referenced advanced optimization techniques during the routing phase.

Automated Chip Creation

Automated chip creation is a new generation of implementation technology that automatically synthesizes chip floorplans. Automated chip creation is found in our new Talus family of products. Talus is an RTL-to-GDSII solution that aims to eliminate manual and resource intensive floorplan interventions. Designs are automatically partitioned into blocks, shaped and placed to achieve optimal floorplan chip area and performance. Furthermore, blocks are automatically distributed on multiple computing processing machines to implement any size designs 5-10 times faster. Talus allows prototyping of large designs early in the design cycle and flexible floorplans to implement engineering changes later in the design while it provides better quality of results.

Physical Verification and Design for Manufacturability

Every completed physical layout must be analyzed and manipulated before final manufacturing. This process—commonly called physical verification—has increased in complexity and importance as manufacturing technology has moved from 130 nanometers to 90 nanometers, and now to 65 nanometers. Moreover, new physical phenomena at these manufacturing nodes—including optical proximity correction (“OPC”) and chemical-mechanical-polishing (“CMP”) effects—have introduced the need for new design-for-manufacturing technologies.

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We have introduced a new product line to address these challenges, with technologies resulting from our acquisition of Mojave, Inc. (“Mojave”) These products include Quartz™ DRC and Quartz™ LVS, physical verification tools designed specifically to address the challenges at 90 nanometers and 65 nanometers. They are architected to do a full-chip design rule check for any design, at any node, in two hours or less. Quartz DRC and Quartz LVS have been architected to be highly scalable. By using techniques that enable fine-grain parallelism, Quartz DRC and Quartz LVS are able to use a large number (up to 100) separate Linux machines on a standard computer network. This ability to do distributed processing on a standard Linux machine provides the ability to linearly increase the speed of processing—increasing the number of processors by 2x increases the speed by 2x—for design rule checking. This scalability is essential to achieving a fast turnaround time of two hours or less.

We have a strong position for design for manufacturability—as we now offer both a leading physical design system, and a leading physical verification system. We are leveraging the Mojave technology, and developing future products, including OPC-aware software, that will be used during both design and manufacturing.

Silicon Sign-off

Design teams have traditionally relied upon one set of tools for implementation and another set of tools for sign-off analysis. While this separation enables an advantageous tradeoff with respect to accuracy versus runtime, it also requires corrective iteration loops when discrepancies are found during sign-off analysis. With the increased analysis challenges which the 90- and 65-nanometer processes present, such as combining noise analysis with on-chip variation, or OCV, across ever-increasing process corners and operating modes, the use of separate point sign-off tools becomes a primary bottleneck in the drive to improve design cycle time. Our “Sign-off in the Loop” flow breaks the sign-off iteration bottleneck by making sign-off-level analysis directly available during the implementation flow. The capabilities of Quartz RC^™ are augmented by the integration of QuickCap technology into the extractor. QuickCap is the industry golden standard for reference parasitic extraction. The inclusion of this technology into a full-chip extractor enables users to attain the highest possible accuracy for the most timing critical nets on a chip.

Products

Below is a description of our major products.

Talus^™ Design is a key component of the next-generation RTL-to-GDSII Talus platform. This product enables logic designers to synthesize, evaluate, and improve the quality of their RTL code, design constraints, testability requirements and floorplan. The physical netlist generated by Talus Design provides a clean handoff between the RTL designer and layout engineer, eliminating back-to-front iterations necessary for timing closure in conventional flows.

Talus^™ Vortex is our place and route product within the next-generation Talus platform. Talus Vortex flow begins with design netlist, target library, and design constraints. It utilizes state-of-the-art implementation automation to produce a physical layout and routing connection of the design to meet timing, area, power, clock, and routing requirements for manufacture.

Talus^™ ACC is a revolutionary floorplan synthesis and chip assembly flow automation product within the next-generation Talus platform. The Talus ACC flow works with Talus Design and Talus Vortex to achieve the highest level of automation starting with RTL and design constraints to automatically partition designs with large-block (macro) placements meeting design constraints and then re-assemble the design meeting criteria. Talus ACC can also be used as a stand-alone floorplan synthesis solution with other logic synthesis and place & route solutions to reduce the time to produce a partitioned design layout with production-quality macro placement and partition design budgets.

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Talus^™ Power is an optimization option to Talus Design and Talus Vortex for advanced low-power needs. By using Talus Power, dynamic and leakage power can be minimized while meeting design performance, area, and manufacturing requirements. Multiple techniques are employed and embodied in a design flow to maximize the automation required to meet aggressive design schedules.

Talus^™ DFM is the design for manufacturing optimization tool to avoid or correct yield limiting defects during IC design implementation phase. DFM aware optimizations take advantage of available high yield standard cell libraries when possible to implement a DFM friendly chip. Our routing technology produces fewer via metal contacts, which are a major source of lower yield. Furthermore, wire optimization to spread or widen wires reduces random defects without introducing physical design rule check or timing closure problems. In addition, foundry provided soft DFM rules such as end of line and redundant via contacts are automatically supported during design implementation phase to comply with foundry recommended DFM rules.

Quartz^™ Rail is a manufacturing sign-off analysis tool for ‘static’ and ‘transient’ voltage drop within a chip. Using industry-standard input for design logic, layout, and activity, and including an interface to Magma’s FineSim SPICE product for silicon accurate measurement, Quartz Rail provides a reliable and comprehensive voltage-drop analysis for design implementation. Quartz Rail is integrated in the Talus implementation platform to simplify the flow for design analysis to influence design decisions early in the implementation process for best quality of results.

Quartz^™ RC: Provides sign-off-quality parasitic extraction and can operate as either a standalone tool or integrated with the Blast Fusion system, where it underlies the “Sign-off in the Loop” flow.

Quartz^™ Time: Combines the proven static timer in Blast Fusion with advanced timing capabilities to create a standalone sign-off timing system.

Quartz^™ SSTA: Provides a parametric yield analysis capability for the design, providing parametric extraction and statistical timing analysis simultaneously.

Quartz^™ DRC and Quartz^™ LVS: Targeted to provide the fastest turnaround time of any physical verification tools, with a goal of performing a full chip design rule check (“DRC”) in less than 2 hours.

Quartz^™ Formal: A logic equivalency checking tool used to verify the functional accuracy of a gate-level design with respect to its source HDL description.

Blast Create^™ is a key component of our RTL-to-GDSII integrated circuit design solution. It enables logic designers to synthesize, visualize, evaluate and improve the quality of their RTL code, design constraints, testability requirements and floorplan. The physical netlist generated by Blast Create provides a clean handoff between RTL designer and layout engineer, eliminating back-to-front iterations necessary for timing closure in conventional flows.

Blast Fusion^® is our physical design software that shortens the time it takes to design and produce deep submicron integrated circuits. The Blast Fusion flow starts by reading in the netlist, target library and design constraints. The netlist is optimized for circuit performance taking into account placement information that specifies the location of the gates in the chip layout. At the conclusion of this step, Blast Fusion generates a report that predicts the final timing performance that is achievable in the completed chip layout. In the final step, detailed physical design, Blast Fusion generates the final chip layout by performing the routing of wires that are needed to connect the gates into the desired circuit configuration and meet the timing performance requirements.

Blast Fusion is intended for use by chip design teams and other groups who are responsible for taking a design from netlist to completed chip layout. In the conventional ASIC design flow, front-end designers use synthesis software to translate and optimize their RTL files into a netlist which is then handed off to the ASIC or semiconductor vendor or separate layout design group for physical design using Blast Fusion. Sales of Blast Fusion account for the largest portion of our revenue.

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Blast Noise^® is our noise detection and correction product. Interference, or noise from wires in close proximity to each other, can decrease chip performance or cause chip failure, particularly at 0.18 micron and below. Blast Noise works with Blast Fusion to actively detect potential noise problems and correct them during the physical design process.

Blast Plan^™ delivers hierarchical design planning capabilities for use in implementing complex integrated circuit and system-on-chip designs. In a hierarchical design methodology, a chip design is partitioned into blocks that are designed and implemented individually and then later assembled to create the entire chip. Blast Plan works with Blast Fusion and Blast Create to streamline the hierarchical planning and design of large chips and system-on-chips within a single environment.

Blast Plan^™ Pro combines the hierarchical design planning capabilities of Blast Plan with design exploration and early problem detection. Blast Plan Pro uses the same analysis engines as our implementation system, thus providing a direct path to IC implementation using Blast Fusion.

Blast Rail^™ provides IC designers with integrated power analysis and planning, voltage-drop analysis, voltage-drop-induced delay analysis, and electromigration analysis on rail wires and vias. These features enable designers to maintain power integrity in their designs. Blast Rail is fully integrated with our RTL-to-GDSII implementation flow to enable a correct-by-construction rail design solution. Blast Rail^™ NX is our enhanced version of Blast Rail.

Blast Power^™, when launched in May 2004, was the industry’s first integrated power management and power minimization solution from RTL to GDSII. Blast Power is available as an option to our Blast Create and Blast Fusion implementation system, enabling us to offer a low-power design methodology that includes embedded power, timing, and rail analysis and power minimization techniques. With Blast Power, our users will be able to make power-vs-timing and power-vs-area tradeoffs throughout the RTL-to-GDSII flow—without having to export design data out of the Magma system. This tight integration of power optimization and management into the implementation process will enable users to deliver lower power and more cost-effective development cycles than point tool flows.

Blast Fusion^® QT: Provides advanced capabilities that enable “Sign-off in the Loop” timing analysis with concurrent optimization. This product provides designers access to a sign-off timing analysis engine within the implementation flow, eliminating the need to iterate with external sign-off tools.

Blast Fusion^® 5.0: Provides enhanced physical synthesis to improve congestion and timing of high performance designs. The product supports advanced 65-nanometer routing rules and improved runtime up to 50%. The optimization engine will take full advantage of multi mode and margin less OCV analysis to reduce design margins and turn around time.

Blast Plan^™ FX: Provides automated hierarchical design capabilities for taking a complete hierarchical chip from RTL to GDSII in a deterministic, repeatable fashion throughout the design cycle.

Blast Yield^™: A comprehensive design-for-yield (“DFY”) solution which incorporates multiple techniques to optimize the design for parametric and functional yield—both cell and wire yield—without compromising timing or area.

ArchEvaluator^™ is the only commercial EDA tool that enables the programmable or Structured ASIC architecture designers to discover new synthesis-friendly architectures with the best performance and density advantages. ArchEvaluator is able to evaluate a wide scope of architecture parameters.

QuickCap^® is the industry’s leading parasitic extraction technology. QuickCap is a highly accurate 3D-field solver used in parameter extraction and rules generation, library cell extraction, critical cell analysis, and critical net analysis.

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QuickCap^® NX is an enhanced version of the QuickCap tool, targeted to address specific design challenges that occur in 90-nanometer and smaller process technologies.

SiliconSmart^® products provide robust timing, power, and signal integrity models in a variety of industry standard formats.

FineSim^™: The next-generation highly accurate fast circuit simulator with full-chip analysis capabilities. These capabilities include advanced post-layout simulation features, high accuracy with low memory usage and high performance.

FineSim^™ Pro: The next-generation highly accurate fast circuit simulator with full-chip analysis capabilities. These capabilities include advanced post-layout simulation features, high accuracy with low memory usage and high performance.

FineSim^™ SPICE: The next-generation pure circuit simulator with Native Parallel Technology™ that vastly increases capacity and speed, thereby enabling simulation of circuits in a manner not previously done by competing spice simulators.

Camelot^™: Provides silicon debug capability by linking IC design data with manufactured ICs using tool navigation, allowing for the localization of errors on the silicon versus design in early yield improvement cycles.

YieldManager^®: Provides fab wide capability to collect, correlate, analyze and report yield loss data, driving yield prediction and early yield loss detection in the semiconductor manufacturing production process.

Services

We provide consulting and training to help our customers more rapidly adopt our technology. We also provide post-contract support, or maintenance, for our products.

Customers

We license our software products to semiconductor manufacturers and electronic products companies around the world. Our major customers include Texas Instruments, Broadcom, NEC, Toshiba, Qualcomm, Intel, Marvell, LSI Logic, Samsung and Vitesse. No customer accounted for 10% or more of our consolidated revenues during fiscal 2007.

Product Backlog

As of April 1, 2007 and April 2, 2006, we had greater than $420 million and $368 million, respectively, in backlog, which represents contractual commitments by our customers through purchase orders or contracts. As of April 1, 2007 and April 2, 2006, approximately 12% and 9%, respectively, of the backlog is variable based on volume of usage of our products by the customers, approximately 1% and 2%, respectively, includes specific future deliverables, and approximately 4% and 6%, respectively, is recognized in revenue on a cash receipts basis. We have estimated variable usage, for the purposes of determining our backlog, based on information from customers’ forecasts available at the contract execution date. 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.

Revenue and Orders Mix

Our license revenue in any given quarter depends on the volume of short term licenses shipped during the quarter and the amount of long term, ratable and cash receipts revenue from deferred revenue that is recognized

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out of backlog and recognized on orders received during the quarter. 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 is subject to substantial fluctuation in any given quarter or multiple quarter periods, and the actual mix of licenses sold affects the revenue we recognize in the period. Even if we achieve the target level of total orders, we may not meet our revenue targets if we are unable to achieve our target license mix. In particular, we may fall short of our revenue targets if we deliver more long term or ratable licenses than expected, or we may exceed our revenue targets if we deliver more short term licenses than expected.

Unbilled Accounts Receivable

Unbilled accounts receivable represent revenue that has been recognized in advance of contractual invoicing to the customer. 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. As of April 1, 2007 and April 2, 2006, unbilled accounts receivable were approximately $7.6 million and $7.7 million, respectively. These amounts were included in accounts receivable on our consolidated balance sheets for these periods.

Revenue by Geographic Areas

We generated 32% of our total revenue from sales outside the United States for fiscal 2007, compared to 33% in fiscal 2006 and 43% in fiscal 2005. Additional disclosure regarding financial information on geographic areas is included in Note 13 of our Consolidated Financial Statements in Item 8 of this Annual Report.

Sales and Marketing

We license our products primarily through a direct sales force focused primarily on the industry leaders in the communications, computing, consumer electronics, networking and semiconductor industries. We have North American sales offices in California, Massachusetts, North Carolina, Pennsylvania, Texas, Washington and Canada. Internationally, we have European offices in Germany, France and the United Kingdom, an office in Israel and Asian offices in China, India, Japan, Korea and Taiwan. Our direct sales force is supported by a larger group of field application engineers that work closely with the customers’ technical chip design professionals.

As of April 1, 2007, we had 363 employees in our marketing, sales and technical sales support organizations. We intend to continue to expand our sales and field application engineering personnel on a worldwide basis.

Competition

The electronic design automation industry is highly competitive and characterized by technological change, evolving standards, and price erosion. Major competitive factors in the market we address include technical innovation, product features and performance, level of integration, reliability, price, total system cost, reduction in design cycle time, customer support and reputation.

We currently compete with companies that hold dominant shares in the electronic design automation market. In particular, Cadence Design Systems, Inc. (“Cadence”) and Synopsys, Inc. (“Synopsys”) are continuing to broaden their product lines to provide an integrated design flow, and we continue to compete with Mentor Graphics Corporation (“Mentor”) in certain product areas, such as physical verification tools. Each of these companies has a longer operating history and significantly greater financial, technical and marketing resources, as well as greater name recognition and larger installed customer bases than we do. These companies also 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. Our competitors are better able to offer

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aggressive discounts on their products, a practice that they often employ. Our competitors offer a more comprehensive range of products than we do; for example, we do not offer logic simulation 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. Further consolidation in the electronic design automation market could result in an increasingly competitive environment. Competitive pressures may prevent us from increasing market share or require us to reduce the price of products and services, which could harm our business. To execute our business strategy successfully, we must continue to increase our sales worldwide. If we fail to do so in a timely manner or at all, we may not be able to gain market share and our business and operating results could suffer.

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

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

Research and Development

We devote a substantial portion of our resources to developing new products and enhancing our existing products, conducting product testing and quality assurance testing, improving our core technology and strengthening our technological expertise in the electronic design automation market. Our research and development expenditures for fiscal 2007, 2006 and 2005 were $63.6 million, $50.1 million and $43.1 million, respectively. There have not been any customer-sponsored research activities since our inception.

As of April 1, 2007, our research and development group consisted of 379 employees. We have engineering centers in California and Texas in the United States, and in China, India, the Netherlands and Korea. Our engineers are focused in the areas of product development, advanced research, product engineering and design services. Our product development group develops our common core technology and is responsible for ensuring that each product fits into this common architecture. Our advanced research group works independently from our product development group to assess and develop new technologies to meet the evolving needs of integrated circuit design automation. Our product engineering group is primarily focused on product releases and customization. Our design services group is specifically focused on, and assists in completing, customer designs for commercial applications.

Intellectual Property

Currently, we hold, directly or indirectly, more than 60 issued patents. Patent protection affords only limited protection for our technology. Our patents will expire on various dates between May 2008 and February 2025. We have filed, and plan to file, applications for additional patents. We do not know if our patent applications or any future patent application will result in a patent being issued with the scope of the claims we seek, if at all, or whether any patents we may receive will be challenged or invalidated. Rights that may be granted under our patent applications that may issue in the future may not provide us competitive advantages. Further, patent protection in foreign jurisdictions where we may need this protection may be limited or unavailable.

It is difficult to monitor and prevent unauthorized use of technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. In addition, our competitors may

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independently develop technology similar to ours. We will continue to assess appropriate occasions for seeking patent and other intellectual property protections for those aspects of our technology that we believe constitute innovations providing significant competitive advantages.

Our success depends in part upon our rights in proprietary software technology. We have patent applications pending for some of our proprietary software technology. We rely on a combination of copyright, trade secret, trademark and contractual protection to establish and protect our proprietary rights that are not protected by patents, and we enter into confidentiality agreements with those of our employees and consultants involved in product development. We routinely require our employees, customers and potential business partners to enter into confidentiality and nondisclosure agreements before we will disclose any sensitive aspects of our products, technology or business plans. We require employees to agree to surrender to us any proprietary information, inventions or other intellectual property they generate while employed by us. Despite our efforts to protect our proprietary rights through confidentiality and license agreements, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. These precautions may not prevent misappropriation or infringement of our intellectual property.

Some of our products and technology include software or other intellectual property licensed from other parties. In addition, we also license software and other intellectual property from other parties for internal use. We may have to or want to obtain new licenses or renew licenses in the future.

Third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. Many of our contracts contain provisions indemnifying our customers from third-party intellectual property infringement claims. On September 17, 2004 and again on September 26, 2005, Synopsys, Inc. filed suit for patent infringement against us (as further discussed below in Item 3 of this Part I), and, other parties may assert infringement claims against us and/or our customers. Our products may be found by a court to infringe issued patents that may relate to or are required for our products. In addition, because patent applications in the United States are sometimes not publicly disclosed until the patent is issued, applications may have been filed that relate to our software products. We may be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties. Intellectual property litigation is expensive and time consuming and could divert management’s attention away from running our business. If there is a successful claim of infringement, we may be ordered to pay substantial monetary damages, we may be prevented from distributing some of our products, and/or we may be required to develop non-infringing technology or enter into royalty or license agreements. These royalty or license agreements, if required, may not be available on acceptable terms, if at all. Our failure to develop non-infringing technology or license the proprietary rights on a timely basis would harm our business.

Foreign Operations

As indicated above and in Item 2 below, we have offices, including sales offices and engineering centers, located around the world. For additional information regarding risks attendant to our foreign operations, see the discussions under Item 1A, “Risk Factors” including discussion under the headings stating: “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 are subject to risks associated with changes in foreign currency exchange rates,” and “Failure to obtain export licenses could harm our business by preventing us from transferring our technology outside of the United States.”

Employees

As of April 1, 2007, we had 843 full-time employees, including 379 in research and development, 363 in sales and marketing and 101 in general and administrative. None of our employees are covered by collective bargaining agreements. We believe our relations with our employees are good.

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Corporate Information

We were incorporated in Delaware in 1997. Our principal executive offices are located at 1650 Technology Drive, San Jose, California 95110, and our telephone number is (408) 565-7500. Our common stock is traded on the Nasdaq Global Market under the ticker symbol LAVA. Our Web site address is www.magma-da.com. The information in our Web site is not incorporated by reference into this annual report. Through a link on the Investor Relations section of our Web site, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they are filed with, or furnished to, the Securities and Exchange Commission. Additionally, the public may read and copy any materials we file with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission at the following Internet site: http://www.sec.gov. Our 2007 annual meeting is scheduled to be held on August 29, 2007 at our offices in San Jose, California. Financial information about us is set forth in the financial statements below.

ITEM 1A.    RISK FACTORS

Our business faces many risks. The risks described below are not 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 risk factors 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 major 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 in fiscal 2003 and fiscal 2004. 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 not adopt our proprietary technologies or use our 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 had an accumulated deficit of approximately $197.8 million as of April 1, 2007. If we continue to incur losses, the trading price of our stock would likely decline.

We had an accumulated deficit of approximately $197.8 million as of April 1, 2007. Except for fiscal 2003 and fiscal 2004, we incurred losses in all other fiscal years. 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.

Our quarterly results are difficult to predict, and if we fail to reach certain quarterly financial expectations, our stock price is likely to 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

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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 litigation;

• 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 have faced lawsuits brought by Synopsys, Inc. related to patent infringement and other claims, 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.

Synopsys previously filed various suits, including an action for patent infringement, against us. In addition, a putative shareholder class action lawsuit and a putative derivative lawsuit have been filed against us. All claims brought against us by Synopsys have been fully resolved by a settlement and a license under the asserted patents, although other similar litigation involving Synopsys or other parties may follow (subject, in the case of Synopsys, to the terms of the settlement agreement with Synopsys pursuant to which we and Synopsys agreed not to initiate future patent litigation against each other for a period of two years commencing on March 29, 2007 provided certain terms are met). In the future Synopsys or other parties may assert intellectual property infringement claims against us or our customers (subject, in the case of Synopsys, to the terms of said settlement agreement). 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. We also license technology from certain third parties and could be subject to claims if the software which we license is deemed to infringe the rights of others. 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

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from third-party intellectual property infringement claims that are brought against them based on their use of our products. Also, we may be unaware of filed patent applications that relate to our software products. We believe that the patent portfolios of our competitors are far larger than ours. This disparity between our patent portfolio and the patent portfolios of our competitors 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 and other types of litigation, could be, in the case of intellectual property litigation, our loss of critical proprietary rights and, in the case of intellectual property litigation and other types of litigation, unexpected operating costs and substantial monetary damages. Intellectual property litigation and other types of litigation are expensive and time-consuming and could divert our management’s attention from our business. If there is a successful claim against us for 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.

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.

The price of our common stock may fluctuate significantly, which may make it difficult for our stockholders to resell our stock at attractive prices.

Our common stock trades on the Nasdaq Global Market under the symbol “LAVA”. 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. Furthermore, the price of our common stock fluctuated significantly in light of the recent litigation with Synopsys.

In March, 2007, we completed exchanges, whereby certain holders of approximately $49.9 million in aggregate principle amount of our Zero Coupon Convertible Subordinated Notes due May 15, 2008 (the “2008 Notes”) agreed to exchange their 2008 Notes for an equal aggregate principal amount of 2% Convertible Senior Notes due May 15, 2010 (the “2010 Notes”). The 2010 Notes were initially convertible into 3,329,267 shares of our common stock. Approximately $15.2 million aggregate principal amount of the 2008 Notes remain outstanding, which is convertible into 664,916 shares of our common stock. Upon the occurrence of certain triggering events, the number of shares of our common stock that are issuable upon conversion of the 2010 Notes may be increased by up to an additional 1,098,658 shares of our common stock. Sales of a substantial number of shares of our common stock in the public market following this note exchange, or any conversion of the 2010 Notes into shares of our common stock or the perception that such sales may occur, could cause the market price of our common stock to decline and could increase the fluctuations in our stock price.

The market price of our stock is subject to significant fluctuations in response to the risk factors set forth in this Item 1A., many of which are beyond our control. Such fluctuations, as well as economic conditions generally, may adversely affect the market price of our common stock.

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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 common stock, regardless of our operating performance.

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 the Silicon Valley where our headquarters is located.

Furthermore, in light of our adopting SFAS 123R “Share-Based Payment” in the first quarter of our fiscal year 2007, we changed our employee compensation practices, and those changes could make it harder for us to retain existing employees and attract qualified candidates. If we lose the services of a significant number of our employees and/or if we cannot hire additional employees of the same caliber, 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 who we may be unable to recruit and retain.

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.

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. Our 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 our products against those of our competitors. As the complexity of the products we sell increases, we expect our 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 our customers to invest significant time and incur significant costs, we must target those individuals within our 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 those individuals decide to purchase our products, the negotiation and documentation processes can be lengthy and could lead the decision-maker to reconsider the purchase. 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. Furthermore, technological changes, litigation risk or other competitive factors could cause some customers to shorten the terms of their licenses significantly, and such shorter terms could in turn have an impact on our total results for orders for this fiscal year. In addition, the precise mix of orders is subject to substantial fluctuation in any given quarter or multiple quarter periods, and the actual mix of licenses sold affects the revenue we recognize in the period. Even if we achieve the target level of total orders, we may not meet our revenue targets if we are unable to achieve our target license mix. In particular, we may fall short of our revenue targets if we deliver more long term or ratable licenses than expected, or we may exceed our revenue targets if we deliver more short term licenses than expected.

We may be unable to make payments to satisfy our indemnification obligations.

We enter into standard license agreements in the ordinary course of business. Pursuant to these agreements, we agree to indemnify certain of 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 our normal business practices. We estimate that the fair value of our indemnification obligations is insignificant, based upon our historical experience concerning product and patent infringement claims. Accordingly, we have no liabilities recorded for indemnification under these agreements. If an indemnification event were to occur, we might not have enough funds to pay our indemnification obligations. Further, any material indemnification payment could have a material adverse effect on our financial condition and the results of our operations.

We have entered into certain indemnification agreements whereby certain of 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. Additionally, in connection with certain of our recent business acquisitions, we agreed to assume, or cause our subsidiaries to assume, indemnification obligations to the officers and directors of the acquired companies. While we have a directors and officers insurance policy that reduces our exposure and enables us to recover a portion of any future amounts paid pursuant to our indemnification obligations to our officers and directors, the maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, as a result of our directors and officers insurance policy coverage, and our belief that our estimated potential exposure to our officers and directors for indemnification liabilities is minimal, no liabilities have been recorded for these agreements as of April 1, 2007. Therefore, if an indemnification event were to occur, we might not have enough funds to pay our indemnification obligations. Further, any material indemnification payment could have a material adverse effect on our financial condition and the results of our operations.

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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. For the fiscal year ended April 1, 2007, our top three customers together accounted for approximately 25% of our revenue.

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

Most of our customers license our software under time-based licensing agreements, with terms that typically range 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, for bundled agreements, 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 unbundled agreements, as the payment terms are extended, the revenue from these contracts is recognized as amounts become due and payable. Revenue recognized under these arrangements will be higher in the 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 EDA 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, Synopsys and Mentor. Each of these companies has a longer operating history and significantly greater financial, technical and marketing resources than we do, as well as greater name recognition and a larger installed customer base. Our competitors are better able to offer aggressive discounts on their products, a practice they often employ. Competition and corresponding pricing pressures among EDA vendors or other factors might be causing or might cause in the future the overall market for EDA products to have low growth rates, remain relatively flat or even decrease in terms of overall dollars. Our competitors offer a more comprehensive range of products than we do; for example, we do not offer logic simulation 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 acquiring companies with promising new chip design products or companies that may be too large for us to acquire without a strain on our resources and liquidity.

Competition in the EDA market has increased as customers rationalized their EDA spending by using products from fewer EDA vendors. Continued consolidation in the electronic design automation market could intensify this trend. Also, many of our competitors, such as Cadence, Synopsys and Mentor, have established relationships with our current and potential customers and can devote substantial resources aimed at preventing

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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 which may compete with our 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 either cause potential customers to defer purchases of our products or cause potential customers to decide against purchasing our products. If we fail to compete successfully, we will not gain market share, or our market share may decrease, and our business may 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 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 Knights Technology, Inc. (“Knights”), ACAD Corporation (“ACAD”), Mojave, Silicon Metrics Corporation, or any other companies we have acquired or 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 retaining 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;

• the risk that actions incentivized by earnout provisions will ultimately prove not to be in our best interest if our 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 our management’s attention;

• potential incompatibility of business cultures;

• potential dilution to existing stockholders if we incur debt or issue equity securities to finance acquisitions; and

• additional expenses associated with the amortization of intangible assets.

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

Many of our customers are currently working on 90-nanometer designs. We continue to work toward developing and enhancing our product line in anticipation of increased customer demand for 65-nanometer (sub-90 nanometer) design geometries. Similarly, we acquired Mojave personnel and technology to better address the needs of potential or existing customers to design and verify 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. In addition, if customers are not able successfully to make profits as they adopt smaller geometries, demand for our products may be adversely affected, and our operating results may be harmed.

Our operating results will be harmed if chip designers do not adopt Blast Fusion, Talus, FineSim, the Quartz family of products or our other current and future products.

Blast Fusion has accounted for the largest portion of our revenue since our inception and we believe that revenue from Blast Fusion, Talus, FineSim, and the Quartz family of products will account for most of our revenue for the foreseeable future. In addition, we have dedicated significant resources to developing and marketing Talus and other products. We must gain market penetration of Blast Fusion, Talus, FineSim, the Quartz family of products and other products in order to achieve our growth strategy and financial success. Moreover, if integrated circuit designers do not continue to adopt Blast Fusion, Talus, FineSim, the Quartz family of products or our other current and future products, our operating results will be significantly harmed.

In the event that the changes we made to our organizational structure in fiscal 2006 result in ineffective interoperability between our products or ineffective collaboration among our employees, then our operating results may be harmed.

We changed our organizational structure in fiscal 2006 to establish major business units that are responsible for our various products. If this new organizational structure results in ineffective interoperability between our products or ineffective collaboration among our employees, then our operating results may be harmed. For example, if this new organizational structure is not successful, we could experience delays in new product development that could cause us to lose customer orders, which could harm our operating results.

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 consolidation among our customers would harm our business and financial condition.

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 business. The continuing threat of terrorist attacks in the United States, the ongoing events in Afghanistan, Iraq, Iran, the rest of the Middle East and North Korea and other worldwide events 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.

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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. Any such seasonal cyclical industry downturns could harm our operating results.

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 we presently anticipate. 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, or if new products do not meet performance features as marketed, our reputation and our business could 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 acquired or 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 or meet the performance features as marketed, our customer relationships may suffer. Also, a limited number of our contracts include specified ongoing performance criteria. If our products fail to meet these criteria, it may lead to termination of these agreements and loss of future revenue. Complex software often contains errors. Any failure or poor performance of our software or the third-party software with which it is integrated could result in:

• delayed market acceptance of our software products;

• delays in product shipments;

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

• damage to our reputation;

• delayed or lost revenue; and

• product liability claims.

Our product functions are often critical to our customers, especially because of the resources our customers expend on the design and fabrication of integrated circuits. Many of our licensing agreements contain provisions to provide a limited warranty, and some of our licensing agreements provide 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 coverage and limits that we believe are consistent with similarly situated companies within the EDA industry, however, our insurance coverage may prove insufficient to protect against any claims that we experience.

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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 32% of our total revenue from sales outside North America during fiscal year 2007, compared to 33% for fiscal year 2006 and 43% for fiscal year 2005. 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.

As we expand our international operations, we will need to maintain 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 North Korea, Iran, Iraq and rest of the Middle East;

• 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 unexpected adverse revenue fluctuations.

Future changes in accounting standards or 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.

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 Sarbanes-Oxley Act of 2002 and the listing requirements for the Nasdaq Stock Market have imposed 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 further 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 (“Section 404”), which requires that we implement and maintain an effective system of internal controls and annual certification of our compliance by our independent auditor. For example, we have incurred significant expenses and will continue to incur expenses

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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 years ended April 1, 2007, April 2, 2006 and March 31, 2005, our independent registered public accounting firms have 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 these and other 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. Further, a failure to comply with Section 404 could cause us to delay filing our public reports, potentially resulting in de-listing by the Nasdaq Stock Market and penalties or other adverse consequences under our existing contractual arrangements. In particular, pursuant to the indenture for the 2010 Notes, if we fail to file our annual or quarterly reports in accordance with the terms of that indenture, or if we do not comply with certain provisions of the Trust Indenture Act specified in the indenture, after the passage of certain periods of time at the election of a certain minimum number of holders of the 2010 Notes, we may be in default under the indenture unless we pay a fee equal to 1% per annum of the aggregate principal amounts of the 2010 Notes, or the extension fee, to extend the default date. Even if we pay the applicable extension fee, we will eventually be in default for these filing failures if sufficient time passes and we have not made the applicable filing.

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 our company have been detected. Failure of the control systems to prevent error or fraud could materially adversely impact our financial results and our business.

Forecasting our tax rates is complex and subject to uncertainty.

Our 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 that are not deductible for tax purposes, including stock-based compensation and write-offs of acquired in-process research and development;

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

• future changes in ownership that 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 these evolving 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

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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 equity compensation 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 equity compensation 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 had recently been negatively affected by uncertainty surrounding the outcome of our litigation with Synopsys, Inc. discussed above.

In August 2005, we implemented 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 $9.20, the fair market value on the date of grant. 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, our ability to retain employees could be affected.

If our stock price declines in the future due to market conditions, investors’ perceptions of the technology industry or managerial or performance problems we might 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 us, which would negatively impact our operating results.

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

Due to changes in the accounting treatment for employee stock options, we have changed our employee compensation practices, and our reported results of operations have been and will likely continue to be adversely affected.

Until April 2, 2006, we accounted 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 adopted the new rules in the first quarter of our fiscal year 2007. This change in accounting

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treatment has resulted and will continue to result in significant additional compensation expense compared to prior periods and has adversely affected and will likely continue to adversely affect our reported results of operations and hinder our ability to achieve profitability. We are continuing to assess the full impact of the adoption of SFAS 123R on our business practices and, as part of that assessment, have changed our employee compensation practices by, for example, issuing more restricted stock and fewer stock options. These 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 we decreased our workforce by 23 employees. Over time we have significantly expanded our operations in the United States and internationally, and we plan to continue to expand the geographic scope of our operations. To pace the growth of our operations with the growth in our revenue, we must continue to improve administrative, financial and operations systems, procedures and controls. Failure to improve our internal procedures and controls could hinder our efforts to adequately manage our growth, disrupt operations, lead to deficiencies in our internal controls and financial reporting and otherwise harm 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 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 customers’ 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 (including 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 small 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;

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• 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;

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

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

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

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

The laws of some countries in which we market our products may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for them, 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 as a result of this concentration of ownership may be able to elect most of our directors and 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.

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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 our Board of Directors to create and issue, without prior stockholder approval, 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.

Our board of directors also has the power to adopt a stockholder rights plan, which could delay or prevent a change in control of us even if the change in control is generally beneficial to our 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 our 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 a portion of revenue in Japan and operating expenses in Europe, Japan and Asia-Pacific, which are denominated in the respective local currencies. As of April 1, 2007, we had approximately $2.8 million of cash and money market funds in foreign currencies. At this time, we are not hedging the effect of foreign currency fluctuations on our operating results using derivative financial instruments. While we assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis, our assessments may prove incorrect.

The convertible notes we issued in May 2003 and the convertible notes we issued in March 2007 are debt obligations that must be repaid in cash in May 2008 and May 2010, respectively, if they are not redeemed or converted into shares of 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 the 2008 Notes. In May 2005, we repurchased, in privately negotiated transactions, $44.5 million face amount (or approximately 29.7% of the total) of the 2008

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Notes at an average discount to face value of approximately 22%. In addition, in May 2006, we repurchased another $40.3 million face amount (approximately 38.2% of the remaining principal) of the 2008 Notes at an average discount to face value of approximately 13%. We spent an aggregate of approximately $34.8 million and $35.0 million, respectively, on the repurchases in May 2005 and May 2006. In March 2007, we exchanged, in privately negotiated transactions, an aggregate principal amount of $49.9 million of the 2008 Notes for an equal aggregate principal amount of the 2010 Notes. We will be required to repay the $15.2 million remaining principal amount of the 2008 Notes in full in May 2008 and the $49.9 million principal amount of the 2010 Notes in full in May 2010, unless the holders of those notes elect to convert them into shares of our common stock before the repayment dates or these notes are otherwise redeemed. The conversion price, subject to adjustment in certain circumstances, is $15.00 for the 2010 Notes and $22.86 for the 2008 Notes. If the price of our common stock does not rise above the applicable conversion price, conversion of the notes is unlikely and we would be required to repay the principal amounts 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.

We may have insufficient cash flow to meet our debt service obligations, including payments due on our convertible notes.

We will be required to generate cash sufficient to conduct our business operations and pay our indebtedness and other liabilities, including all amounts, both principal and interest, due on our outstanding 2008 Notes and 2010 Notes. The aggregate outstanding principal amount of these notes was $15.2 million and $49.9 million, respectively, at April 1, 2007. The 2010 Notes bear interest at 2% per annum, with interest payable on May 15 and November 15 of each year, commencing May 15, 2007. We may not be able to cover our anticipated debt service obligations from our cash flow. This may materially hinder our ability to make payments on the notes. Our ability to meet our future debt service obligations will depend upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. Accordingly, we cannot assure that we will be able to make required principal and interest payments on the notes when due.

The conversion of our outstanding convertible notes would result in dilution to our current stockholders.

We currently have outstanding 2008 Notes in the principal amount of $15.2 million and 2010 Notes in the principal amount of $49.9 million. The 2008 are convertible into shares of our common stock at a conversion price of $22.86 per share, subject to adjustment. The 2010 Notes are convertible into shares of our common stock at a conversion price of $15.00 per share, subject to adjustment. At current conversion prices, an aggregate of approximately 3,995,000 shares of our common stock would be issued upon the conversion of all outstanding notes at these exchange rates, which would dilute the voting power and ownership percentage of our existing stockholders.

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 the 2008 Notes, with the objective of reducing the potential dilutive effect of issuing common stock upon conversion of the notes. Although at the time of our May 2005 and May 2006 repurchases and our March 2007 exchanges of the 2008 Notes portions of the hedging arrangements were retired, the remaining portions of these hedging arrangements are likely to have caused Credit Suisse First Boston International and others to take

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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.

We may be unable to meet the requirements under the indentures to purchase our 2008 Notes and 2010 Notes upon a change in control.

Upon a change in control, which is defined in the indentures relating to the 2008 Notes and 2010 Notes 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, or any failure (if any) by us to comply with such requirements in the past, 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 San Jose, California, in California’s Silicon Valley region, 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.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.       PROPERTIES

Our corporate headquarters are located in San Jose, California, where we occupy approximately 106,854 square feet under two leases, both of which expire on October 31, 2011. We have North American sales offices in California, Massachusetts, North Carolina, Pennsylvania, Texas, Washington and Canada. In addition, we have European offices in Germany, the Netherlands, France and the United Kingdom, an office in Israel, and Asian offices in China, India, Japan, Korea and Taiwan. We believe our current facilities are adequate to support our current and near-term operations. However, if we need additional space, adequate space may not be available on commercially reasonable terms or at all.

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ITEM 3.       LEGAL PROCEEDINGS

We are subject to some legal proceedings described below and from time to time, we are also involved in other disputes that arise in the ordinary course of business. The number and significance of these litigation and disputes is increasing as our business expands and we grow larger. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. As a result, these litigation and disputes could harm our business and have an adverse effect on our consolidated financial statements. However, the results of any litigation or dispute are inherently uncertain and, at this time, no estimate could be made of the loss or range of loss, if any, from these litigation matters and disputes. Accordingly, we have not recorded any liabilities relating to these contingencies as of April 1, 2007. Legal fees are expensed in the period in which they are incurred.

Litigation with Synopsys

Synopsys California Case (Related Foreign Litigation)

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 us 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”).

On September 26, 2005, Synopsys, Inc. filed an action against us 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 we 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. The Complaint seeks unspecified monetary damages, an unspecified restitutionary/disgorgement award, injunctive relief, fees and costs, and an accounting of all revenues and profits derived from licensing the technology at issue. On October 19, 2005, we removed the action to the United States District Court for the Northern District of California. On October 26, 2005, we moved to strike and dismiss the complaint. On October 27, 2005, the Court granted our motion to relate the removed action with the preexisting patent infringement action, and both actions are now assigned to Judge Maxine M. Chesney.

On November 8, 2005, Synopsys filed a motion for sanctions against us based on our assertion of non-infringement defenses and counterclaims in the litigation. We opposed the motion, which was set for hearing on December 16, 2005. The hearing was vacated and the motion was taken under submission by the Court.

On July 29, 2005, Synopsys filed an action against us in Japan in Civil Department No. 40 of the Tokyo District Court seeking to obtain ownership of the Japanese patent application corresponding to our ‘446 Patent.

On April 18, 2005, Synopsys filed an action against us in Germany at the Landgericht München I (District Court in Munich) seeking to obtain ownership of the European patent application corresponding to our ‘446 Patent.

Synopsys Delaware Case

On September 26, 2005, Synopsys, Inc. filed an action against us 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”). 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 us as a result of our alleged infringement of the patents-in-suit.

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On October 25, 2005, we filed an Amended Answer, adding a counterclaim for infringement of U.S. Patent No. 6,505,328 (“the ‘328 Patent”). The ‘328 Patent relates to methods for designing integrated circuits. We seek treble damages and an injunction against Synopsys for the sale and manufacture of products we allege infringe the ‘328 Patent.

On March 24, 2006, we filed a motion for leave to file a Second Amended Answer and Counterclaims, to add counterclaims for infringement of U.S. Patent Nos. 6,519,745 (“the ‘745 Patent”), 6,931,610 (“the ‘610 Patent”), 6,854,093 (“the ‘093 Patent”), and 6,857,116 (“the ‘116 Patent”). All four patents relate to methods for designing integrated circuits. Synopsys opposed the motion on April 7, 2006. We filed our reply brief on April 14, 2006. The Court granted our motion on May 25, 2006, and we filed our Second Amended Answer and Counterclaims on May 31, 2006.

Settlement

On March 29, 2007 Synopsys and Magma settled all pending litigation between the companies. As part of the settlement, Synopsys and Magma agree to release all claims in California, Delaware, Germany and Japan and to cross license the patents at issue in these jurisdictions as well as any related applications, both companies agree not to initiate future patent litigation against each other for 2 years provided certain terms are met, and Magma agreed to make a payment to Synopsys of $12.5 million toward the settlement of this dispute. All other terms of the settlement are confidential.

Other Litigation

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. In March 2006, defendants filed a motion to dismiss the consolidated amended complaint. Plaintiff filed a further amended complaint in June 2006, which defendants again moved to dismiss. Defendants’ motion was granted in part and denied in part by an order dated August 18, 2006, which dismissed claims against two of the individual defendants. The case is now proceeding on the remaining claims.

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 us 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 the action has been stayed pending further developments in the putative shareholder class action referenced above.

Narpat Bhandari v. Magma Design Automation, Inc. Cadence Design Systems, Inc., Dynalith Systems, Inc., Altera Corp., Mentor Graphics, Corp. and Aldec, Inc., Case No. 6:06-CV-480, United States District Court, Eastern District of Texas, Tyler Division. On November 8, 2006, a complaint was filed alleging that we and several other named defendants infringe United States Patent No. 5,663,900. The complaint identifies our FineSim software, and other unidentified devices or programs, as the products accused of infringement. We and the other Defendants moved to dismiss the complaint on the basis that the only named plaintiff, Bhandari, does not own the ‘900 Patent. On May 11, 2007, the Court issued a Memorandum Opinion and Order granting the motion to dismiss and dismissed the case without prejudice.

Cadence Design Systems, Inc., Magma Design Automation, Inc., Altera Corp., and Mentor Graphics, Corp. v. Narpat Bhandari and Vanguard Systems, Inc., Case No. C 07-00823, United States District Court, Northern District of California, San Francisco Division. Magma and the other named plaintiffs filed a complaint for

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declaratory judgment on February 8, 2007, which we amended on March 27, 2007. The amended complaint for declaratory judgment seeks five claims of relief: (1) declaratory judgment of non-infringement of the ‘900 Patent; (2) declaratory judgment of invalidity of the ‘900 Patent; (3) lack of ownership of the ‘900 Patent; (4) the ‘900 Patent is unenforceable due to laches; and (5) declaratory judgment that unclean bars enforcement of the ‘900 Patent. We and the other Plaintiffs contend that LSI Logic is a joint owner of the ‘900 Patent and we have obtained a license from LSI. On April 6, 2007, Defendants Narpat Bhandari and Vanguard Systems, Inc. answered the amended complaint and filed a counterclaim of patent infringement of the ‘900 Patent. As in the Texas Action, the claim for patent infringement against us identified our FineSim software, and other unidentified devices or programs, as the products accused of infringement. The counterclaim seeks unspecified monetary damages, pre- and post-judgment interest, attorneys’ fees, and costs. Both Plaintiffs and Defendants proposed bifurcation of the issue of LSI’s ownership from all other remaining issues, and a stay of activities relating to validity, enforceability, infringement, and damages until after a bench trial to resolve the ownership issue. The Court will take up this proposal, as well as issues of scheduling and other issues, during the Case Management Conference, which is scheduled for May 21, 2007. While we intend to vigorously pursue this litigation against Bhandari and Vanguard Systems, the results of any litigation are inherently uncertain and we can not assure that we will be able to successfully defend against claims of patent infringement. We are currently unable to assess the extent of damages and/or other relief, if any, that could be awarded. We intend to vigorously defend against the claims asserted by Bhandari and Vanguard Systems. However, the results of any litigation are inherently uncertain and we can not assure that we will be able to successfully defend against the claims of Bhandari and Vanguard Systems. We are currently unable to assess the extent of damages and/or other relief, if any, that could be awarded to Bhandari and Vanguard Systems.

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

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instruction G(3) of Form 10-K, the information regarding our executive officers required by Item 401(b) of Regulation S-K is listed below.

The following table provides the names, offices, and ages of each of our executive officers as of May 31, 2007:

Name	Age	Position
Rajeev Madhavan	41	Chief Executive Officer and Chairman of the Board of Directors
Roy E. Jewell	52	President, Chief Operating Officer and Director
Peter S. Teshima	49	Corporate Vice President, Finance and Chief Financial Officer
Saeid Ghafouri	49	Corporate Vice President, Worldwide Field Operations
David H. Stanley	60	Corporate Vice President, Corporate Affairs and Secretary

Rajeev Madhavan has served as our Chief Executive Officer and Chairman of the Board of Directors since our inception in April 1997. Mr. Madhavan served as our President from our inception until May 2001. Prior to co-founding Magma, from July 1994 until February 1997, Mr. Madhavan founded and served as the President and Chief Executive Officer of Ambit Design Systems, Inc., an electronic design automation software company, later acquired by Cadence Design Systems, Inc., an electronic design automation software company.

Roy E. Jewell has served as our President since May 2001 and as one of our directors since July 2001. Mr. Jewell has served as our Chief Operating Officer since March 2001. From March 1999 to September 2000, Mr. Jewell served as the Chief Executive Officer at a company he co-founded, Clarisay, Inc., a supplier of surface acoustic wave filters. From January 1998 to March 1999, Mr. Jewell was a member of the CEO Staff at Avant! Corporation, a provider of software products for integrated circuit designs. From July 1992 to January 1998, Mr. Jewell was the President and Chief Executive Officer of Technology Modeling Associates, Inc. or TMA, subsequently acquired by Avant! Corporation. Prior to that time, Mr. Jewell served in various marketing positions at TMA.

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Peter S. Teshima has served as our Corporate Vice President, Finance and Chief Financial Officer since April 2006. He served as our Vice President, Finance from August 2004 to April 2006. As our Vice President, Finance, he managed Magma’s worldwide finance organization. From January 2003 to August 2004 he served as Chief Operating Officer and Chief Financial Officer for Hier Design, Inc., a provider of electronic design automation design planning software targeted at the field programmable gate array market space. From February 2000 to December 2002, Mr. Teshima was Chief Financial Officer and Vice President of Finance and Administration at InTime Software, Inc., a provider of electronic design automation software. From November 1998 to January 2000, Mr. Teshima served as the Chief Financial Officer and Vice President of Finance and Administration of Cyclone Commerce, a provider of e-commerce and business to business software applications and products. From 1997 to 1998, Mr. Teshima served as Chief Financial Officer and Vice President of Finance and Administration of Avant! Corporation. Mr. Teshima’s prior experience includes serving as Chief Financial Officer at interHDL Inc., and High Level Design Systems.

Saeid Ghafouri has served as our Corporate Vice President, Worldwide Field Operations since September 2002. From September 1999 to September 2002, Mr. Ghafouri was President and Chief Executive Officer of Empact Software, Inc., an enterprise software company. He served as President and Chief Executive Officer of an electronic design automation company, interHDL, which was acquired by Avant! Corporation, from April 1998 to September 1999. Prior to that, Mr. Ghafouri served in various management positions between June 1996 and April 1998 at Synopsys, Inc., most recently as Vice President—Business Development for library products. He spent eight years with Cadence Design Systems Inc., between March 1986 and May 1994, where he served in various positions in Sales, Marketing and Applications Engineering.

David H. Stanley has served as our Corporate Vice President, Corporate Affairs since November, 2005 and as our Corporate Secretary since January 2006. From April 2005 to November 2005, Mr. Stanley served as a legal consultant to us. From July 2004 to April 2005 Mr. Stanley was an independent legal adviser. Prior to that, Mr. Stanley was our Director for Corporate Development and Strategy from August 2003 to June 2004, in which position Mr. Stanley worked on mergers and acquisitions. From September 1999 until April 2003, Mr. Stanley was general counsel of COLO.COM, a collocation space provider. From October 1997 to September 1999, Mr. Stanley was the general counsel and a member of the CEO Staff of Avant! Corporation. Mr. Stanley received an A.B. degree in economics from Dartmouth College in Hanover, New Hampshire, and a J.D. degree from the University of San Francisco.

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PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Global Market under the symbol “LAVA”. Public trading in our common stock commenced on November 20, 2001. Prior to that, there was no public market for our common stock. As of May 31, 2007, there were 465 holders of record (not including beneficial holders of stock held in street names) of our common stock.

The following table sets forth, for the periods indicated, the high and low per share sale prices of our common stock, as reported by the Nasdaq Global Market on its consolidated transaction reporting system.

	High		Low
Fiscal 2007:
Fourth quarter	$	8.95	$	6.50
Third quarter	$	9.58	$	6.49
Second quarter	$	9.89	$	8.28
First quarter	$	12.35	$	8.13
Fiscal 2006:
Fourth quarter	$	10.85	$	8.31
Third quarter	$	9.20	$	7.55
Second quarter	$	9.63	$	7.96
First quarter	$	12.05	$	5.43

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The following graph compares the cumulative 5-year total return to holders of our common stock relative to the cumulative total returns of the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Index. The graph assumes that the value of the investment in our common stock and in each index was $100 on March 31, 2002 and tracks it (including reinvestment of dividends) through April 1, 2007. The comparisons in the table are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of the common stock.

	3/31/02	3/31/03	3/31/04	3/31/05	4/2/06	4/1/07
Magma Design Automation, Inc.	100.00	39.83	107.30	61.00	44.45	61.46
NASDAQ Composite	100.00	71.63	109.32	109.98	131.49	138.22
NASDAQ Computer & Data Processing	100.00	76.72	96.82	104.03	122.64	133.49

Dividend Policy

We have not declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. Our Board of Directors will determine future dividends, if any.

Securities Authorized for Issuance under Equity Compensation Plans

Information relating to securities authorized for issuance under equity compensation plans will be presented under the caption “Securities Authorized for Issuance under Equity Compensation Plans” in our definitive proxy statement. That information is incorporated into this report by reference.

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Recent Sales of Unregistered Securities

In March 2007 we issued approximately $49.9 million aggregate principal amount of the 2010 Notes in privately negotiated transactions exempt from registration under the Securities Act. We disclosed these issuances in our Form 8-K filed on March 5, 2007 and our Form 8-K filed on March 16, 2007.

Purchases of Equity Securities by the Issuer

The following table shows repurchases of shares of our common stock in the fourth quarter of fiscal 2007:

Period	Total Number of Shares Purchased*	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1—January 31, 2007	1,929	$	5.93	0	N/A
February 1—February 29, 2007	15,269	$	9.56	0	N/A
March 1—April 1, 2007	360	$	0.0001	0	N/A
Total	17,558	$	8.97	0	N/A

* Includes 1,305 shares and 14,634 shares repurchased at $8.77 and $9.98, respectively, the fair market value on the repurchase dates, in order to satisfy tax withholding obligations associated with the vesting of restricted shares. The remaining shares that were repurchased represented forfeitures of restricted stock as a result of employee terminations.

ITEM 6.    SELECTED FINANCIAL DATA

The following selected consolidated financial data are qualified by reference to, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related Notes included in Item 8 of this Report. The selected consolidated balance sheet data as of April 1, 2007 and April 2, 2006 and selected consolidated statements of operations data for the years ended April 1, 2007, April 2, 2006 and March 31, 2005, are derived from our audited consolidated financial statements included elsewhere in this Report. The selected consolidated balance sheet data as of March 31, 2005, 2004, and 2003 and the selected consolidated statements of operations data for the years ended March 31, 2004 and 2003 were derived from audited consolidated financial statements not included in this Report. Our historical results are not necessarily indicative of our future results.

	Fiscal Year Ended
	April 1, 2007			April 2, 2006			March 31, 2005			March 31, 2004		March 31, 2003
	(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue	$	178,153		$	164,044		$	145,941		$	113,729	$	75,092
Cost of revenue(1)	$	54,579		$	41,715		$	22,216		$	16,647	$	11,575
Operating income (loss)(1)(2)(3)	$	(67,773	)	$	(26,529	)	$	(5,654	)	$	13,633	$	2,994
Other income, net(4)	$	7,269		$	8,141		$	209		$	1,418	$	1,263
Net income (loss)	$	(61,185	)	$	(20,937	)	$	(8,581	)	$	11,475	$	3,074
Net income (loss) per share—basic	$	(1.67	)	$	(0.61	)	$	(0.25	)	$	0.36	$	0.10
Net income (loss) per share—diluted	$	(1.67	)	$	(0.61	)	$	(0.25	)	$	0.29	$	0.10

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	Fiscal Year Ended
	April 1, 2007		April 2, 2006		March 31, 2005		March 31, 2004		March 31, 2003
	(in thousands, except per share data)
Consolidated Balance Sheet Data:
Cash and cash equivalents, short-term and long-term investments	$	56,038	$	97,158	$	135,518	$	150,842	$	95,697
Total assets	$	239,646	$	284,064	$	319,224	$	314,475	$	127,478
Convertible notes, net	$	63,077	$	105,500	$	150,000	$	150,000	$	—
Other non-current liabilities	$	4,689	$	5,727	$	1,749	$	5,999	$	72
Total stockholders’ equity	$	82,767	$	113,903	$	121,399	$	117,739	$	105,772

(1) We adopted SFAS 123R, “Share-Based Payment” on April 3, 2006 using the modified prospective transition method, under which we began recognizing compensation expense for stock-based awards granted on or after April 3, 2006 and unvested awards granted prior to April 3, 2006.

(2) Includes a charge of $12.5 million relating to litigation settlement expense for fiscal 2007.

(3) Includes charges of $1.3 million, $0.5 million $4.4 million and $0.2 million for fiscal 2007, 2006, 2005 and 2004, respectively, for in-process research and development.

(4) Includes gains on extinguishment of convertible notes of $6.5 million and $8.8 million for fiscal 2007 and 2006, respectively.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operation section should be read in conjunction with “Selected Consolidated Financial Data” and our condensed consolidated financial statements and results appearing elsewhere in this report. Throughout 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 these and other forward looking statements by terms such as “becoming,” “may,” “will,” “should,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” or comparable terminology. These forward-looking statements include, but are not limited to, our expectations about revenue, completion of in-process development of Knights Technology products, research and development expense, sales and marketing expense, general sales and administrative expense, cash expenditures, and various other 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; negative effects of past and future changes to our organizational structure; litigation, including future litigation about which we are unaware; potentially higher-than-anticipated costs of compliance with regulatory requirements, including those relating to internal control over financial reporting; changes in laws and regulations, including export control laws and tax regulations; any delay of customer orders or failure of customers to renew licenses; adoption of products by customers; delays or defaults in customer payments; weaker-than-anticipated sales of our products and services; higher-than-expected costs of providing support services for our products; adverse pricing pressure; risks relating to conducting business internationally, including currency risks; weakness in and the cyclical nature of the communications, computing, consumer electronics, networking or semiconductor industries; our ability to manage expanding operations; our ability to attract and retain key personnel, including management, technical, marketing and sales personnel needed to operate our company successfully; product defects; our ability to continue to deliver competitive products to customers; superior pricing or performance by our competitors’ products; potentially higher-than-anticipated costs of litigation; our ability to protect our intellectual property; our ability to attract sufficient capital on reasonable terms in the future; terrorism or natural disasters such as earthquakes; and changes in accounting rules. We undertake no additional obligation to update these forward looking statements.

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Executive Summary

We provide 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” 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 (“R&D”) budgets. As a result, our revenue is heavily influenced by our customers’ long-term business outlook and willingness to invest in new chip designs.

The semiconductor industry is highly volatile and cost-sensitive. Our customers focus on controlling costs and reducing risk, lowering R&D expenditures, cutting back on design starts, purchasing from fewer suppliers, and requiring more favorable pricing and payment terms from suppliers. In addition, intense competition among suppliers of EDA products has resulted in pricing pressure on EDA products.

To support our customers, we have focused on providing technologically advanced products to address each step in the 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.

Our accomplishments during fiscal 2007 include:

• We successfully completed four transactions during fiscal 2007 to broaden our product offerings and to incorporate key technologies into our existing products.

• The number of our employees increased to 843 as of April 1, 2007, up from 639 as of April 2, 2006. Most of the increase in employees represents additions to our R&D and application engineering organizations. Our investments in these organizations are expected to enable us to continue to provide leading-edge design solutions for our customers in all key areas of chip design.

• Revenue for fiscal 2007 was $178.2 million, an increase of 9% from the prior year. Licenses and bundled licenses and services sales for fiscal 2007 and 2006 accounted for approximately 81% and 85%, respectively, of total revenue. Of the total revenue for fiscal 2007, 66% represented orders recognized on a ratable basis or due-and-payable or cash-receipts basis, and 15% represented short-term time-based and perpetual licenses recognized up-front.

• Domestic sales revenue increased by $12.2 million or 11% in fiscal 2007 as compared with the prior year. This increase was primarily due to large orders executed during fiscal 2007 in North America. These orders came from new customers and 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.

• For fiscal 2007, cash flows generated from operations were $21.3 million, or 12% of fiscal 2007 revenue.

Recent Acquisitions

During fiscal 2007, we acquired companies and purchased technologies that enable us to expand into new markets. We believe that these acquisitions are a significant factor in Magma being able to compete successfully in the EDA industry and we expect to make similar acquisitions in the future. These acquisitions have increased the number of our employees and increased our research and development and sales and marketing expenses.

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Acquisitions may decrease our liquidity in the short term if earnout milestones are achieved and we are required to pay contingent cash consideration under the terms of the applicable acquisition agreements.

Business combination

On November 20, 2006, we acquired Knights, a wholly owned subsidiary of FEI Company. Knights is a provider of yield management and failure analysis software solutions to the semiconductor industry. The acquisition broadens our product portfolio and is expected to allow us to tighten the link between design and manufacturing. We acquired Knights for a total consideration of approximately $8.0 million in cash. Under the acquisition agreement, we retained $250,000 of the initial consideration in a segregated bank account to secure certain indemnification obligations of FEI Company.

Asset purchases

On February 12, 2007, we acquired certain patents and intellectual property of a privately-held developer of EDA and design flow technology. Pursuant to the asset purchase agreement, we paid a total consideration of $250,000 in cash upon close of the transaction.

On October 6, 2006, we acquired a technology license and certain other information from another company for a total fee of $2.0 million. The licensed technology will be integrated into our current product offerings and various other products under development. Under the license agreement, we obtained a perpetual, fully-paid, royalty-free worldwide license. We also agreed to pay up to $6.0 million of cash in additional license fees based upon achievement of certain milestones.

On May 3, 2006, we acquired a license to technology relating to electronic design automation from Stabie-Soft, Inc. We paid $2.5 million for the license upon close of the transaction. We also agreed to pay up to $0.5 million in cash in additional license fees based upon achievement of certain milestones.

Acquisition-related contingent cash considerations

During fiscal 2007, a total of $10.8 million of contingent cash consideration was earned upon the achievement of certain milestones under various prior asset purchase and business combination agreements, of which $2.3 million remained payable as of April 1, 2007.

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, stock-based compensation, allowance for doubtful accounts, strategic investments, asset purchases and business combinations, valuation of long-lived assets and income taxes 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

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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 this Form 10-K. 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.

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; and

• 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).

Licenses revenue and bundled licenses and services 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.

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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. We classify the revenue recognized from these transactions separately as bundled licenses and services revenue in our consolidated statements of operations.

For our perpetual licenses and some time-based license arrangements, we unbundle maintenance by including maintenance for up to the first period 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 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.

Stock-based compensation

Effective April 3, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) using the modified prospective transition method and therefore, have not restated prior periods’ results for comparative purposes to reflect the impact of SFAS 123R. Under SFAS 123R, stock-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as expense, net of estimated forfeitures, over the vesting period of the award. Prior to SFAS 123R adoption, we accounted for share-based payments under APB 25 and accordingly, generally recognized stock-based compensation expense related primarily to restricted stock awards and the employee stock option exchange in fiscal 2006 and accounted for forfeitures as they occurred.

Determining the fair value of stock-based awards at the grant date requires the input of various highly subjective assumptions, including expected future stock price volatility, expected term of instruments and expected forfeiture rates. We established the expected term for employee options and awards, as well as forfeiture rates, based on the historical settlement experience, while giving consideration to vesting schedules and to options that have life cycles less than the contractual terms. Assumptions for option exercises and pre-vesting terminations of options were stratified for employee groups with sufficiently distinct behavior patterns. Expected

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future stock price volatility was developed based on the average of our historical weekly stock price volatility and average implied volatility. These input factors are subjective and are determined using management’s judgment. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.

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 April 1, 2007, one of our customers 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. 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 business combinations may change as additional information becomes available regarding the assets acquired and liabilities assumed resulting in changes in the purchase price allocation.

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Goodwill impairment

SFAS 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 13 to the consolidated financial statements). Significant judgments required to estimate the fair value of reporting units 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 units. 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. If one or more indicators of impairment exist, we will 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 No. 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. We 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 April 1, 2007, $0.6 million of the notes 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) and convertible notes totaled $2.0 million at April 1, 2007. Our ability to recover our investments in private, non-marketable equity securities and convertible notes, and to earn a return on these investments

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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.

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. For equity investments where our ownership interest is between 20% to 50%, we record our share of net equity income (loss) of the investee based on our proportionate ownership. 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 experienced volatility over the past few years, we have experienced substantial impairments in our portfolio of non-marketable equity securities. If certain 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 and share of equity loss related to these non-marketable equity investments of $0.6 million during fiscal 2007.

Results of Operations

Revenue overview

Revenue is comprised of licenses revenue, bundled licenses and services revenue, and services revenue. Licenses revenue consists of fees for time-based or perpetual licenses of our software products. Bundled licenses and services revenue consists of fees for software licenses and post-contract customer support (“PCS”), where we do not have VSOE of fair value of PCS. Services revenue consists of fees for services, such as customer training, consulting and PCS associated with unbundled license arrangements. 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

• 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 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

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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 (in thousands, except for percentage data):

	Year Ended April 1, 2007		% of Revenue		Year Ended April 2, 2006		% of Revenue
Revenue category:
Licenses and bundled licenses and services revenue
Ratable	$	33,199	19	%	$	34,123	21	%
Due & Payable		75,506	42	%		55,004	34	%
Cash Receipts		9,199	5	%		8,465	5	%
Up-Front		27,012	15	%		41,659	25	%
		144,916	81	%		139,251	85	%
Services revenue		33,237	19	%		24,793	15	%
Total Revenue	$	178,153	100	%	$	164,044	100	%

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 licenses with a term of less than 15 months, we recognize license revenue ratably over the license term. 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 “Up-Front”:

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.”

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 maintenance term as we received cash payments from these customers. For management reporting and analysis purposes, we refer to this type of license revenue as “Cash Receipts.”

Up-Front/Perpetual license or Time-Based licenses with short-term payments.    For unbundled time-based and perpetual licenses, we recognize license revenue upon shipment if 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 “Up-Front,” 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” revenue, for management reporting and analysis

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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 under Part I, Item 1A, “Risk factors.”

Revenue, cost of revenue and gross profit

The table below sets forth the fluctuations in revenue, cost of revenue and gross profit from fiscal 2006 to fiscal 2007 and from fiscal 2005 to fiscal 2006 (in thousands, except percentage data):

	Year Ended									% Change
	April 1, 2007			April 2, 2006			March 31, 2005			2006 / 2007		2005 / 2006
Revenue:
Licenses	$	101,991		$	86,418		$	75,519		18	%	14	%
Bundled licenses and services.		42,925			52,833			48,476		(19	)%	9	%
Services		33,237			24,793			21,946		34	%	13	%
Total revenue		178,153			164,044			145,941		9	%	12	%
Cost of revenue
Licenses		24,125			16,267			4,580		48	%	255	%
Bundled licenses and services.		12,935			13,404			7,175		(4	)%	87	%
Services		17,519			12,044			10,461		46	%	15	%
Total cost of revenue		54,579			41,715			22,216		31	%	88	%
Gross profit	$	123,574		$	122,329		$	123,725		1	%	(1	)%
Percentage of total revenue:
Licenses revenue		57	%		53	%		52	%
Bundled licenses and services revenue		24	%		32	%		33	%
Services revenue		19	%		15	%		15	%
Cost of revenue		31	%		25	%		15	%
Gross profit		69	%		75	%		85	%

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 the fluctuations in geographic distribution of revenue from fiscal 2006 to fiscal 2007 and from fiscal 2005 to fiscal 2006 (in thousands, except percentage data):

	Year Ended									% Change
	April 1, 2007			April 2, 2006			March 31, 2005			2006 / 2007		2005 / 2006
Revenue:
Domestic	$	121,633		$	109,434		$	82,537		11	%	33	%
International		56,520			54,610			63,404		4	%	(14	)%
Total revenue	$	178,153		$	164,044		$	145,941		9	%	12	%
Percentage of total revenue:
Domestic		68	%		67	%		57	%
International		32	%		33	%		43	%
Total revenue		100	%		100	%		100	%

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Revenue

• Licenses revenue increased in fiscal 2007 compared to fiscal 2006 primarily due to large orders executed during fiscal 2007 in North America, Japan and Asia-Pacific. These orders came from new customers and 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. We do not factor any of our receivables to obtain revenue. The increase in domestic revenue was partially offset by a decrease in revenue from Europe in fiscal 2007 compared to fiscal 2006. No customer accounted for greater than 10% of total revenue for fiscal 2007 and one customer accounted for greater than 10% of total revenue for fiscal 2006. License revenue as a percentage of revenue increased in fiscal 2007 compared to fiscal 2006.

License revenue increased in fiscal 2006 compared to fiscal 2005 primarily due to large orders executed during the fiscal 2006 periods in North America and Europe. 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. One customer accounted for greater than 10% of total revenue for both fiscal 2006 and fiscal 2005. License revenue as a percentage of revenue increased slightly in fiscal 2006 as compared to fiscal 2005.

• Bundled licenses and services revenue decreased in fiscal 2007 compared to fiscal 2006 primarily driven by revenue from large orders of a few of the company’s customers executed during fiscal 2006 that either transitioned to unbundled license revenue or ended in fiscal 2007. Bundled licenses and services revenue decreased in all regions except Asia-Pacific. Bundled licenses and services revenue came from new customers and existing customers extending license periods. Bundled licenses and services revenue as a percentage of revenue decreased in fiscal 2007 compared to fiscal 2006.

Bundled licenses and services revenue increased in fiscal 2006 compared to fiscal 2005 primarily due to large orders executed during the fiscal 2006 periods in North America and Europe, These orders came from existing customers who extended license periods and added license capacity. Bundled licenses and services revenue as a percentage of revenue decreased in fiscal 2006 as compared to fiscal 2005.

• Services revenue increased in fiscal 2007 compared to fiscal 2006 primarily due to a $4.5 million increase in services revenue and a $3.9 million increase in maintenance revenue. The increase in maintenance revenue was primarily due to our large customers accelerating their deployment of our licenses and placing additional service orders.

Services revenue increased in fiscal 2006 compared to fiscal 2005 primarily due to a $3.5 million increase in maintenance revenue.

• Domestic revenue as a percentage of total revenue in fiscal 2007 increased from 67% to 68% as compared to fiscal 2006. This increase was primarily due to large orders executed during fiscal 2007 from a few major customers.

Domestic revenue as a percentage of total revenue in fiscal 2006 increased from 57% to 67% as compared to fiscal 2005. This increase was 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 acquirer, also an existing customer, purchased additional software licenses for use by engineers transferred in the acquisition. The increase in domestic revenue was also due to a customer in North America purchasing additional capacity for existing licenses and licenses to new technology products during fiscal 2006.

• International revenue as a percentage of total revenue in fiscal 2007 decreased from 33% to 32% as compared to fiscal 2006 primarily due to our existing customers in Europe requiring less capacity for existing licenses and fewer licenses to new technology products.

International revenue as a percentage of total revenue in fiscal 2006 decreased from 43% to 33% as compared to fiscal 2005 primarily due to our existing customers in Japan and Europe requiring less capacity for existing licenses and fewer licenses to new technology products.

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Cost of revenue

• Cost of licenses revenue primarily consists of amortization of acquired developed technology and other intangible assets, software maintenance costs, royalties and allocated outside sales representative expenses. Cost of license revenue increased in fiscal 2007 compared to fiscal 2006 primarily due to an increase in amortization charges related to new acquired intangible assets and to several existing acquired technology licenses, as we began recognizing revenue from such products that were based on these acquired technologies during fiscal 2007 or fiscal 2006. All or a portion of the amortization expenses on these existing technology assets were included in the operating expense for fiscal 2006. The remainder of the fluctuation in cost of license was accounted for by other individually insignificant items.

Cost of license revenue increased in fiscal 2006 compared to fiscal 2005 primarily due to an increase in amortization charges related to new acquired intangible assets and to several existing acquired technology licenses, as we began recognizing revenue from such products that were based on these acquired technologies during fiscal 2006 or fiscal 2005. All or a portion of the amortization expenses on these existing technology assets were included in the operating expense for fiscal 2005. The remainder of the fluctuation in cost of license was accounted for by other individually insignificant items.

• Cost of bundled licenses and services revenue primarily consists of allocation of costs from cost of licenses and services. Cost of bundled licenses and services revenue decreased in fiscal 2007 compared to fiscal 2006 primarily due to decreases in bundled licenses and services revenue in fiscal 2007 compared to fiscal 2006. Cost of bundled licenses and services revenue increased in fiscal 2006 compared to fiscal 2005 primarily due to increases in bundled licenses and services revenue in fiscal 2006 compared to fiscal 2005.

• Cost of services revenue primarily consists of personnel and related costs to provide product support, consulting services and training. Cost of services revenue also includes stock-based compensation expenses, asset depreciation and allocated outside sales representative expenses. Cost of service revenue increased in fiscal 2007 compared to fiscal 2006 primarily due to increases in personnel and related costs and stock-based compensation expenses for application engineers that corresponded to higher consulting and maintenance activities in fiscal 2007 compared to fiscal 2006. Stock-based compensation expense for fiscal 2007 was based on the SFAS 123R fair value method, while stock-based compensation expense for fiscal 2006 was based on the intrinsic value method.

Cost of services revenue increased in fiscal 2006 compared to fiscal 2005 primarily due to increases in personnel and related costs for application engineers that corresponded to higher consulting and maintenance activities in fiscal 2006 compared to fiscal 2005.

Operating expenses

The table below (in thousands, except percentage data) sets forth the fluctuations in operating expenses from fiscal 2006 to fiscal 2007 and from fiscal 2005 to fiscal 2006:

	Year Ended						% Change
	April 1, 2007		April 2, 2006		March 31, 2005		2006 / 2007		2005 / 2006
Operating expenses:
Research and development	$	63,625	$	50,085	$	43,052	27	%	16	%
In-process research and development		1,300		450		4,364	189	%	(90	)%
Sales and marketing		60,041		46,539		44,779	29	%	4	%
General and administrative		42,870		39,935		18,475	7	%	116	%
Restructuring costs		—		—		698
Amortization of intangible assets		11,011		11,849		18,011	(7	)%	(34	)%
Litigation settlement		12,500		—		—
Total operating expenses	$	191,347	$	148,858	$	129,379	29	%	15	%

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	Year Ended						% Change
	April 1, 2007		April 2, 2006		March 31, 2005		2006 / 2007	2005 / 2006
Percentage of total revenue:
Research and development	36	%	31	%	30	%
In-process research and development	1	%	0	%	3	%
Sales and marketing	34	%	28	%	31	%
General and administrative	24	%	24	%	13	%
Restructuring costs	—		—		1	%
Amortization of intangible assets	6	%	7	%	12	%
Litigation settlement	7	%	—		—
Total operating expenses	107	%	91	%	89	%

• Research and development expense increased by $13.5 million in fiscal 2007 compared to fiscal 2006 primarily due to an increase in payroll-related expenses of $9.7 million, an increase in stock-based compensation charges of $1.7 million, and increases in other individually insignificant items such as consulting and travel expenses. The increase in payroll related expenses in fiscal 2007 was primarily attributable to an increase in bonus expense of $1.5 million and an increase in salaries and related expenses of $7.3 million due to increases in the number of employees and annual wage increases. We increased the number of our research and development employees by 50% through direct hiring and acquisitions during fiscal 2007. Stock-based compensation expense for fiscal 2007 was based on the SFAS 123R fair value method, while stock-based compensation expense for fiscal 2006 was based on the intrinsic value method.

Research and development expense increased by $4.2 million in fiscal 2006 compared to fiscal 2005 primarily due to an increase in payroll related expenses of $5.5 million, which included an increase in bonus expense of $3.0 million and an increase in salaries and related expenses of $1.6 million due to the increase of senior and experienced staff in research and development through direct hiring and acquisitions. The increase in research and development expense in fiscal 2006 was also caused by higher allocated common expenses (e.g., information technology and facility related expenses) of $0.5 million compared to fiscal 2005. The increases in research and development expense in fiscal 2006 compared to fiscal 2005 were partially offset by a decrease in software maintenance costs of $1.7 million 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 research and development expense in fiscal 2008 to increase moderately, but to decrease as a percentage of fiscal 2008 revenue.

• In-process research and development (“IPR&D”) expense of $1.3 million in fiscal 2007 consisted of a charge recorded in connection with our acquisition of Knights in November 2006. IPR&D expense of $450,000 in fiscal 2006 consisted of a charge recorded in connection with our acquisition of ACAD in November 2005. IPR&D expenses of $4.4 million in fiscal 2005 consisted primarily of a charge of $4.0 million recorded in connection with our acquisition of Mojave. in April 2004. The charges were recorded based on management’s final purchase price allocation and were related to acquired technologies for which commercial feasibility had not been established and had no alternative future uses. The in-process technology projects of Mojave and ACAD were completed in fiscal 2006 and fiscal 2007, respectively, and we expect to bring the in-process products of Knights to completion during the first quarter of fiscal 2008.

• Sales and marketing expense increased by $13.5 million in fiscal 2007 compared to fiscal 2006 primarily due to an increase in payroll related expenses of $7.7 million, an increase in stock-based compensation charges of $3.7 million, an increase in commission expense of $1.4 million, an increase in travel expense of $1.4 million and increases in other individually insignificant items such as professional services and marketing communications. The increases in payroll related charges were

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primarily due to increases in the number of employees and annual wage increases. In fiscal 2007, the number of employees in sales and marketing increased by 20% over fiscal 2006 primarily due to growth in the number of application engineer employees. Stock-based compensation expense for fiscal 2007 was based on the SFAS 123R fair value method, while stock-based compensation expense for fiscal 2006 was based on the intrinsic value method. The increases were partially offset by an increase in expenses allocated to cost of services revenue (primarily application engineering costs) of $2.2 million.

Sales and marketing expense increased by $1.8 million in fiscal 2006 compared to fiscal 2005 primarily due to an increase in payroll related expenses of $3.7 million, which included an increase in bonus expense of $1.9 million and an increase in salaries and fringe benefits of $1.4 million as we increased the number of our sales and marketing employees by 11% (primarily application engineers), through direct hiring and acquisitions during fiscal 2006. The increase was also caused by an increase in commission expense of $0.3 million as a result of sales and bookings growth experienced in fiscal 2006. The increases were partially offset by an increase in expenses allocated to cost of services revenue (primarily application engineering costs) of $1.8 million and a decrease in professional services of $0.5 million.

We expect our sales and marketing expenses in fiscal 2008 to increase moderately compared to fiscal 2007, but to decrease as a percentage of fiscal 2008 revenue.

• General and administrative expense increased by $2.9 million in fiscal 2007 compared to fiscal 2006 primarily due to increases in stock-based compensation expenses of $4.4 million, moving expenses and write-off of unamortized leasehold improvement of $2.8 million, payroll related expenses of $2.0 million, asset depreciation of $1.0 million and consulting expense of $0.9 million. The increases were partially offset by a decrease of $6.9 million in legal fees related to patent litigation with Synopsys, Inc. and other legal expenses, excluding the settlement fee of $12.5 million for the Synopsys litigation, and an increase in allocated cost to other functional areas of $2.9 million due to higher common expenses in fiscal 2007 compared to fiscal 2006. Stock-based compensation expense for fiscal 2007 was based on the SFAS 123R fair value method, while stock-based compensation expense for fiscal 2006 was based on the intrinsic value method. The remainder of the fluctuation in general and administrative expense was accounted for by other individually insignificant items.

General and administrative expense increased by $21.5 million in fiscal 2006 compared to fiscal 2005 primarily due to increases in professional service fees of $16.4 million, payroll related expenses of $4.3 million, and asset depreciation of $1.8 million, partially offset by a decrease in bad debt expense of $0.5 million and an increase in allocated cost to other functional areas of $1.0 million due to higher common expenses in fiscal 2006 compared to fiscal 2005. The increase in professional service fees in fiscal 2006 primarily consisted of legal expenses of $13.9 million, which were accrued for as incurred, specifically related to patent litigation with Synopsys, Inc. The increase in payroll related expenses in fiscal 2006 primarily consisted of an increase in bonus expense of $1.6 million and an increase in salaries and fringe benefits of $2.4 million as we increased the number of our general and administrative employees by 22% in fiscal 2006, The remainder of the fluctuation in general and administrative expense was accounted for by other individually insignificant items.

We expect our general and administrative expenses in fiscal 2008 to decrease compared to fiscal 2007. Legal expenses and professional services related to litigation are expected to decrease significantly, variable compensation is expected to grow moderately in proportion to increases in the number of employees, and professional fees related to compliance with the requirements of the Sarbanes-Oxley Act of 2002 are expected to increase moderately over fiscal 2007 level.

• Litigation settlement costs of $12.5 million in fiscal 2007 represented an accrued payment to Synopsys of $12.5 million toward the settlement of the patent litigation with Synopsys. The payment was made in April 2007. No such charge was incurred in fiscal 2006 and fiscal 2005.

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• Restructuring costs of $0.7 million in fiscal 2005 represented employee termination charges resulting from our realignment to current business conditions in the first quarter of fiscal 2005. No such charge was incurred in fiscal 2007 and fiscal 2006.

• Amortization of intangible assets decreased by $0.8 million in fiscal 2007 compared to fiscal 2006 primarily due to the change in classification of amortization charges relating to developed technology from operating expenses to cost of license revenue as we began recognizing revenues from products based on the developed technology during fiscal 2007 or fiscal 2006.

Amortization of intangible assets decreased by $6.2 million in fiscal 2006 compared to fiscal 2005 primarily due to a $9.5 million decrease in amortization relating to certain developed technologies resulting from the change in classification of amortization charges relating to these developed technology from operating expenses to cost of license revenue as we began recognizing revenues from products based on these developed technology during fiscal 2006 or 2005. The decrease was partially offset by amortization of new intangible assets acquired in fiscal 2006.

The intangible assets amortized include licensed technology, patents, trademarks, customer contracts, customer relationships, no shop rights, non-competition agreements and assembled workforces that were identified in the purchase price allocation for each business combination and asset purchase transaction.

Other items

The table below (in thousands, except percentage data) sets forth the fluctuations in other items from fiscal 2006 to fiscal 2007 and from fiscal 2005 to fiscal 2006:

	Year Ended									% Change
	April 1, 2007			April 2, 2006			March 31, 2005			2006 / 2007		2005 / 2006
Other income, net:
Interest income	$	2,729		$	2,875		$	2,287		(5	)%	26	%
Interest expense		(723	)		(849	)		(996	)	(15	)%	(15	)%
Gain on extinguish of debt		6,532			8,781			—		(26	)%
Other expense, net		(1,269	)		(2,666	)		(1,082	)	(52	)%	146	%
Total other income, net	$	7,269		$	8,141		$	209
Income tax provision	$	1,002		$	2,549		$	3,136		(61	)%	(19	)%

• Interest income decreased by 5% in fiscal 2007 compared to fiscal 2006 primarily due to our lower cash and investments balance resulting from our use of cash to acquire intangible assets and to repurchase a portion of our 2008 Notes during fiscal 2007. The decrease was partially offset by higher interest rates on our cash and investments balance during the period.

Interest income increased in fiscal 2006 compared to fiscal 2005 primarily due to higher interest rates on our cash and investments balance during fiscal 2006. Even though our total cash and investment balance was lower in fiscal 2006, 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 fiscal 2006 compared to fiscal 2005.

• Interest expense primarily represents amortization of debt discount and issuance costs, which were recorded in connection with our 2008 Notes offering completed in May 2003. During fiscal 2007, we wrote off a total of $0.9 million of the unamortized debt issuance costs in connection with the portions of the 2008 Notes repurchased in May 2006 and exchanged in March 2007, resulting in less amortization on debt issuance costs for fiscal 2007. The decrease was partially offset by increase of interest expense on capital leases in fiscal 2007.

During fiscal 2006, we wrote off $0.9 million of the unamortized debt issuance costs in connection with the portions of the 2008 Notes repurchased in May 2005, resulting in $0.3 million lower amortization on

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debt issuance costs for fiscal 2006 compared to fiscal 2005. The decrease was partially offset by increase of interest expense on capital leases in fiscal 2006.

• Gain on extinguishment of debt, net in fiscal 2007 primarily consisted of a $5.3 million gain on the repurchase of $40.3 million of the 2008 Notes and a $2.1 million gain on the exchange of $49.9 million of the 2008 Notes for the 2010 Notes. The gains were partially offset by a total of $0.9 million write-offs of the debt issuance costs related to the portions of the 2008 Notes repurchased or exchanged in fiscal 2007.

Gain on extinguishment of debt, net in fiscal 2006 primarily consisted of 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.

• Other expense, net decreased by $1.4 million in fiscal 2007 compared to fiscal 2006 primarily due to a $0.7 million decrease in loss on sale of short-term investments, a $0.4 million decrease in charges associated with other than temporary impairment in our strategic investments and a $0.3 million favorable change in foreign exchange gain/loss in fiscal 2007. The impairment charge was determined based on our periodic review of the investee company’s financial performance, financial conditions and near-term prospects. The favorable change in foreign exchange gain/loss in fiscal 2007 was caused by a favorable exchange rate fluctuation between the U.S. Dollar and the Japanese Yen.

Other expense, net increased by $1.6 million in fiscal 2006 compared to fiscal 2005 primarily due to a $0.7 million increase in loss on sale of short-term investments, a $0.2 million increase in charges associated with other than temporary impairment in our strategic investments and a $0.7 million negative change in foreign exchange gain/loss in fiscal 2006. The negative change in foreign exchange gain/loss in fiscal 2006 was caused by an unfavorable exchange rate fluctuation between the U.S. Dollar and the Japanese Yen.

• Provision for income taxes. The effective tax rate was 1.7%, 13.9% and 57.6% in fiscal 2007, 2006, and 2005, respectively. Our effective tax rates vary from the U.S. statutory rate primarily due to changes in our valuation allowance, state taxes, foreign income taxed at other than U.S. rates, deferred compensation, in-process research and development, research and development tax credits, and foreign withholding taxes. Income tax expense was $1.0 million, $2.5 million and $3.1 million in fiscal 2007, 2006 and 2005 respectively. The income tax expense is comprised primarily of alternative minimum taxes, state and local taxes, income taxes in certain foreign jurisdictions, 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 against our net deferred tax assets until it becomes more likely than not that the deferred tax assets are realizable. We 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 carryforwards 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 unutilized net operating loss and tax credit carryforwards.

Liquidity and Capital Resources

	April 1, 2007			April 2, 2006			March 31, 2005
As of:
Cash, cash equivalents and short-term investments	$	56,038		$	97,158		$	135,518
For the Year Ended:
Net cash provided by operating activities	$	21,312		$	40,210		$	37,128
Net cash provided by (used in) investing activities	$	(8,337	)	$	43,082		$	(27,738	)
Net cash used in financing activities	$	(26,189	)	$	(45,232	)	$	(6,375	)

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Our cash, cash equivalents and short-term investments, excluding restricted cash, were (a) approximately $56.0 million at April 1, 2007, a decrease of $41.1 million or 42% from April 2, 2006; and (b) approximately $97.2 million at April 2, 2006, a decrease of $38.4 million or 28% from March 31, 2005. The decreases in both fiscal years primarily reflected cash used for repurchase of a portion of the 2008 Notes, purchases of intangible assets, equity investments and capital investments, and for fiscal 2006, also reflected cash used for repurchase of common stock. These decreases were partially offset by cash generated from operations and proceeds from common stock issuances. Our investment portfolio consists of high-grade fixed-income securities diversified among corporate, U.S. 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.

Repurchases and exchanges of convertible subordinated notes

On May 22, 2003, we issued $150.0 million principal amount of the 2008 Notes resulting in net proceeds of approximately $145.1 million. The 2008 Notes do not bear coupon interest and are convertible into shares of our common stock at an initial conversion price of $22.86 per share. Based upon the $22.86 initial conversion rate, the $150.0 million principal amount of 2008 Notes was initially convertible into an aggregate of approximately 6.56 million shares of our common stock. The 2008 Notes are subordinated to our existing and future senior indebtedness, including the 2010 Notes, and effectively subordinated to all indebtedness and other liabilities of our subsidiaries. In order to minimize the dilutive effect from the issuance of the 2008 Notes, we entered into convertible bond hedge and warrant transactions with Credit Suisse First Boston International (“CSFB International”). Under the convertible bond hedge arrangement, CSFB International agreed to sell us, for $22.86 per share, up to 6.56 million shares of our common stock to cover our obligation to issue shares upon conversion of the 2008 Notes. In addition, we issued CSFB International a warrant to purchase up to 6.56 million shares of common stock for a purchase price of $31.50 per share. Purchases and sales under this arrangement may be made only upon expiration of the 2008 Notes or their earlier conversion (to the extent thereof). Both transactions may be settled at our option either in cash or net shares, and will expire on the earlier of a conversion event or the maturity of the convertible debt on May 15, 2008. The net cost incurred in connection with these arrangements, which consists of the $56.2 million cost of the convertible bond hedge, offset in part by the $35.9 million proceeds from the issuance of the warrant, was approximately $20.3 million.

In May 2005, we repurchased, in privately negotiated transactions, $44.5 million face amount (or approximately 29.7% of the principal amount) of the 2008 Notes at an average discount to face value of approximately 22%. We spent an aggregate of approximately $34.8 million on the repurchase. The repurchase left approximately $105.5 million aggregate principal amount of the 2008 Notes outstanding. At the same time we terminated a corresponding portion of the hedging arrangements.

In May 2006, we repurchased, in privately negotiated transactions, an additional $40.3 million face amount (or approximately 38.2% of the remaining principal amount) of the 2008 Notes at an average discount to face value of approximately 13%. We spent an aggregate of approximately $35.0 million on the repurchase. The repurchase left approximately $65.2 million aggregate principal amount of the 2008 Notes outstanding. At the same time we terminated a corresponding portion of the hedging arrangements.

In March 2007, we exchanged, in privately negotiated transactions, an aggregate principal amount of $49.9 million (or approximately 76.7% of the remaining principal amount) of the 2008 Notes for an equal aggregate principal amount of the 2010 Notes. At the same time we terminated a corresponding portion of the hedging arrangements. The 2010 Notes bear interest at 2% per annum and are convertible into shares of our common stock at an initial conversion price of $15.00 per share, for an aggregate of approximately 3.33 million shares. The 2010 Notes are unsecured senior indebtedness of Magma, which rank senior in right of payment to the 2008 Notes and junior in right of payment to Magma’s $5.0 million revolving line of credit facility. After May 20, 2009, we will have the option to redeem the 2010 Notes for cash in an amount equal to 100% of the aggregate outstanding principal amount at the time of such redemption. The 2010 Notes also contain a net share

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settlement provision which allows us, at our option, in lieu of delivery of some or all of the shares of common stock otherwise issuable upon conversion of the 2010 Notes, to pay holders of the 2010 Notes in cash for all or a portion of the principal amount of the converted 2010 Notes and any amounts in excess of the principal amount which are due. After the exchange, approximately $15.2 million principal amount of the 2008 Notes remain due on May 15, 2008 and approximately $49.9 million principal amount of the 2010 Notes remain due on May 15, 2010, unless the holders of those notes elect to convert them into our common or the notes are otherwise redeemed before their respective repayment dates.

Repurchases of common stock

On April 13, 2005, we announced that our Board of Directors authorized us to repurchase up to 2,000,000 shares of our common stock. The stock repurchase program was completed in May 2005 and we used approximately $16.0 million to repurchase 2,000,000 shares of our common stock. 1,000,000 of the repurchased shares are reserved for our 2004 Employment Inducement Award Plan and the remaining 1,000,000 shares are to be used for general corporate purposes.

On July 28, 2004, we announced that our Board of Directors authorized us to repurchase up to 1,000,000 shares of our common stock. The repurchase was completed in the second quarter of fiscal 2005 and we used approximately $16.6 million to repurchase 1,000,000 shares of our common stock. The repurchased shares are to be used for our 2004 Employment Inducement Award Plan.

Net cash provided by operating activities

Net cash provided by operating activities decreased by $18.9 million to $21.3 million in fiscal 2007 compared to fiscal 2006. The decrease was primarily due to a $31.8 million increase in costs and expenses and a $1.0 million decrease in cash from interest income. These decreases in cash flow were partially offset by a $7.7 million net change in accounts payable and accrued liabilities balances and a $6.4 million increase in cash from customers in fiscal 2007. The increase in cash from customers was primarily due to growth in revenue and strong cash collection in fiscal 2007 compared to fiscal 2006. Accounts payable and accrued liabilities balances increased by $19.4 million and $11.7 million, respectively, in fiscal 2007 and 2006. The increase in accrued liabilities balances was primarily due to the accrual of the $12.5 million Synopsys litigation settlement in the fourth quarter of fiscal 2007, partially offset by decreases in accrued bonuses and commissions balances.

Net cash provided by operating activities increased by $3.1 million to $40.2 million in fiscal 2006 compared to fiscal 2005. The increase was primarily due to a $22.2 million increase in cash from customers, an $8.2 million decrease in payments associated with accounts payable and accrued liabilities and a $1.6 million increase in cash from interest income. These increases in cash flow were partially offset by a $28.1 million increase in costs and expenses and a $0.8 million increase in payments associated with prepaid and other assets balances. The increase in cash from customers was primarily due to growth in revenue and strong cash collection in fiscal 2006 compared to fiscal 2005. The payment of accrued liabilities in fiscal 2005 was primarily related to a payout of accrued bonuses during the period.

Net cash provided by/used in investing activities

Net cash used in investing activities was $8.3 million in fiscal 2007. We had net proceeds of $28.0 million from sales of marketable securities as we liquidated these investments to repurchase a portion of the 2008 Notes. We used a total of $25.3 million in cash to acquire Knights, purchase technology licenses and make earnout payments relating to prior acquisitions and made an investment of $0.9 million in a privately held technology company for business and strategic purposes. We also acquired property and equipment totaling $5.4 million in cash and $2.8 million through capital leases. The property and equipment expenditures were primarily for purchases of computer equipment and research and development tools to support our growing operations. In addition, in connection with the $3.0 million borrowings under the line of credit and our entry into two new

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office leases, we maintain restricted cash of $4.7 million as securities to the borrowings and deposits for the new leases. We may make additional asset purchases and strategic equity investments in the future by using our cash, cash equivalents and/or short-term investments. We expect to make capital expenditures of approximately $8.4 million in fiscal 2008 and we expect to use capital lease financing as well as our cash, cash equivalents and/or short-term investments to fund these purchases.

Net cash provided by investing activities was $43.1 million in fiscal 2006. We had net proceeds of $76.4 million from sales of marketable securities as we liquidated these investments to repurchase a portion of the 2008 Notes as well as to repurchase 2,000,000 shares of common stock. Partially offsetting the cash inflow, we used a total of $11.6 million in cash to acquire ACAD, to purchase a technology license from IBM and patents from ReShape. We also made earnout payments totaling $14.5 million upon achievement of certain milestones relating to Mojave and other prior asset purchases. We also made an investment of $0.8 million in a privately held technology company for business and strategic purposes. In addition, we acquired property and equipment totaling $6.5 million in cash and $2.4 million through capital leases.

Net cash used in investing activities was $27.7 million in fiscal 2005. In order to broaden our product offerings and to incorporate certain key technologies into our existing products, we used a total of $13.2 million in cash, net of cash acquired, to complete the Mojave, Lemmatis, Fortis and other asset purchase transactions during fiscal 2005. We also made earnout payments totaling $17.8 million upon achievement of certain milestones relating to prior asset purchases. In addition, we made net investments of $1.3 million in several privately held technology companies for business and strategic purposes. We had net proceeds of $17.3 million from sales of marketable securities as we liquidated these investments to repurchase 1,000,000 shares of common stock. In fiscal 2005 we acquired property and equipment totaling $12.7 million.

Net cash used in financing activities

Net cash used in financing activities was $26.2 million in fiscal 2007. We used $35.0 million to repurchase a portion of 2008 Notes and received net proceeds of $84,000 from termination of the related portion of the bond hedge and warrant, incurred $1.0 million of debt issuance costs in connection with the exchange of a portion of our 2008 Notes, and made payments of $1.5 million on our capital leases. The primary sources of cash were $3.0 million borrowings under the line of credit and $8.2 million in net cash received from the exercise of stock options and purchases of shares under the employee stock purchase plan during the period.

Net cash used in financing activities was $45.2 million in fiscal 2006. We used $34.8 million to repurchase a portion of our 2008 Notes and received net proceeds of $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 our Board of Directors in April 2005, and made payments of $0.8 million on our capital leases. The primary source of cash was $6.3 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 $6.4 million in fiscal 2005. The sole source of cash was $10.4 million of cash received from the exercise of stock options and shares purchased under the employee stock purchase plan during the period. We used $16.6 million to repurchase 1,000,000 shares of common stock on the open market, as authorized by our Board of Directors in July 2004.

Capital resources

We believe that our existing cash, 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.

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On March 29, 2007 Synopsys and Magma settled all pending litigation between the companies. As part of the settlement, Synopsys and Magma agree to release all claims in both California and Delaware and to cross license the patents at issue in these jurisdictions as well as any related applications, both companies agree not to initiate future patent litigation against each other for 2 years provided certain terms are met, and we agreed to make a payment to Synopsys of $12.5 million toward the settlement of this dispute. The $12.5 million of litigation settlement was recorded as accrued liabilities in our consolidated balance sheets as of April 1, 2007 and the payment was made in April 2007. This payment did not affect our estimate that our existing cash, 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.

Our acquisition agreements related to certain business combination and asset purchase transactions obligate us to pay certain contingent cash consideration based on meeting certain financial or project milestones and continued employment of certain employees. Total amount of cash contingent consideration that could be paid under our acquisition agreements, assuming all contingencies are met, was $46.6 million as of April 1, 2007. These contingent consideration obligations are not expected to affect our estimate that our existing cash, 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.

Contractual obligations

As of April 1, 2007, our principal commitments consisted of operating leases for office facilities, with an aggregated future obligation amount of $19.0 million through fiscal 2012, capital leases for computer equipment and purchase obligations. Although we have no material commitments for capital expenditures, we anticipate an increase in our capital expenditures and lease commitments with our anticipated growth in operations, infrastructure, and personnel. Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the course of business for which we have not received the goods or services as of April 1, 2007. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

As of April 1, 2007, our borrowings consisted primarily of approximately $65.1 million of the convertible notes, including approximately $15.2 million principal amount of the 2008 Notes due on May 15, 2008 and approximately $49.9 million principal amount of the 2010 Notes due on May 15, 2010, unless the holders of those notes elect to convert them into our common or the notes are otherwise redeemed before their respective repayment dates. The 2010 Notes bear interest at 2.00% annually and we are required to make semi-annual interest payments to holders of the 2010 Notes. The 2008 Notes do not bear coupon interest. In addition, we face fixed financial penalties under the 2010 Notes which would be incurred if we either fail to file certain Exchange Act reports or fail to perform our obligations under the Registration Rights Agreement which we entered with the holders of those notes.

As of April 1, 2007, our borrowings also consisted of a $3.0 million outstanding borrowing under our revolving line of credit facility. In November 2006, we established a $5.0 million revolving line of credit facility with Wells Fargo Bank, N.A. The credit facility is available through November 2011 and bears an interest rate equal to the bank’s prime rate less 1.60% or LIBOR plus 0.60%, which was 5.94% at April 1, 2007. We are required to make interest only payments monthly and the outstanding principal amount plus all accrued but unpaid interest is payable in full at the expiration of the credit facility. The credit facility is secured by deposits held with the bank. In addition, the credit facility allows letters of credit to be issued on our behalf, provided that the aggregate outstanding amount of the letters of credit shall not exceed the available amount for borrowing under the credit facility. As of April 1, 2007, three letters of credit totaling $1.85 million were outstanding under the credit facility, and we had a borrowing base availability of $150,000 under the same facility.

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The table below summarizes our significant contractual obligations at April 1, 2007, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in millions). The operating lease obligations and purchase obligations were not recorded in our consolidated balance sheets as of April 1, 2007.

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 Years		4-5 Years		After 5 Years
Operating lease obligations	$	19.0	$	5.0	$	9.0	$	5.0	$	—
Capital lease obligations		4.0		2.0		2.0		—		—
Convertible notes		65.1		—		15.2		49.9		—
Line of credit		3.0		—		—		3.0		—
Purchase obligations		5.6		4.5		1.1		—		—
Total	$	96.7	$	11.5	$	27.3	$	57.9	$	—

Off-balance sheet arrangements

As of April 1, 2007, 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 provide may exceed the amount received from the customer. We estimate the fair value of our indemnification obligations to be insignificant, based on our historical experience concerning product and patent infringement claims. Accordingly, we have no liabilities recorded for indemnification under these agreements as of April 1, 2007.

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 and enables us to recover a portion of future amounts paid. 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 April 1, 2007.

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. No liabilities have been recorded for these agreements as of April 1, 2007.

Warranties

We offer certain 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 April 1, 2007. 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.

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ITEM 7A.    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. As of April 1, 2007, a hypothetical 100 basis point increase in interest rates would result in approximately a $6,000 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 the 2008 Notes. Concurrent with the issuance of the 2008 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 2008 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 May 2006 and May 2005, we repurchased $40.3 million and $44.5 million, respectively, face value of our 2008 Notes for $35.0 million and $34.8 million, respectively. In doing so, we liquidated investments that generated a realized loss of approximately $0.7 million related to the May 2005 repurchases. There were no significant losses realized in connection with the May 2006 repurchases. Certain portions of the hedge and warrant transactions entered into by us in 2003 were terminated in connection with the repurchases. We believe 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 April 1, 2007, we had approximately $2.8 million of cash and money market funds in foreign bank accounts. At this time, we have not deemed it to be cost effective to engage in a program of hedging the effect of foreign currency fluctuations on our operating results using derivative financial instruments. We assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements and Financial Statement Schedules

	Page
Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm (Grant Thornton LLP)	59
Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP)	61
Consolidated Balance Sheets as of April 1, 2007 and April 2, 2006	62
Consolidated Statements of Operations for each of the three fiscal years ended April 1, 2007	63
Consolidated Statements of Stockholders’ Equity for each of the three fiscal years ended April 1, 2007	64
Consolidated Statements of Cash Flows for each of the three fiscal years ended April 1, 2007	66
Notes to Consolidated Financial Statements	68
Financial Statement Schedules:
II—Valuation and Qualifying Accounts	108
All other schedules are omitted because they are not required or the required information is shown in the Consolidated Financial Statements or Notes thereto.
Supplementary Financial Data:
Selected Consolidated Quarterly Financial Data (Unaudited)	108

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors and Stockholders of

Magma Design Automation, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting as of April 1, 2007, that Magma Design Automation, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of April 1, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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 the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal controls over financial reporting as of April 1, 2007, is fairly stated in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 1, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Magma Design Automation, Inc. as of April 1, 2007 and April 2, 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the years then ended and our report dated June 1, 2007 expressed an unqualified opinion on those financial statements.

/s/    Grant Thornton LLP

San Jose, California

June 1, 2007

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Magma Design Automation, Inc.

We have audited the accompanying consolidated balance sheets of Magma Design Automation, Inc. and subsidiaries as of April 1, 2007 and April 2, 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for the years then ended. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Magma Design Automation, Inc. as of April 1, 2007 and April 2, 2006, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

As discussed in Note 1 to the consolidated financial statements, effective April 3, 2006 the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, applying the modified-prospective method.

We also have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Magma Design Automation Inc.’s internal control over financial reporting as of April 1, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated June 1, 2007, expressed an unqualified opinion on management’s assessment of, and an unqualified opinion on the effective operation of, internal control over financial reporting.

/s/    Grant Thornton LLP

San Jose, California

June 1, 2007

60

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Magma Design Automation, Inc.:

In our opinion, the consolidated statements of operations, stockholders’ equity and cash flows for the year ended March 31, 2005 present fairly, in all material respects, the results of operations and cash flows of Magma Design Automation, Inc. and its subsidiaries for the year ended March 31, 2005, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the year ended March 31, 2005 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/    PricewaterhouseCoopers LLP

San Jose, California

June 14, 2005

61

MAGMA DESIGN AUTOMATION, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	April 1, 2007			April 2, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	45,338		$	58,550
Restricted cash		4,997			58
Short-term investments		10,700			38,608
Accounts receivable, net		41,086			33,849
Prepaid expenses and other current assets		4,126			4,096
Total current assets		106,247			135,161
Property and equipment, net		17,866			20,062
Intangible assets, net		56,874			75,735
Goodwill		48,499			43,985
Restricted cash		4,700			3,841
Other assets		5,460			5,280
Total assets	$	239,646		$	284,064
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,442		$	2,479
Accrued expenses		53,254			31,833
Deferred revenue		28,417			24,622
Total current liabilities		89,113			58,934
Convertible notes, net of debt discount of $2,078 and $0 at April 1, 2007 and April 2, 2006, respectively		63,077			105,500
Line of credit		3,000			—
Other long-term liabilities		1,689			5,727
Total liabilities		156,879			170,161
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized and no shares issued and outstanding		—			—
Common stock, $.0001 par value; 150,000,000 shares authorized; 38,533,351 and 35,575,701 shares issued and outstanding at April 1, 2007 and April 2, 2006, respectively		4			4
Additional paid-in capital		310,825			286,336
Deferred stock-based compensation		—			(2,020	)
Accumulated deficit		(197,808	)		(136,581	)
Treasury stock at cost, 2,679,426 and 3,000,000 shares at April 1, 2007 and April 2, 2006, respectively		(29,162	)		(32,650	)
Accumulated other comprehensive loss		(1,092	)		(1,186	)
Total stockholders’ equity		82,767			113,903
Total liabilities and stockholders’ equity	$	239,646		$	284,064

The accompanying notes are an integral part of these consolidated financial statements.

62

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended
	April 1, 2007			April 2, 2006			March 31, 2005
Revenue:
Licenses	$	101,991		$	86,418		$	75,519
Bundled licenses and services		42,925			52,833			48,476
Services		33,237			24,793			21,946
Total revenue		178,153			164,044			145,941
Cost of revenue:
Licenses		24,125			16,267			4,580
Bundled licenses and services		12,935			13,404			7,175
Services		17,519			12,044			10,461
Total cost of revenue		54,579			41,715			22,216
Gross profit		123,574			122,329			123,725
Operating expenses:
Research and development		63,625			50,085			43,052
In-process research and development		1,300			450			4,364
Sales and marketing		60,041			46,539			44,779
General and administrative		42,870			39,935			18,475
Restructuring costs		—			—			698
Amortization of intangible assets		11,011			11,849			18,011
Litigation settlement		12,500			—			—
Total operating expenses		191,347			148,858			129,379
Operating loss		(67,773	)		(26,529	)		(5,654	)
Other income:
Interest income		2,729			2,875			2,287
Interest expense		(723	)		(849	)		(996	)
Gain on extinguishment of debt		6,532			8,781			—
Other expense, net		(1,269	)		(2,666	)		(1,082	)
Other income, net		7,269			8,141			209
Net loss before income taxes		(60,504	)		(18,388	)		(5,445	)
Provision for income taxes		1,002			2,549			3,136
Net loss before cumulative effect of change in accounting principle		(61,506	)		(20,937	)		(8,581	)
Cumulative effect of change in accounting principle		321			—			—
Net loss	$	(61,185	)	$	(20,937	)	$	(8,581	)
Net loss per common share before cumulative effect of change in accounting principle—basic and diluted	$	(1.68	)	$	(0.61	)	$	(0.25	)
Net loss per share—basic and diluted	$	(1.67	)	$	(0.61	)	$	(0.25	)
Shares used in calculation—basic and diluted		36,605			34,348			33,861

The accompanying notes are an integral part of these consolidated financial statements.

63

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(in thousands, except share data)

	Common Stock				Additional Paid-in Capital			Deferred Stock-Based Compensation			Accumulated Deficit			Treasury Stock					Comprehensive Loss			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares		Amount											Shares		Amount
BALANCES AT MARCH 31, 2004	33,941,692		$	3	$	226,586		$	(718	)	$	(107,063	)	—		$	—					$	(1,069	)	$	117,739
Issuance of common stock under stock incentive plans	1,708,716			1		16,353			(6,000	)		—		—			—						—			10,354
Issuance of common stock in connection with asset purchase	607,554			—		18,341			(1,088	)		—		—			—						—			17,253
Repurchase of common stock	(1,008,104	)		—		(4	)		—			—		(1,000,000	)		(16,606	)					—			(16,610	)
Amortization of deferred stock-based compensation, net of forfeitures	—			—		(177	)		2,057			—		—			—						—			1,880
Tax benefits associated with exercise of stock options and debt issuance costs	—			—		528			—			—		—			—						—			528
Comprehensive loss:
Net loss	—			—		—			—			(8,581	)	—			—		$	(8,581	)		—			(8,581	)
Cumulative translation adjustments	—			—		—			—			—		—			—			(206	)		(206	)		(206	)
Unrealized loss on investments, net of tax	—			—		—			—			—		—			—			(958	)		(958	)		(958	)
Other comprehensive loss	—			—		—			—			—		—			—						(1,164	)
Comprehensive loss																			$	(9,745	)
BALANCES AT MARCH 31, 2005	35,249,858		$	4	$	261,627		$	(5,749	)	$	(115,644	)	(1,000,000	)	$	(16,606	)				$	(2,233	)	$	121,399
Issuance of common stock under stock incentive plans	1,180,128			—		6,454			—			—		—			—						—			6,454
Issuance of common stock in connection with asset purchase	1,264,648			—		15,653			(1,509	)		—		—			—						—			14,144
Issuance of common stock warrant in connection with asset purchase	—			—		3,080			—			—		—			—									3,080
Net proceeds from termination of hedge and warrant	—			—		140			—			—		—			—									140
Repurchase of common stock	(2,000,000	)		—		—			—			—		(2,000,000	)		(16,044	)					—			(16,044	)
Stock-based compensation	—			—		801			(696	)		—		—			—						—			105
Repurchase of restricted stock	(118,933	)		—		(1,656	)		1,463			—		—			—									(193	)
Amortization of deferred stock-based compensation, net of forfeitures	—			—		(1	)		4,471			—		—			—									4,470
Tax benefits associated with convertible debt repurchase	—			—		128			—			—		—			—									128
Tax benefits associated with exercise of stock options and debt issuance costs	—			—		110			—			—		—			—						—			110
Comprehensive loss:
Net loss	—			—		—			—			(20,937	)	—			—		$	(20,937	)		—			(20,937	)
Cumulative translation adjustments	—			—		—			—			—		—			—			272			272			272
Unrealized gain on investments, net of tax	—			—		—			—			—		—			—			775			775			775
Other comprehensive income	—			—		—			—			—		—			—						1,047
Comprehensive loss																			$	(19,890	)
BALANCES AT APRIL 2, 2006	35,575,701		$	4	$	286,336		$	(2,020	)	$	(136,581	)	(3,000,000	)	$	(32,650	)				$	(1,186	)	$	113,903

64

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME—(Continued)

(in thousands, except share data)

	Common Stock				Additional Paid-in Capital			Deferred Stock-Based Compensation			Accumulated Deficit			Treasury Stock					Comprehensive Loss			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares		Amount											Shares		Amount
BALANCES AT APRIL 2, 2006 (CONTINUED)	35,575,701		$	4	$	286,336		$	(2,020	)	$	(136,581	)	(3,000,000	)	$	(32,650	)				$	(1,186	)	$	113,903
Issuance of common stock under stock incentive plans	1,866,841			—		8,652			—			—		—			163						—			8,815
Issuance of common stock in connection with asset purchase	1,177,399			—		6,220			—			—		—			—						—			6,220
Net proceeds from termination of hedge and warrant	—			—		190			—			—		—			—									190
Retirement of common stock	(86,590	)		—		(695	)		—			—		—			—						—			(695	)
Elimination of unamortized deferred stock-based compensation	—			—		(2,020	)		2,020			—		—			—						—			—
Stock-based compensation expense, net of forfeitures						15,565			—			—		—			—						—			15,565
Cumulative effect of change in accounting principle	—			—		(321	)		—			—		—			—						—			(321	)
Tax benefits associated with exercise of stock options and debt issuance costs	—			—		223			—			—		—			—						—			223
Retirement of treasure stock						(3,325	)							320,574			3,325						—			—
Comprehensive loss
Net loss	—			—		—			—			(61,185	)	—			—		$	(61,185	)					(61,185	)
Reissuance of treasury stock												(42	)							(42	)					(42	)
Cumulative translation adjustments																				29			29			29
Net unrealized loss on available-for-sale securities	—			—		—			—			—		—			—			65			65			65
Other comprehensive income																							94
Total comprehensive loss	—			—		—			—			—		—			—		$	(61,133	)
BALANCES AT APRIL 1, 2007	38,533,351		$	4	$	310,825		$	—		$	(197,808	)	2,679,426		$	(29,162	)				$	(1,092	)	$	82,767

The accompanying notes are an integral part of these consolidated financial statements.

65

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended
	April 1, 2007			April 2, 2006			March 31, 2005
Cash flows from operating activities:
Net loss	$	(61,185	)	$	(20,937	)	$	(8,581	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of change in accounting principle		(321	)		—			—
Depreciation and amortization		10,364			9,467			7,770
Amortization of intangible assets		42,149			35,524			24,384
In-process research and development		1,300			450			4,364
Provision for (recovery from) doubtful accounts		88			(282	)		187
Amortization of debt issuance costs		506			725			983
Impairment or loss on strategic equity investments		605			1,003			825
Gain on extinguishment of convertible notes		(6,532	)		(8,781	)		—
Loss on sale of short-term investments		3			661			—
Loss on disposal of fixed assets		2,557			93			273
Stock-based compensation		15,565			4,576			1,880
Tax benefit realized from gain on repurchase of convertible debt		—			128			—
Tax benefits associated with exercise of stock options and debt issuance costs		223			110			528
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(7,298	)		687			(781	)
Prepaid expenses and other current assets		1,225			2,125			2,102
Other assets		(327	)		(417	)		(617	)
Accounts payable		3,082			(704	)		1,352
Accrued expenses		16,316			12,396			1,106
Deferred revenue		3,795			3,877			798
Other long-term liabilities		(800	)		(491	)		555
Net cash flows provided by operating activities		21,315			40,210			37,128
Cash flows from investing activities:
Purchase of intangible assets		(25,257	)		(26,085	)		(31,017	)
Purchase of property and equipment		(5,453	)		(6,485	)		(12,692	)
Purchase of available for sale investments		(29,395	)		(97,588	)		(170,045	)
Proceeds from maturities and sales of available for sale investments		57,365			173,990			187,325
Purchase of strategic investments		(900	)		(750	)		(1,309	)
Restricted cash		(4,700	)		—			—
Net cash flows provided by (used in) investing activities		(8,340	)		43,082			(27,738	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net		8,180			6,259			10,354
Repurchase of common stock		—			(16,044	)		(16,610	)
Repurchase of convertible notes, net		(35,889	)		(34,668	)		—
Proceeds from line of credit		3,000			—			—
Repayment of lease obligations		(1,480	)		(780	)		(119	)
Net cash used in financing activities		(26,189	)		(45,233	)		(6,375	)
Effect of foreign currency translation changes on cash		2			(131	)		(27	)
Net change in cash		(13,212	)		37,928			2,988
Beginning cash		58,550			20,622			17,634
Ending cash	$	45,338		$	58,550		$	20,622

The accompanying notes are an integral part of these consolidated financial statements.

66

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(in thousands)

	Year Ended
	April 1, 2007		April 2, 2006			March 31, 2005
Supplemental disclosure:
Non-cash investing and financing activities:
Deferred stock-based compensation recorded in connection with asset purchase	$	514	$	(246	)	$	(7,088	)
Purchase of fixed assets under capital leases	$	2,791	$	2,352		$	596
Issuance of common stock in connection with asset purchase	$	6,220	$	15,407		$	18,341
Issuance of common stock warrant in connection with asset purchase	$	—	$	3,080		$	—
Retirement of treasury stock	$	3,325	$	—		$	—
Common stock received from termination of hedge and warrant	$	102	$	—		$	—
Cash paid for:
Interest	$	141	$	126		$	195
Income taxes	$	740	$	572		$	611

The accompanying notes are an integral part of these consolidated financial statements.

67

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    The Company and Summary of Significant Accounting Policies

The Company

Magma Design Automation, Inc. (the “Company” or “Magma”), a Delaware corporation, was incorporated on April 1, 1997. The Company provides design and implementation, analysis and verification software that enables chip designers to reduce the time it takes to design and produce complex integrated circuits used in the communications, computing, consumer electronics, networking and semiconductor industries. The Company has licensed its products to major semiconductor companies and electronic products manufacturers in Asia, Europe and the United States.

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 from their functional currency to the U.S. dollar.

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 completion of Magma’s fiscal year ended March 31, 2005, Magma’s fiscal years consist of four quarters of 13 weeks each except for each fifth or sixth fiscal year, which includes one quarter with 14 weeks. As a result of this change, the first quarter of Magma’s fiscal year 2006 included three additional days, the results of which was included in Magma’s Form 10-Q for that quarter.

Reclassifications

Certain amounts in the fiscal 2006 and 2005 consolidated financial statements have been reclassified to conform to the fiscal 2007 presentation. Specifically, the Company has reclassified prior year stock-based compensation charges into the related functional classification as detailed in the consolidated statements of operations and in Note 1 under “Stock-based compensation.” In addition, the Company modified its revenue and cost of revenue presentation in its consolidated statements of operations and, accordingly, the related amounts reported in the consolidated statements of operations for fiscal 2006 and 2005 have been reclassified to conform to the current period presentation.

Use of estimates

Preparation of the 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 revenues and expenses during the reporting period. Management periodically evaluates such estimates and assumptions for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates.

Revenue recognition

Revenue is comprised of licenses revenue, bundled licenses and services revenue, and services revenue. Licenses revenue consists of fees for time-based or perpetual licenses of the Company’s software products.

68

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Bundled licenses and services revenue consists of fees for software licenses and post-contract customer support (“PCS”), where the Company does not have vendor specific objective evidence (“VSOE”) of fair value of PCS. Services revenue consists of fees for services, such as customer training, consulting and PCS associated with unbundled license arrangements. PCS sold with unbundled license arrangements is renewable after the initial PCS period expires, generally in one-year increments for a fixed percentage of the net license fee.

The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modifications of SOP 97-2, Software Revenue Recognition, with respect to certain transactions.” The Company recognizes revenue when all of the following criteria are met as set forth in paragraph 8 of SOP 97-2:

• Persuasive evidence of an arrangement exists,

• Delivery has occurred,

• The vendor’s fee is fixed or determinable, and

• Collectibility is probable.

The Company defines each of the four criteria above as follows:

Persuasive evidence of an arrangement exists.    It is the Company’s customary practice to have a written contract, which is signed by both the customer and Magma, or a purchase order from those customers that have previously negotiated an end-user license arrangement or volume purchase agreement, prior to recognizing revenue on an arrangement.

Delivery has occurred.    The Company’s software may be either physically or electronically delivered to its customers. For those products that are delivered physically, the Company’s standard transfer terms are FOB shipping point. For an electronic delivery of software, delivery is considered to have occurred when the customer has been provided with the access codes that allow the customer to take immediate possession of the software on its hardware.

If an arrangement includes undelivered products or services that are essential to the functionality of the delivered product, delivery is not considered to have occurred.

The fee is fixed or determinable.    The fee customers pay for products is negotiated at the outset of an arrangement. If the license fees are a function of variable-pricing mechanisms such as the number of units distributed or copied by the customer, or the expected number of users in an arrangement, such fees are not recognized as revenue until such time as amounts become fixed or determinable. In addition, where the Company grants extended payment terms to a specific customer, the Company’s fees are not considered to be fixed or determinable at the inception of the arrangements.

The Company considers arrangements where less than 100% of the license and initial period PCS fee is due within one year from the order date to have extended payment terms. For bundled agreements, revenue from such arrangements is recognized at the lesser of the aggregate of amounts due and payable or ratably. For unbundled agreements, revenue from such arrangements is recognized as amounts become due and payable. Payments received from customers in advance of revenue being recognized are presented as deferred revenue on the consolidated balance sheets.

Collectibility is probable.    Collectibility is assessed on a customer-by-customer basis. The Company typically sells to customers for which there is a history of successful collection. New customers are subjected to a

69

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

credit review process that evaluates the customers’ financial positions and ultimately their ability to pay. If it is determined from the outset of an arrangement that collectibility is not probable based upon the Company’s credit review process, revenue is recognized on a cash receipts basis (as each payment is collected).

Multiple element arrangements.    The Company allocates revenue on software arrangements involving multiple elements to each element based on the relative fair values of the elements. The Company’s determination of fair value of each element in multiple element arrangements is based on VSOE. The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately or renewal rates of PCS.

The Company has analyzed all of the elements included in its multiple-element arrangements and determined that it has sufficient VSOE to allocate revenue to the PCS components of its perpetual license products and consulting. Accordingly, assuming all other revenue recognition criteria are met, revenue from unbundled licenses is recognized upon delivery using the residual method in accordance with SOP 98-9 and revenue from PCS is recognized ratably over the PCS term. If an unbundled arrangement involves extended payment terms, revenue recognized using the residual method is limited to amounts due and payable. The Company recognizes revenue from bundled licenses ratably over the term of the license period, as the license and PCS portions of a bundled license are not sold separately. Revenue from bundled arrangements with extended payment terms is recognized as the lesser of amounts due and payable or ratable portion of the entire fee.

Certain of the Company’s time-based licenses include the rights to specified and unspecified additional products. Revenue from contracts with the rights to unspecified additional software products is recognized ratably over the contract term. The Company recognizes revenue from time-based licenses that include both unspecified additional software products and extended payment terms that are not considered to be fixed or determinable in an amount that is the lesser of amounts due and payable or the ratable portion of the entire fee. Revenue from licenses that include a right to specified upgrades is deferred until the upgrades are delivered because there is no vendor specific objective evidence for the specific upgrade.

The Company provides design methodology assistance and specialized services relating to generalized turnkey design services. The Company has vendor specific objective evidence of fair value for consulting and training services. Therefore, revenue from such services is recognized when such services are performed. The Company’s consulting services generally are not essential to the functionality of the software. The Company’s software products are fully functional upon delivery and implementation does not require any significant modification or alteration. The Company’s services to its customers often include assistance with product adoption and integration and specialized design methodology assistance. Customers typically purchase these professional services to facilitate the adoption of the Company’s technology and dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately and independently from consulting services, which are generally billed on a time-and-materials or milestone-achieved basis. The Company generally recognizes revenue from consulting services as the services are performed.

Cost of revenue

Cost of revenue includes cost of licenses revenue, cost of bundled licenses and services revenue and cost of services revenue. Cost of licenses 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 bundled licenses and services revenue includes allocation of license and service costs. Cost of

70

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

services revenue primarily consists of personnel and related costs to provide product support, consulting services and training, as well as stock-based compensation, asset depreciation, and allocated outside sale representative expenses.

Commission expense

The Company recognizes sales commission expense as it is earned by its employees based on the terms of the respective commission plan. According to the terms of the commission plan, commissions for orders recorded are paid by the Company to employees over a period of time, typically over two to six quarters, depending on the size of the respective orders.

Unbilled receivables

Unbilled receivables represent revenue that has been recognized in the financial statements in advance of contractual invoicing to the customer. The Company will invoice all of the unbilled receivables within one year. As of April 1, 2007 and April 2, 2006, unbilled receivables were approximately $7.6 million and $7.7 million, respectively, and are included in accounts receivable on the consolidated balance sheets for each of these periods.

Research and development expenses

Research and development expenses are charged to expense as incurred.

Capitalized software

Costs incurred in connection with the development of software products are accounted for in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed”. Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. To date, the Company’s software has been available for general release concurrent with the establishment of technological feasibility, and accordingly no costs have been capitalized to date.

Software included in property and equipment includes amounts paid for purchased software and customization services for software used internally which has been capitalized in accordance with SOP 98-1, “Accounting for Costs of Computer Software for Internal Use”.

Foreign currency

The financial statements of foreign subsidiaries are measured using the local currency of the subsidiary as the functional currency. Accordingly, assets and liabilities of the subsidiaries are translated at current rates of exchange at the balance sheet date, and all revenue and expense items are translated using weighted-average exchange rates. At April 1, 2007, April 2, 2006 and March 31, 2005, cumulative foreign currency translation loss is included in accumulated other comprehensive loss on the consolidated balance sheets.

Cash equivalents and short-term investments

The Company invests its excess cash in money market accounts and debt securities and considers all highly liquid debt instruments purchased with an original or remaining maturity of three months or less to be cash

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equivalents. Investments with an original maturity at the time of purchase between three and twelve months are classified as short-term investments and investments that have a maturity date more than twelve months from the balance sheet date are classified as long-term investments.

The Company accounts for investments in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These investments are classified as available-for-sale, and are recorded on the balance sheet at fair market value as of the balance sheet date with unrealized gains or losses reported as a separate component of stockholders’ equity until realized. The Company classifies auction rate securities as available-for-sale short-term investments. 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. Auction rate securities are reported at cost, which approximates fair market value due to the interest rate reset feature of these securities. As such, no gains or losses related to these securities were realized during the years ended April 1, 2007, April 2, 2006 and March 31, 2005.

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

	Cost		Unrealized Gains		Unrealized Loss			Estimated Fair Value
	(in thousands)
As of April 1, 2007
Cash (U.S. and international)	$	15,785	$	—	$	—		$	15,785
Money market funds (U.S.)		20,599		—		—			20,599
Money market funds (International)		155		—		—			155
Commercial paper		8,806		—		(7	)		8,799
Auction rate certificates		10,700		—		—			10,700
	$	56,045	$	—	$	(7	)	$	56,038
As of April 2, 2006
Cash (U.S. and international)	$	5,457	$	—	$	—		$	5,457
Money market funds (U.S.)		4,898		—		—			4,898
Money market funds (International)		7,711		—		—			7,711
Commercial paper		40,556		—		(72	)		40,484
Auction rate preferred		3,250		—		—			3,250
Government agencies		158		—		—			158
Auction rate certificates		35,200		—		—			35,200
	$	97,230	$	—	$	(72	)	$	97,158

As of April 1, 2007, the stated maturities of the Company’s current investments (including $8.8 million classified as cash equivalent investments in the table above) are $8.8 million within one year and $10.7 million after ten years.

As of April 1, 2007 and April 2, 2006, all of the $7,000 and $72,000, respectively, of 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 April 1, 2007 and April 2, 2006 were

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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. There were no significant losses realized in connection with the convertible subordinated note repurchases in May 2006. See “Convertible Notes” in Note 8 for information regarding the repurchases of convertible subordinated notes.

Restricted cash

The Company’s total restricted cash balance was $9.7 million (of which $5.0 million was classified as current assets and $4.7 million was classified as long-term assets) and $3.9 million (of which $58,000 was classified as current assets and $3.8 million was classified as long-term assets), respectively, as of April 1, 2007 and April 2, 2006. The restricted cash primarily represented the portion of cash considerations maintained in escrow accounts to secure certain indemnification obligations related to certain business combination and asset purchase transactions. As of April 1, 2007, the restricted cash also included $3.0 million and $1.7 million, respectively, as securities to the borrowings under the line of credit and deposits for the new office leases entered into during fiscal 2007. Such amounts were disclosed separately on the consolidated balance sheets as of April 1, 2007 and April 2, 2006.

Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. The Company’s cash, cash equivalents and short-term investments generally consist of commercial paper, government agencies, municipal obligations and money market funds with high-quality financial institutions. Accounts receivable are typically unsecured and are derived from license and service sales. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts.

At April 1, 2007, one customer accounted for 12% of accounts receivable. At April 2, 2006, one customer accounted for 14% of accounts receivable. See Note 13 for a disclosure of customers accounting for greater than 10% of revenue for each of the three years ended April 1, 2007.

Trade accounts receivable

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

Property and equipment

Property and equipment are recorded at cost. Depreciation of property and equipment is based on the straight-line method over the estimated useful lives of the related assets, generally three to five years. Leasehold

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improvements are amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Maintenance and repair costs are charged to operations as incurred.

Property and equipment consisted of the following (in thousands):

	April 1, 2007			April 2, 2006
Property and equipment, net:
Computer equipment	$	31,522		$	25,380
Software		7,599			6,162
Furniture and fixtures		3,561			2,701
Leasehold improvements		5,144			8,168
		47,826			42,411
Accumulated depreciation and amortization		(29,960	)		(22,349	)
	$	17,866		$	20,062

Depreciation expense was $10.4 million, $9.5 million and $7.8 million, respectively, for the years ended April 1, 2007, April 2, 2006 and March 31, 2005.

The cost of equipment acquired under capital leases included in property and equipment was $5.8 million and $3.0 million, respectively, as of April 1, 2007 and April 2, 2006. Accumulated amortization of the leased equipment was $2.4 million and $0.9 million, respectively, as of April 1, 2007 and April 2, 2006. Amortization of assets reported under capital leases was included with depreciation expense.

Impairment of long-lived assets

In accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews long-lived assets, such as property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Under SFAS 144, an impairment loss would be recognized for assets to be held and used when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Strategic investments

The Company invests in debt and equity of private companies as part of its business strategy. 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 the Company writes the investment down to its estimated fair value. For equity investment with ownership between 20% to 50%, the Company records its share of net equity income (loss) of the investee based on its proportionate ownership. The investments are included in other long-term assets in the consolidated balance sheets.

The Company regularly reviews the assumptions underlying the operating performance and cash flow forecasts based on information provided by these investee companies. Assessing each investment’s carrying value requires significant judgment by management as this financial information may be more limited, may not be as timely and may be less accurate than information available from publicly traded companies. If the Company determines, based

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on the best available evidence, that the carrying value of an investment is impaired, the Company writes down the carrying value of an investment to its estimated fair value and records the related write-down as a loss in equity investment, which is included in other income (expense), net in its consolidated statements of operations. For the years ended April 1, 2007, April 2, 2006 and March 31, 2005, the Company recorded net loss in equity investments of $0.6 million, $1.0 million and $0.8 million, respectively. At April 1, 2007 and April 2, 2006, the carrying value on the strategic investments was $2.0 million and $2.1 million, respectively.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against deferred tax assets if it is more likely than not that all or a portion of the deferred tax assets will not be realized.

Treasury Stock Reissuance

Shares of common stock repurchased by the Company are recorded at cost as treasury stock and result in a reduction of stockholders’ equity in the Company’s Consolidated Balance Sheets. From time to time, treasury shares may be reissued as part of the Company’s stock-based compensation programs. When shares are reissued, we use the weighted average cost method for determining cost. If the issuance price is higher than the cost, the excess of the issuance price over cost is credited to additional paid-in capital (“APIC”). If the issuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to retained earnings (accumulated deficit). During the year ended April 1, 2007, the Company recorded $42,000 of such charges to accumulated deficit.

Stock-based compensation

Effective April 3, 2006, the Company accounts for stock-based employee compensation arrangements under Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) which supersedes the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and requires the fair value recognition of share-based payment arrangements, including stock options, restricted stock, restricted stock units and shares issued under the Employee Stock Purchase Plan (“ESPP”). Prior to April 3, 2006, the Company accounted for its stock-based compensation plans using the intrinsic value method under the provisions of APB 25 and related guidance. The Company adopted SFAS 123R using the modified prospective transition method and accordingly prior periods have not been restated to reflect the impact of SFAS 123R. Under the modified-prospective-transition method, the results of operations include compensation costs of unvested options and awards granted prior to April 3, 2006, and options and awards granted subsequent to that date. Additionally, the Company elected to use the straight-line method to recognize its stock-based compensation expenses over the option and award’s vesting periods. For options and awards granted prior to adoption of SFAS 123R, the Company continues to record stock-based compensation expenses under the accelerated attribution method. As required by SFAS 123R, on April 3, 2006, the Company eliminated the unamortized deferred stock compensation of $2.0 million and reduced the Company’s additional paid-in capital by the same amount, which had been included in stockholders’ equity in the Company’s condensed consolidated balance sheet as of April 2, 2006.

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The Company uses the Black-Scholes option pricing model to determine the fair value of each stock option grant and each purchase right granted under its ESPP. The fair value of each restricted stock and restricted stock unit is determined using the fair value of the Company’s common stock on the date of the grant. Determining the fair value of stock-based awards at the grant date requires the input of various highly subjective assumptions, including expected future stock price volatility, expected term of instruments and expected forfeiture rates. The Company established the expected term for employee options and awards, as well as forfeiture rates, based on the historical settlement experience, while giving consideration to vesting schedules and to options that have life cycles less than the contractual terms. Assumptions for option exercises and pre-vesting terminations of options were stratified for employee groups with sufficiently distinct behavior patterns. Expected future stock price volatility was developed based on the average of our historical weekly stock price volatility and average implied volatility. The risk-free interest rate for the period within the expected life of the option is based on the yield of United States Treasury notes at the time of grant. Magma has not historically paid dividends, thus the expected dividends used in the calculation are zero.

During fiscal 2007, the Company recorded a non-cash benefit of $321,000 for estimated forfeitures of restricted stock previously expensed as of the SFAS 123R implementation date as a one-time cumulative effect of change in accounting principle. No income tax benefit related to this cumulative effect of change in accounting principle was recorded as the Company has provided full valuation allowance against its net deferred tax assets.

In March 2005, the Commission issued Staff Accounting Bulletin (“SAB”) No. 107, which provided supplemental implementation guidance for SFAS 123R. SAB 107 requires stock-based compensation to be classified in the same expense line items as cash compensation. Accordingly, the Company recorded stock-based compensation for the three years ended April 1, 2007 as follows (in thousands):

	Year Ended
	April 1, 2007		April 2, 2006		March 31, 2005
Cost of revenue	$	1,253	$	78	$	1
Research and development expense		5,880		4,150		1,336
Sales and marketing expense		3,852		131		125
General and administrative expense		4,580		217		418
Total stock-based compensation expense	$	15,565	$	4,576	$	1,880

The Company has not provided an income tax benefit for stock-based compensation expense for current and prior year periods, since it is more likely than not that the deferred tax assets associated with this expense will not be realized. To the extent the Company realizes the deferred tax assets associated with the stock-based compensation expense in the future, the income tax effects of such an event may be recognized at that time. Prior to the adoption of SFAS 123R, the Company presented all tax benefits for deductions resulting from the exercise of stock options as operating cash flows on its statement of cash flows. SFAS 123R requires the cash retained as a result of tax benefits for tax deductions in excess of the compensation expense recorded for those options to be classified as cash from financing activities. The Company recorded no such excess tax benefits for the year ended April 1, 2007. The tax benefits of $223,000 recorded in fiscal 2007 under additional paid-in capital on the consolidated stockholders’ equity statement represented the true-up adjustment on prior year’s tax provision.

The adoption of SFAS 123R has had a material effect on the Company’s financial results since April 3, 2006. For fiscal 2007, the Company’s operating loss and net loss were higher by $11.0 million and $10.7 million, respectively, than if the Company had continued to account for stock-based compensation under APB 25. Basic

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and diluted net loss per share for fiscal 2007 were each higher by $0.30 than if the Company had continued to account for stock-based compensation under APB 25. In fiscal 2006, the Company recognized $4.6 million of stock-based compensation expense related primarily to restricted stock awards.

In November 2005, FASB issued Financial Statement Position (“FSP”), on SFAS No. 123R-3, “Transition Election Related to Accounting for Tax Effects of Stock-Based Payment Awards.” Effective upon issuance, FSP 123R-3 provides for an alternative transition method for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123R. The alternative transition method provides simplified approaches to establish the beginning balance of a tax benefit pool comprised of the additional paid-in capital, or APIC, related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC tax benefit pool and the statement of cash flows of stock-based awards that were outstanding upon the adoption of SFAS No. 123R. Companies have one year from the later of the adoption of SFAS No. 123R or the effective date of the FSP to evaluate their transition alternatives and make a one-time election. Upon adoption of SFAS No. 123R, the Company elected to calculate its historical pool of windfall tax benefits using the “long-form method” provided in paragraph 81 of SFAS 123R, which resulted in an APIC windfall pool of tax benefits position.

Fair value of financial instruments

Financial instruments consist of cash and cash equivalents, short and long-term investments, accounts receivable and payable, accrued liabilities, convertible notes, convertible bond hedge and a written call warrant. The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable and payable and accrued liabilities approximate their fair values because of the short-term nature of those instruments. The Company has estimated the fair value of its convertible subordinated notes, convertible bond hedge and written call warrant by using available market information and valuation methodology considered to be appropriate. The following table summarizes the Company’s carrying values and market-based fair values of these financial instruments as of April 1, 2007 and April 2, 2006 (in thousands):

	Carrying Value			Estimated Fair Value
April 1, 2007
Convertible subordinated notes due 2008	$	15,216		$	14,227
Convertible senior notes due 2010	$	47,861		$	46,693
Convertible bond hedge	$	(5,696	)	$	(31	)
Written call warrant	$	3,642		$	—
April 2, 2006
Convertible subordinated notes due 2008	$	105,500		$	89,675
Convertible bond hedge	$	(39,495	)	$	(1,601	)
Written call warrant	$	25,252		$	287

Information on the carrying value of the convertible notes, convertible bond hedge and written call warrant is provided in “Note 8—Convertible Notes.”

Comprehensive income

Statement of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive Income” requires companies to classify items of other comprehensive income by their nature in the financial statements and display the accumulated balance of other comprehensive income separately from retained earnings and

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additional paid-in-capital in the equity section of the balance sheet. Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. Accumulated other comprehensive income or loss is shown in the consolidated statement of stockholders’ equity.

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

	April 1, 2007			April 2, 2006
Unrealized loss on available-for-sale investments, net	$	(7	)	$	(72	)
Foreign currency translation adjustments		(1,085	)		(1,114	)
Accumulated other comprehensive loss	$	(1,092	)	$	(1,186	)

Recently issued accounting pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact of the adoption of this statement on its consolidated financial position or results of operations.

In November, 2006, the Emerging Issues Task Force (“EITF”) approved EITF Issue No. 06-6 “Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments.” EITF 06-6 addresses the issue of accounting for modifications made to convertible debt instruments, supersedes Issue No. 05-7 “Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues,” clarifies the accounting approach required for such modifications and modifies guidance provided in EITF 96-19 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.” EITF 06-6 suggests that the change in the fair value of the conversion feature be excluded from the EITF 96-19 analysis, and that the significance of change in the conversion feature be separately evaluated to determine if the original instrument has been extinguished and modifications that increase the fair value of a conversion feature should be recognized as a reduction in the carrying amount of the debt instrument with a corresponding increase in equity. EITF 06-6 is effective for convertible debt instrument modifications made after November 29, 2006. The Company applied the guidance provided in EITF 06-6 and in the revised EITF 96-19 to the exchange of a portion of its convertible subordinated notes in March 2007. The adoption of EITF 06-6 did not have a material impact on the Company’s consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS 157 “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies only to other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact of the adoption of this statement on its consolidated financial position or results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB 108”) addressing how the effects of prior-year uncorrected financial statement misstatements should be considered in current-year financial statements. SAB 108 requires registrants to quantify misstatements using both balance-sheet and income-statement approaches in evaluating whether or not a misstatement is material.

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SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on the Company’s consolidated financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). Under FIN 48, companies are required to apply the “more likely than not” threshold to the recognition and derecognition of tax positions. FIN 48 also provides guidance on the measurement of tax positions, balance sheet classification, interest and penalties, accounting in interim periods, disclosure and transition. The new guidance is effective for the Company beginning April 2, 2007. The cumulative effect of the adoption of FIN 48 will be recorded as an adjustment to the beginning balance of retained earnings (or other balance sheet accounts, as appropriate) for fiscal year 2008. The Company is currently evaluating the provisions in FIN 48, however, at the present time, it does not anticipate that the adoption of FIN 48 will have a material impact on its consolidated financial position or 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 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. The adoption of SFAS 154 has not had a material effect on the Company’s consolidated financial position or results of operations.

In June 2006, the FASB issued EITF 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)”. The consensus reached in EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions (e.g. sales, use, value added and excise taxes) between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. In addition, for any such taxes that are reported on a gross basis, the amounts of those taxes should be disclosed in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. EITF 06-03 was effective January 1, 2007. We record a significant portion of the taxes within the scope of EITF 06-03 on a net basis except for certain taxes in the United States. The amount of taxes within the scope of EITF 06-03 recorded on a gross basis were immaterial for fiscal years 2005 through 2007.

Note 2.    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 (loss) attributed to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted net income (loss) per share gives effect to all dilutive potential common shares outstanding during the period including stock subject to repurchase, stock options and warrants using the treasury stock method and convertible subordinated notes using the if-converted method.

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For each of the three years ended April 1, 2007, 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. Such shares included the following:

	Year Ended
	April 1, 2007		April 2, 2006		March 31, 2005
Shares of common stock issuable upon conversion of convertible notes		3,995,000		4,615,000		6,562,000
Warrants outstanding		—		500,000		—
Shares of common stock issuable under stock option plans outstanding		11,232,741		8,978,871		9,990,580
Weighted average price of shares issuable under stock option plans	$	9.80	$	11.51	$	15.30

Note 3.    Balance Sheet Components

Significant components of certain balance sheet items are as follows (in thousands):

	April 1, 2007			April 2, 2006
Accounts receivable, net:
Trade accounts receivable	$	33,580		$	26,267
Unbilled receivable		7,561			7,697
Gross accounts receivable		41,141			33,964
Allowance for doubtful accounts		(55	)		(115	)
	$	41,086		$	33,849
Accrued expenses:
Accrued sales commissions	$	3,058		$	3,296
Accrued bonuses		10,623			7,706
Other payroll and related accruals		6,988			5,655
Acquisition accrual		6,960			4,090
Litigation settlement accrual		12,500			—
Accrued professional fees		4,101			3,302
Income taxes payable		3,866			4,128
Other		5,158			3,656
	$	53,254		$	31,833

Note 4.    Business Combinations

Fiscal 2007 Business Combination

Knights Technology, Inc., wholly owned subsidiary of FEI Company (“Knights”)

On November 20, 2006, the Company acquired all of the outstanding stock of Knights, a wholly owned subsidiary of FEI Company. Knights is a provider of yield management and failure analysis software solutions to the semiconductor industry. The acquisition broadens the Company’s product portfolio and is expected to allow the Company to tighten the link between design and manufacturing.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company acquired Knights for a total consideration of approximately $8.0 million in cash. The Company retained $250,000 of the initial consideration in a segregated bank account to secure certain indemnification obligations of FEI Company, and this $250,000 was recorded as restricted cash and is separately disclosed on the Company’s consolidated balance sheet as of April 1, 2007. The results of operations of Knights have been included in Magma’s results of operations since the acquisition date. The Company does not consider the Knights acquisition material to its results of operations and therefore is not presenting pro forma statements of operations for the year ended April 1, 2007.

The acquisition was accounted for as a business combination. The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. A summary of the purchase price allocations pertaining to the Knights acquisition and the amortization periods of the intangible assets acquired is as follows (in thousands):

Cash consideration paid	$	8,000
Transaction costs		140
Total purchase price	$	8,140
Allocation of purchase price:
Current assets	$	1,262
Non-current assets		99
Current liabilities		(1,121	)
Net tangible assets acquired		240
Intangible assets acquired:
Customer relationship or base		1,000
Developed technology		2,600
Trademarks		500
Acquired customer contracts		300
Non-competition agreements		200
In-process research and development		1,300
Goodwill		2,000
Total assets acquired	$	8,140
Amortization period of intangibles (in years)
Customer relationship or base		7
Developed technology		4-5
Trademarks		7
Acquired customer contracts		3
Non-competition agreements		3

The excess of the purchase price over the estimated value of the net tangible assets acquired was allocated to various intangible assets, consisting primarily of developed technology, trademarks and customer and contract-related assets, in-process research and development (“IPR&D”) and goodwill. The goodwill is not expected to be deductible for income tax purposes. The $1.3 million portion of the purchase price allocated to IPR&D was recognized as a charge to operating expenses on the acquisition date.

The values assigned to developed technologies were based upon future discounted cash flows related to the existing products’ projected income streams using a discount rate of 11%. The Company believes these rates were appropriate given the business risks inherent in marketing and selling these products. Factors considered in

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estimating the discounted cash flows to be derived from the existing technology include risks related to the characteristics and applications of the technology, existing and future markets and an assessment of the age of the technology within its life span.

Other intangibles include the value of an existing customer relationship or base, trademarks, non-competition agreements and existing customer contracts. The cash flows generated by these intangible assets were valued using discount rates ranging from 13% to 14%.

The in-process technologies acquired from Knights are at a stage of development that require further research and development to determine technical feasibility and commercial viability and they have no future alternative use. The valuation method used to value IPR&D is a form of discounted cash flow method commonly known as the excess earnings method. This approach is a widely recognized appraisal method and is commonly used to value technology assets. The value of the in-process technology is the sum of the discounted expected future cash flows attributable to the in-process technology, taking into consideration the costs to complete the products utilizing this technology, utilization of pre-existing technology, the risks related to the characteristics and applications of the technology, existing and future markets and the technological risk associated with completing the development of the technology. The cash flows derived from the in-process technology projects were discounted at rates ranging from 15% to 16%. The Company believes the rate used was appropriate given the risks associated with the technologies for which commercial feasibility had not been established and there was no alternative use. The percentage of completion for in-process technology projects acquired ranged from 48% to 60%, and was an average of the percentage of completion based on costs and time. The cost-based percentage of completion was determined by identifying the total expenses incurred to date for the project as a ratio of the total expenses expected to be incurred to bring the project to technical and commercial feasibility. The time-based percentage of completion was determined by identifying the elapsed time invested in the project as a ratio of the total time required to bring the project to technical and commercial feasibility. Schedules were based on management’s estimate of tasks completed and the tasks to be completed to bring the project to technical and commercial feasibility. The in-process technology projects currently are expected to be completed during the first quarter of fiscal year 2008.

Development of in-process technology remains a substantial risk to the Company due to a variety of factors including the remaining effort to achieve technical feasibility, rapidly changing customer requirements and competitive threats from other companies and technologies. Additionally, the value of other intangible assets acquired may become impaired. The value of the in-process research and development, as well as the value of other intangible assets, was estimated by the management with the assistance of an independent appraisal firm, based on input from the Company and the acquired companies’ management, using valuation methods that are in accordance with the generally accepted accounting principles.

Fiscal 2006 Business Combination

ACAD Corporation (“ACAD”)

On November 29, 2005, the Company acquired ACAD, a privately-held company that develops circuit simulation software, to broaden its product portfolio into simulation, addressing a new market, and to enhance certain other existing Magma products, all of which help integrated circuit (“IC”) manufacturers produce higher quality chips more efficiently. The acquisition of ACAD further supports Magma’s focus to deliver effective electronic design automation (“EDA”) software to IC manufactures, enabling IC designers to meet critical time-to-market objectives, improve chip performance, and handle multimillion-gate designs.

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The Company acquired ACAD for an initial consideration of approximately $453,000 in cash and assumption of its net liabilities of approximately $3.9 million as of November 29, 2005. The Company also agreed to pay up to $5.65 million of cash in contingent consideration to the ACAD shareholders upon achieving or exceeding certain financial and technical milestones. As of April 1, 2007, $2.8 million of the contingent consideration has been earned and was recorded as an addition to goodwill on the Company’s consolidated balance sheet.

As of April 1, 2007, the Company retained a total of $0.6 million of the initial and contingent considerations in a segregated bank account to secure certain indemnification obligations of the ACAD shareholders, and was recorded as restricted cash, which is separately disclosed on the Company’s consolidated balance sheet. As of April 1, 2007, the Company has paid substantially all the liabilities assumed at acquisition. The results of operations from ACAD have been included in Magma’s results of operations from the acquisition date.

The acquisition was accounted for as a business combination. The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. A summary of the purchase price allocations pertaining to the ACAD acquisition and the amortization periods of the intangible assets acquired is as follows (in thousands):

Cash consideration paid	$	453
Total purchase price	$	453
Allocation of purchase price:
Current assets	$	581
Current liabilities		(4,512	)
Net liabilities assumed		(3,931	)
Intangible assets acquired:
Customer relationship or base		110
Developed technology		1,860
Acquired customer contracts		190
Non-competition agreements		300
In-process research and development		450
Goodwill		1,474
Total net assets acquired	$	453
Amortization period of intangibles (in years)
Customer relationship or base		4
Developed technology		4
Acquired customer contracts		1-2
Non-competition agreements		3

The excess of the purchase price over the estimated value of the net tangible assets acquired was allocated to various intangible assets, consisting primarily of developed technology, customer and contract-related assets and goodwill. The goodwill is not expected to be deductible for income tax purposes.

The values assigned to developed technologies were based upon future discounted cash flows related to the existing products’ projected income streams using discount rates ranging from 15% to 21%. The Company believes these rates were appropriate given the business risks inherent in marketing and selling these products. Factors considered in estimating the discounted cash flows to be derived from the existing technology include

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risks related to the characteristics and applications of the technology, existing and future markets and an assessment of the age of the technology within its life span.

Other intangibles include the value of an existing customer relationship or base, non-competition agreements and existing customer contracts. These intangible assets were valued using discount rates ranging from 15% to 25%.

The in-process technologies acquired from ACAD are at a stage of development that require further research and development to determine technical feasibility and commercial viability and they have no future alternative use. The valuation method used to value in-process research and development is a form of discounted cash flow method commonly known as the excess earnings method. This approach is a widely recognized appraisal method and is commonly used to value technology assets. The value of the in-process technology is the sum of the discounted expected future cash flows attributable to the in-process technology, taking into consideration the costs to complete the products utilizing this technology, utilization of pre-existing technology, the risks related to the characteristics and applications of the technology, existing and future markets and the technological risk associated with completing the development of the technology. The cash flows derived from the in-process technology projects were discounted at a rate of 30%. The Company believes the rate used was appropriate given the risks associated with the technologies for which commercial feasibility had not been established and there was no alternative use. The percentage of completion for each in-process project was determined by identifying the elapsed time invested in the project as a ratio of the total time required to bring the project to technical and commercial feasibility. Schedules were based on management’s estimate of tasks completed and the tasks to be completed to bring the project to technical and commercial feasibility. The in-process technology projects were completed in fiscal 2007.

Development of in-process technology remains a substantial risk to the Company due to a variety of factors including the remaining effort to achieve technical feasibility, rapidly changing customer requirements and competitive threats from other companies and technologies. Additionally, the value of other intangible assets acquired may become impaired. The value of the in-process research and development, as well as the value of other intangible assets, was estimated by the management with the assistance of an independent appraisal firm, based on input from the Company and the acquired companies’ management, using valuation methods that are in accordance with the generally accepted accounting principles.

Note 5.    Asset Purchases

Fiscal 2007 Asset Purchases

On February 12, 2007, the Company acquired certain assets from a privately-held developer of EDA technology. Pursuant to the asset purchase agreement, the Company paid a total consideration of $250,000 in cash. Based on management’s estimates and appraisal, $233,000 of the consideration was allocated to patents and intellectual property and $17,000 was allocated to workforce. Both were included in the intangible asset balance on the Company’s consolidated balance sheet as of April 1, 2007. The developed technology and the workforce are being amortized over the estimated economic life of four years.

On October 6, 2006, the Company acquired a technology license and certain other information from another company for a total fee of $2.0 million. The licensed technology will be integrated into the Company’s current product offerings and various other products under development. Under the license agreement, the Company obtained a perpetual, fully-paid, royalty-free worldwide license. The Company also agreed to pay up to $6.0 million of cash in additional license fees based upon achievement of certain milestones. As of April 1, 2007, none of the additional license fees has been earned. The $2.0 million initial license fee was included in the intangible asset balance on the Company’s consolidated balance sheet as of April 1, 2007. This licensed technology is being amortized over the estimated economic life of five years.

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On May 3, 2006, the Company acquired a license to technology relating to electronic design automation from Stabie-Soft, Inc. The Company paid $2.5 million for the license in May 2006 and, upon the completion and delivery of technology meeting certain milestones, the Company paid additional fees of $0.5 million in the second quarter of fiscal 2007. The total license fee of $3.0 million was included in the intangible asset balance on the Company’s consolidated balance sheet as of April 1, 2007. This licensed technology is being amortized over the estimated economic life of five years.

Fiscal 2006 Asset Purchases

ReShape, Inc. (“ReShape”)

On March 9, 2006, the Company acquired certain assets of Reshape, a privately-held developer of EDA and design flow technology. Pursuant to the asset purchase agreement, the Company paid ReShape total consideration of $750,000 in cash. Based on management’s estimates and appraisal, the $750,000 consideration was entirely allocated to patents and intellectual property and included in the intangible asset balance on the Company’s consolidated balance sheet as of April 1, 2007. This developed technology intangible asset is being amortized over the estimated economic life of three years.

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, 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 and was 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 was 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 consolidated balance sheet as of April 1, 2007. In August 2006, IBM exercised the warrant on a cashless exercise basis. In connection with the exercise, 149,005 shares of the Company’s common stock were issued to IBM.

Fiscal 2005 Asset Purchases

Mojave, Inc. (“Mojave”)

On April 29, 2004, the Company completed its acquisition of Mojave, a privately held developer of advanced technology for integrated circuit manufacturability and verification. The acquisition of Mojave allows

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Magma to more comprehensively address its customers’ needs of designing and verifying semiconductors that are manufacturable with desirable yield and performance. Manufacturability is a key design parameter as semiconductor process technology moves to sub-90nm geometries. The total initial purchase price of the Mojave acquisition was approximately $25.1 million and the transaction was accounted for as an asset purchase transaction. The Company acquired all of the outstanding common stock of Mojave in exchange for initial consideration of $24.2 million, which consisted of 607,554 shares of Magma common stock valued at $11.8 million and $12.4 million in cash. In addition to the initial merger consideration, the Company agreed to pay contingent consideration of up to $115.0 million, half in stock and half in cash, based on product orders over a period ending March 31, 2009, but such payments are contingent on the achievement of certain technology or booking milestones. The Company did not assume any stock options or warrants. As of April 1, 2007, $44.2 million of the contingent consideration, which consisted of approximately half in cash and half in stock, has been paid or accrued for under the agreement upon achievement of the milestones. The contingent consideration of $38.6 million, net of $5.0 million of deferred compensations and $0.6 million of forfeitures, when earned, is considered as an additional acquisition cost and recorded as an increase to the developed technology intangible asset. The amount is amortized over the remaining economic life of the developed technology intangible asset.

Magma allocated the initial purchase price of $25.1 million to the fair values of the assets acquired and liabilities assumed. A summary of the purchase price allocation and the amortization periods of the intangible assets acquired is as follows (in thousands):

	Amount Allocated
Allocation of the preliminary purchase price:
Net tangible assets acquired	$	611
Intangible assets acquired:
Developed technology		16,964
Assembled workforce		966
In-process research and development		4,009
Deferred cash compensation		1,320
Deferred stock-based compensation		1,254
Total purchase price	$	25,124
Amortization period of existing technology		5 years
Amortization period of assembled workforce		4 years

The value assigned to developed technology was based upon future discounted cash flows related to the developed technology’s projected income streams using discount rate of 16%. The Company believes this rate was appropriate given the business risks inherent in marketing and selling this technology. Factors considered in estimating the discounted cash flows to be derived from the developed technology included risks related to the characteristics and applications of the technology, existing and future markets and an assessment of the age of the technology within its life span.

The valuation method used to value in-process research and development (“IPR&D”) is a form of discounted cash flow method. This approach is a widely recognized appraisal method and is commonly used to value technology assets. The value of the in-process technology is the sum of the discounted expected future cash flows attributable to the in-process technology, taking into consideration the percentage of completion of products utilizing this technology, utilization of pre-existing technology, the risks related to the characteristics and applications of the technology, existing and future markets and the technological risk associated with

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completing the development of the technology. The cash flows derived from the in-process technology project were discounted at a rate of 30%. The Company believes the rate used was appropriate given the risks associated with the technologies for which commercial feasibility had not been established and had no alternative future uses. The percentage of completion for the in-process project was determined by identifying the elapsed time and costs invested in the project as a ratio of the total time and costs required to bring the project to technical and commercial feasibility, as well as consideration of engineering milestones required to complete the project. The percentage of completion for the in-process project acquired was 12.4%. Schedules were based on management’s estimate of tasks completed and the tasks to be completed to bring the project to technical and commercial feasibility. Revenue resulting from the IPR&D project has commenced in fiscal year 2006.

Development of in-process technology remains a substantial risk to the Company due to a variety of factors including the remaining effort to achieve technical feasibility, rapidly changing customer requirements and competitive threats from other companies and technologies. Additionally, the value of other intangible assets acquired may become impaired. The value of the in-process research and development, as well as the value of other intangible assets, was estimated by the management with the assistance of an independent appraisal firm, based on input from the Company and the acquired companies’ management, using valuation methods that are in accordance with the generally accepted accounting principles.

As part of the initial consideration for the Mojave acquisition, the Company allocated cash of $1.3 million as deferred cash compensation and issued Magma common stock with a value of $1.3 million which was recorded as deferred stock-based compensation. Both the cash and the shares were unearned on the acquisition date and will be earned based on continued provision of employment services by the former Mojave employees in accordance with pre-defined vesting schedules which range from 20 to 41 months. Accordingly, both the deferred cash compensation and the deferred stock-based compensation are treated as compensation and are charged to operating expense. The deferred stock-based compensation is amortized over the vesting period and the deferred cash compensation is recorded and charged to operating expenses when become vested and payable. Upon adoption of SFAS 123R, on April 2, 2006, the remaining $0.1 million of unamortized amount of deferred stock-based compensation was eliminated by reducing the same amount in the Company’s additional paid-in capital. As of April 1, 2007, substantially all of the deferred compensation related to the initial consideration has been charged to operating expense.

Lemmatis, Inc. (“Lemmatis”)

On April 16, 2004, the Company acquired Lemmatis, a privately-held developer of formal verification technology. Pursuant to the merger agreement, the Company paid the stockholders of Lemmatis initial consideration of approximately $0.6 million in cash, less $60,000 which the Company withheld to secure the indemnification obligations of the Lemmatis stockholders. In addition to the initial merger consideration, the Company may pay up to an additional $1.4 million contingent upon the achievement of certain technology milestones set forth in the merger agreement. As of April 1, 2007, all of the $1.4 million of contingent consideration was earned and paid in full in connection with achievement of technology milestones.

Based on management’s estimates and appraisal, the $0.6 million of initial consideration, $76,000 of legal and other professional expenses directly associated with the acquisition and $1.4 million of contingent consideration paid as of April 1, 2007 were entirely allocated to developed technology and included in the intangible asset balance on the Company’s consolidated balance sheet as of April 1, 2007. This developed technology intangible asset is being amortized to cost of revenue over the estimated economic life of three years.

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Fortis Systems, Inc. (“Fortis”)

On December 22, 2004, the Company acquired Fortis, a privately-held developer of optical proximity correction and lithography simulation technology. Pursuant to the merger agreement, the Company paid the stockholders of Fortis initial consideration of approximately $0.5 million in cash, less $50,000 which the Company withheld to secure the indemnification obligations of the Fortis stockholders and subsequently released to the Fortis stockholders in fiscal 2007. In addition to the initial merger consideration, the Company may pay up to an additional $1.0 million contingent upon the achievement of certain technology milestones set forth in the merger agreement. As of April 1, 2007, no contingent consideration was paid for milestone achievement. The acquisition of Fortis has been accounted for as an asset purchase transaction.

The Company allocated the initial purchase price of $0.6 million, including the $0.5 million of initial consideration and the $95,000 of legal and other professional expenses directly associated with the acquisition, to the fair values of the assets acquired and liabilities assumed. The fair value of the existing technology and assembled workforce intangible assets and in-process research and development were determined by management with the use of a third party valuation report. A summary of the purchase price allocation and the amortization periods of the intangible assets acquired is as follows (in thousands):

	Amount Allocated
Intangible assets acquired:
Developed technology	$	172
Assembled workforce		68
In-process research and development		355
Total purchase price	$	595
Amortization period of existing technology		6 years
Amortization period of assembled workforce		2 years

The Company identified the value of in-process research and development through discounted cash flow method and charged it to operating expenses. Such charges related to technologies for which commercial feasibility had not been established and had no alternative future uses. Revenue resulting from the IPR&D project is expected to commence in fiscal year 2008.

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Note 6.    Goodwill and Other Intangible Assets

The following table summarizes the components of goodwill, other intangible assets and related accumulated amortization balances, which were recorded as a result of business combinations and asset purchases described in Notes 4 and 5 (in thousands):

	Weighted Average Life (in Months)	April 1, 2007							April 2, 2006
		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Goodwill		$	48,499	$	—		$	48,499	$	43,985	$	—		$	43,985
Other intangible assets:
Developed technology	40	$	104,464	$	(64,228	)	$	40,236	$	89,192	$	(37,824	)	$	51,368
Licensed technology	40		39,093		(29,667	)		9,426		33,093		(17,962	)		15,131
Customer relationship or base	42		3,310		(1,631	)		1,679		2,310		(1,086	)		1,224
Patents	58		12,690		(8,615	)		4,075		12,690		(5,934	)		6,756
Acquired customer contracts	25		1,390		(1,069	)		321		1,090		(782	)		308
Assembled workforce	45		1,252		(976	)		276		1,235		(675	)		560
No shop right	24		100		(100	)		—		100		(100	)		—
Non-competition agreements	22		500		(156	)		344		300		(33	)		267
Trademark	20		900		(382	)		518		400		(279	)		121
Total		$	163,699	$	(106,824	)	$	56,875	$	140,410	$	(64,675	)	$	75,735

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 consolidated statement of operations. The amortization expense related to intangible assets was as follows (in thousands):

	Year Ended
	April 1, 2007		April 2, 2006		March 31, 2005
Amortization of intangible assets included in:
Cost of revenue—licenses	$	23,368	$	15,964	$	4,229
Cost of revenue—bundled licenses and services		7,770		7,711		2,144
Operating expenses		11,011		11,849		18,011
Total	$	42,149	$	35,524	$	24,384

As of April 1, 2007, the estimated future amortization expense of other intangible assets in the table above is as follows:

Fiscal year	Estimated Amortization Expense
2008	$	28,048
2009		21,577
2010		4,033
2011		2,019
2012 and beyond		1,198
	$	56,875

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In accordance with SFAS 142, the Company performed an annual goodwill impairment test as of December 31, 2006 and determined that goodwill was not impaired. In performing the impairment test, the Company determined that it had one reporting unit. The Company evaluates goodwill at least on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flow. No assurances can be given that future evaluations of goodwill will not result in charges as a result of future impairment.

Note 7.    Restructuring Charge

During the year ended March 31, 2005, the Company recorded a restructuring charge of $0.7 million related to employee termination costs of 22 employees resulting from the Company’s realignment to current business conditions. All termination costs had been paid as of March 31, 2005.

Note 8.    Convertible Notes

Zero Coupon Convertible Subordinated Notes due 2008 (the “2008 Notes”)

On May 22, 2003, the Company completed an offering of $150.0 million principal amount of the 2008 Notes due May 15, 2008 to qualified buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, resulting in net proceeds to the Company of approximately $145.1 million. The 2008 Notes do not bear coupon interest and were initially convertible into shares of the Company’s common stock at a conversion price of $22.86 per share, for an aggregate of 6,561,680 shares. The 2008 Notes are subordinated to the Company’s existing and future senior indebtedness and effectively subordinated to all indebtedness and other liabilities of the Company’s subsidiaries. The Company paid approximately $4.5 million in transaction fees to the underwriters of the offering and approximately $0.4 million in other debt issuance costs. The Company is amortizing the transaction fees and issuance costs over the life of the 2008 Notes using the effective interest method.

In order to minimize the dilutive effect from the issuance of the 2008 Notes, the Company undertook the following additional transactions concurrent with the issuance of the Notes:

• The Company repurchased approximately 1.1 million shares of its common stock at a price of $18.00 per share, or approximately $20.0 million, from one of the initial purchasers of the 2008 Notes, and those shares were retired as of May 30, 2003.

• The Company and Credit Suisse First Boston International (“CSFB International”) entered into convertible bond hedge and warrant transactions with respect to the Company’s common stock, the exposure for which is held by CSFB International. Under the convertible bond hedge arrangement, CSFB International agreed to sell to the Company, for $22.86 per share, up to 6,561,680 shares of Magma common stock to cover the Company’s obligation to issue shares upon conversion of the Notes. In addition, the Company issued CSFB International a warrant to purchase up to 6,561,680 shares of common stock for a purchase price of $31.50 per share. Purchases and sales under this arrangement may be made only upon expiration of the 2008 Notes or their earlier conversion (to the extent thereof). Both transactions may be settled at the Company’s option either in cash or net shares, and will expire on the earlier of a conversion event or the maturity of the convertible debt on May 15, 2008. The transactions are expected to reduce the potential dilution from conversion of the 2008 Notes.

The net cost of $20.3 million incurred in connection with these arrangements, which consisted of the $56.2 million cost of the convertible bond hedge, offset in part by the $35.9 million proceeds from the issuance of the warrant, was presented in stockholder’s equity as a reduction of additional paid-in-capital, in accordance with the guidance in Emerging Issues Task Force Issue No. 00-19,

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“Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” If the contracts are ultimately settled in a manner that results in the Company delivering or receiving cash, the amount of cash paid or received should be reported as a reduction of, or an addition to, stockholders’ equity. The shares issuable under these arrangements were excluded from the calculation of earnings per share for the years ended April 1, 2007 and April 2, 2006 as their effect was anti-dilutive.

In May 2005, the Company repurchased, in privately negotiated transactions, in an aggregate principal amount of $44.5 million (or approximately 29.7% of the total) of the 2008 Notes at an average discount to face value of approximately 22%. The Company spent approximately $34.8 million on the repurchase. The repurchase left approximately $105.5 million principal amount of the 2008 Notes outstanding. In addition, a portion of the hedge and warrant transactions was terminated in connection with the repurchase. In fiscal 2006, the Company recorded a gain of $9.7 million on the repurchase of the 2008 Notes, which was partially offset by the write-off of $0.9 million of deferred financing costs associated with the 2008 Notes. The net proceeds of $140,000 from the termination of a portion of the hedge and warrant were charged to additional paid-in capital.

In May 2006, the Company repurchased, in privately negotiated transactions, in an aggregate principal amount of $40.3 million (or approximately 38.2% of the remaining principal) of the 2008 Notes at an average discount to face value of approximately 13%. The Company spent approximately $35.0 million on the repurchases. The repurchase left approximately $65.2 million principal amount of the 2008 Notes outstanding. In addition, a portion of the hedge and warrant transactions was terminated in connection with the repurchase. In the first quarter of fiscal 2007, the Company recorded a gain of $5.3 million on the repurchase, which was partially offset by the write-off of $0.5 million of deferred financing costs associated with the 2008 Notes. The Company received 14,467 shares of Magma common stock, valued at approximately $102,000, as settlement for termination of a portion of the hedge and warrant in connection with the repurchase. The amount was charged to additional paid-in-capital.

In March 2007, the Company exchanged, in privately negotiated transactions, an aggregate principal amount of $49.9 million (or approximately 76.7% of the remaining principal) of the 2008 Notes for a new series of 2% convertible senior notes due May 2010. The exchange left approximately $15.2 million principal amount of the 2008 Notes outstanding. In the fourth quarter of fiscal 2007, the Company recorded a gain of $2.1 million on the exchange, which was partially offset by the write-off of $0.4 million of deferred financing costs associated with the 2008 Notes. Please see below under “2% Convertible Senior Notes due 2010” for further discussion of the exchange. In addition, a portion of the hedge and warrant was terminated in connection with the exchange. The net proceeds of $88,000 from the termination of a portion of the hedge and warrant were charged to additional paid-in capital.

As of April 1, 2007 and April 2, 2006, the unamortized balance of transaction fees and debt issuance costs related to the 2008 Notes was approximately $99,000 and $1.5 million, respectively. The shares issuable on the conversion of the 2008 Notes are included in “fully diluted shares outstanding” under the if-converted method of accounting for purposes of calculating diluted earnings per share.

2% Convertible Senior Notes due 2010 (the “2010 Notes”)

In March 2007, the Company exchanged, in privately negotiated transactions, an aggregate principal amount of $49.9 million of the 2008 Notes for an equal aggregate principal amount of the 2010 Notes. The 2010 Notes mature on May 15, 2010 and bear interest at 2% per annum, with interest payable on May 15 and November 15 of each year, commencing May 15, 2007. The 2010 Notes are unsecured senior indebtedness of Magma, which

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rank senior in right of payment to the 2008 Notes and junior in right of payment to Magma’s $5.0 million revolving line of credit facility. In addition, after May 20, 2009, the Company will have the option to redeem the 2010 Notes for cash in an amount equal to 100% of the aggregate outstanding principal amount at the time of such redemption. The 2010 Notes also contain a net share settlement provision which allows the Company, at its option, in lieu of delivery of some or all of the shares of common stock otherwise issuable upon conversion of the 2010 Notes, to pay holders of the 2010 Notes in cash for all or a portion of the principal amount of the converted 2010 Notes and any amounts in excess of the principal amount which are due.

The 2010 Notes will be convertible upon the occurrence of certain conditions into shares of Magma common stock at an initial conversion price of $15.00 per share, which is equivalent to an initial conversion rate of approximately 66 shares per $1,000 principal amount of 2010 Notes. The conversion price and the conversion rate will adjust automatically upon certain dilution events. The 2010 Notes are convertible into shares of Magma common stock on or prior to maturity at the option of the holders upon the occurrence of certain change of control events. Conversions under these circumstances require Magma to pay a premium make-whole amount whereby the conversion rate on the 2010 Notes may be increased by up to 22 shares. The premium make-whole amount shall be paid in shares of common stock upon any such automatic conversion, subject to Magma’s option for net share settlement.

The 2010 Notes shall also be convertible at the option of the holders at such time as: (i) the closing price of Magma common stock exceeds 150% of the conversion price of the 2010 Notes, initially $15.00, for 20 out of 30 consecutive trading days; (ii) the trading price per $1,000 principal amount of 2010 Notes is less than 98% of the product of (x) the average price of common stock for each day during any five consecutive trading day period and (y) the conversion rate per $1,000 principal amount of 2010 Notes; (iii) Magma distributes to all holders of common stock rights or warrants entitling them to purchase additional shares of common stock at less than the closing price of common stock on March 5, 2007; (iv) Magma distributes to all holders of common stock any form of dividend which has a per share value exceeding 7.5% of the price of the common stock on the day prior to such date of distribution; (v) the period beginning 60 days prior to May 15, 2010; (vi) there has been a designated change of control of Magma; or (vii) the 2010 Notes have been called for redemption by Magma. Any such conversions shall not entitle the holders of the 2010 Notes to any premium make-whole payment by Magma.

The exchange offer was treated as an extinguishment of the 2008 Notes in accordance with EITF 96-19, “Debtors Accounting for a Modification or Exchange of Debt Instruments,” as amended by EITF 06-6, “Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments.” The exchange resulted in a gain of $2.1 million on extinguishment of debt, which was partially offset by the write-off of $0.4 million of deferred financing costs associated with the 2008 Notes. The Company initially recorded the 2010 Notes at fair value of $47.8 million, net of the debt discount of $2.1 million. The debt discount is being amortized to interest expenses over the term of the 2010 Notes. The company recorded related amortization of $45,000 as of April 1, 2007.

The $1.3 million of underwriting and legal fees related to the 2010 Notes offering was capitalized upon issuance and is being amortized over the term of the 2010 Notes using the effective interest method. As of April 1, 2007, the unamortized balance of debt issuance costs related to the 2010 Notes was approximately $1.2 million. The shares issuable on the conversion of the 2010 Notes are included in “fully diluted shares outstanding” under the if-converted method of accounting for purposes of calculating diluted earnings per share.

Note 9.    Line of Credit

In November 2006, the Company established a $5.0 million revolving line of credit facility with Wells Fargo Bank, N.A. The credit facility is available through November 2011 and bears an interest rate equal to the

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bank’s prime rate less 1.60% or LIBOR plus 0.60%. The Company is required to make interest only payments monthly and the outstanding principal amount plus all accrued but unpaid interest is payable in full at the expiration of the credit facility. As of April 1, 2007, there were $3.0 million borrowings outstanding under the credit facility, bearing an interest rate at 5.94%. The credit facility is secured by deposits held with the bank.

In addition, the credit facility allows letters of credit to be issued on behalf of the Company, provided that the aggregate outstanding amount of the letters of credit shall not exceed the available amount for borrowing under the credit facility. As of April 1, 2007, three letters of credit totaling $1.85 million were outstanding under the credit facility, and the Company had a borrowing base availability of $150,000 under the same facility.

Note 10.    Stockholders’ Equity

Stock Incentive Plans

2004 Employment Inducement Award Plan

The 2004 Employment Inducement Award Plan (“Inducement Plan”) was adopted by the Board of Directors on August 30, 2004. Under the Inducement Plan, the Company, with the approval of the Compensation Committee of the Board of Directors (the “Committee”), may grant non-qualified stock options to new hire employees who are not executive officers of the Company. These employees may also be awarded restricted common shares, stock appreciation rights (“SARs”) or stock unit awards (“Stock Units”). The Committee determines whether an award may be granted, the number of shares/options awarded, the date an award may be exercised, vesting and the exercise price. Each award must be subject to an agreement between each applicable employee and the company. The term of the Inducement Plan continues until May 4, 2011 unless it is terminated earlier in accordance with its terms. The initial number of shares of common stock issuable under the Inducement Plan was 1,000,000 shares, subject to adjustment for certain changes in the Company’s capital structure. On January 24, 2006, the Inducement Plan was amended by the Committee to increase the maximum aggregate number of options, SARs, Stock Units and restricted shares that may be awarded under the Inducement Plan to 2,000,000 shares. As of April 1, 2007, there were options to purchase 1,653,267 shares outstanding under the Inducement Plan, and 1,955 shares were available for the grant of future options or other awards under the Inducement Plan.

2001 Stock Incentive Plan

The 2001 Stock Incentive Plan (“2001 Plan”) was approved by the stockholders in August 2001. Under the 2001 Plan, the Company, with the approval of the Committee or its delegates, may grant incentive stock options or non-qualified stock options to purchase common stock to employees, directors, advisors, and consultants. They may also be awarded restricted common shares, SARs or Stock Units based on the value of the common stock. The initial number of shares of common stock issuable under the 2001 Plan was 2.0 million shares, subject to adjustment for certain changes in the Company’s capital structure. As of January 1 of each year, commencing with January 1, 2002, the aggregate number of options, restricted awards, SARs, and Stock Units that may be awarded under the 2001 Plan will automatically increase by a number equal to the lesser of 6% of the total number of fully diluted shares of common stock then outstanding, 6.0 million shares of common stock, or any lesser number as is determined by the Board of Directors. A committee of the Board of Directors determines the exercise price per share; however, the exercise price of an incentive stock option cannot be less than 100% of the fair market value of the common stock on the option grant date, and the exercise price of a non-qualified stock option cannot be less than the par value of the common stock subject to such non-qualified stock options. As of April 1, 2007, there were options to purchase 8,580,025 shares outstanding under the 2001 Plan, and 3,760,883 shares were available for the grant of future options or other awards under the plan.

1997 and 1998 Stock Incentive Plans

In the year ended March 31, 1998, the Company adopted the 1997 Stock Incentive Plan (“1997 Plan”), and in the year ended March 31, 1999 the Company adopted the 1998 Stock Incentive Plan (“1998 Plan”)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(collectively, “the Plans”). Under the Plans, the Company may grant options to purchase common stock to employees, directors, and consultants. Shares that are subject to options that in the future expire, terminate or are cancelled or as to which options have not been granted under these plans will not be available for future option grants or issuance. Options granted under the Plans were either incentive stock options or non-qualified stock options. The exercise price of incentive stock options and non-qualified stock options were no less than 100% and 85%, respectively, of the fair market value per share of the Company’s common stock on the grant date (110% of fair market value in certain instances), as determined by the Board of Directors. Pursuant to the Plans, the Board of Directors also had the authority to set the term of the options (no longer than ten years from the date of grant, five years in certain instances). Under the terms of the Plans, the options become exercisable prior to vesting, and the Company has the right to repurchase such shares at their original purchase price if the optionee is terminated from service prior to vesting. Such rights expire as the options vest over the vesting period, which is generally four years. At April 1, 2007, there were no unvested shares subject to the Company’s repurchase rights.

As a result of the 2001 Plan becoming effective, no shares of the Company’s common stock are available for future issuance under the Plans. At April 1, 2007, there were no outstanding options under the 1997 Plan and options to purchase 993,186 shares outstanding under the 1998 Plan.

Moscape 1997 Incentive Stock Plan

The Moscape 1997 Incentive Stock Plan (the “Moscape Plan”) provides for the granting of stock options and stock purchase rights to employees, officers, directors and consultants. Both the options and stock purchase rights under the Moscape Plan are exercisable immediately, subject to the Company’s repurchase right in the event of termination, and generally vest over four years. At April 1, 2007, there were options to purchase 6,263 shares outstanding under the Moscape Plan.

Activity under the 1997, 1998 and 2001 Plans, the Inducement Plan and the Moscape Plan is summarized as follows:

	Year Ended
	April 1, 2007				April 2, 2006				March 31, 2005
	Number of Shares		Weighted Average Price per Share		Number of Shares		Weighted Average Price per Share		Number of Shares		Weighted Average Price per Share
Beginning balance	8,978,871		$	10.64	9,990,580		$	15.30	7,849,542		$	15.01
Granted	3,252,322		$	8.18	4,704,349		$	8.83	3,567,990		$	15.35
Exercised	(226,727	)	$	7.76	(151,701	)	$	6.78	(627,657	)	$	7.90
Forfeited	(771,725	)	$	13.16	(5,564,357	)	$	17.58	(799,295	)	$	18.33
Ending balance	11,232,741		$	9.80	8,978,871		$	10.64	9,990,580		$	15.30

At April 1, 2007, April 2, 2006 and March 31, 2005, 6,712,945, 4,634,370 and 4,944,755 outstanding options were exercisable, respectively, with a weighted average exercise price per share of $10.59, $11.51 and $14.20, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes information about stock options outstanding and exercisable at April 1, 2007:

	Options Outstanding				Options Exercisable
Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$  0.29 –   6.99	765,411	5.31	$	6.09	650,019	$	6.01
$  7.00 –   8.12	2,887,326	4.49	$	7.71	1,125,976	$	7.64
$  8.12 –   9.20	4,525,586	4.25	$	9.03	2,368,106	$	9.08
$  9.31 – 16.57	2,554,513	5.73	$	12.63	2,099,741	$	13.17
$16.69 – 25.85	499,905	6.71	$	20.07	469,103	$	20.10
	11,232,741	4.83	$	9.80	6,712,945	$	10.59

	Year Ended
	April 1, 2007			April 2, 2006			March 31, 2005
	Number of Shares	Weighted Average Price per Share		Number of Shares	Weighted Average Price per Share		Number of Shares	Weighted Average Price per Share
Options granted with exercise prices equal to fair value at date of grant	3,252,322	$	8.18	4,704,349	$	8.83	3,567,990	$	15.35
Options granted with exercise prices less than fair value at date of grant	—	$	—	—	$	—	—	$	—

2005 Key Contributor Long-Term Incentive Plan

The 2005 Key Contributor Long-Term Incentive Plan (“KC Incentive Plan”) was adopted by the Board of Directors on December 23, 2004. Awards under the KC Incentive Plan are granted in exchange for a participant’s contributions to Magma. Awards may include (i) cash payments, and/or (ii) shares of Magma’s restricted stock granted under the 2001 Plan, that vest while the participant remains employed by and in good standing with Magma. KC Incentive Plan participants may receive cash awards prior to such awards becoming fully vested and earned. These awards are considered recoverable advances and are to be repaid to Magma in the event that the participant’s employment with Magma is terminated prior to an award being earned. All executive officers as well as certain other participants who receive a restricted stock award under the KC Incentive Plan will have accelerated vesting of such award upon a change in control of Magma. Effective upon a change in control, 25% of a participant’s unvested shares of restricted stock granted under the KC Incentive Plan will immediately become vested shares. In addition, if the participant is, or is deemed to have been, involuntarily terminated within one year after Magma’s change in control, 50% of the remaining unvested shares of restricted stock will vest. If the award so states, participants that receive a cash or stock award under the KC Incentive Plan will not be eligible to receive equity grants under Magma’s 2001 Plan, or cash awards under any other Magma cash variable award plans, until such award is fully vested. As of April 1, 2007, 391,757 shares of restricted stock, net of forfeitures, were issued under the KC Incentive Plan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Repurchases of Common Stock

On April 13, 2005, the Company announced that its Board of Directors authorized Magma to repurchase up to 2,000,000 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 2,000,000 shares of common stock. An aggregate of 1,000,000 of the repurchased shares will be used to fund the increased shares approved by the Committee under the Inducement Plan. The remaining 1,000,000 shares are being held as treasury stock and are to be used for general corporate purposes.

On July 28, 2004, the Company announced that its Board of Directors authorized Magma to repurchase up to 1,000,000 shares of common stock. The repurchase was completed in the second quarter of fiscal 2005 and the Company used approximately $16.6 million to repurchase 1,000,000 shares of common stock. All 1,000,000 of the repurchased shares will be used for Magma’s Inducement Plan.

Option Exchange Program

In June 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, the fair market value on August 22, 2005, the date the new options were granted. 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 at an exercise price of $9.20 were granted under the 2001 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 a six-month period of continued service following the grant date.

Employee Stock Purchase Plan

The 2001 Employee Stock Purchase Plan (“2001 Purchase Plan”) was established in November 2001. Employees, including officers and employee directors but excluding 5% or greater stockholders, are eligible to participate if they are employed for more than 20 hours per week and five months in any calendar year. The 2001 Purchase Plan provided for a series of overlapping offering periods with a duration of 24 months, with new offering periods, except the first offering period, which commenced on November 19, 2001, beginning in February, May, August, and November of each year. The maximum number of shares a participant may purchase during a single offering period is 4,000 shares. The 2001 Purchase Plan allows employees to purchase common stock through payroll deductions of up to 15% of their eligible compensation. Such deductions will accumulate over a three-month accumulation period without interest. After such accumulation period, shares of common stock will be purchased at a price equal to 85% of the fair market value per share of common stock on either the first day preceding the offering period or the last date of the accumulation period, whichever is less. During the year ended April 1, 2007, a total of 1,296,784 shares were issued under the 2001 Purchase Plan with average price of $5.41 per share.

As of April 1, 2007, a total of 3,369,978 shares of common stock remained available for issuance under the 2001 Purchase Plan. Starting with fiscal 2003, the number of shares reserved for issuance is increased on January 1 of each calendar year through fiscal 2011 by the lesser of 3,000,000 shares, 3% of the outstanding common stock on the last day of the immediately preceding fiscal year, or such lesser number of shares as is determined by the Board of Directors.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 11.    Stock-Based Compensation

Stock-based compensation expense by type of awards during the year ended April 1, 2007 was as follows (in thousands):

	Year Ended April 1, 2007
Stock options	$	10,489
Restricted stock and restricted stock units		3,187
Employee stock purchase plan		1,889
Total stock-based compensation expense	$	15,565

Stock Options

The Company’s stock incentive plans require that stock options be granted at the market price of the Company’s common stock on the date of grant. The weighted average grant date fair value of options granted during fiscal 2007 was $3.62 per share. The weighted average assumptions used in the model for fiscal 2007 were as follows:

	Year Ended April 1, 2007
Expected life (years)	4.14
Volatility	41-50	%
Risk-free interest rate	4.49 – 5.15	%
Expected dividend yield	0	%

A summary of the changes in stock options outstanding and exercisable under the Company’s stock incentive plans during the year ended April 1, 2007 is as follows (in thousands, except year and per share amount):

	Number of Shares		Weighted Average Price per Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Options outstanding at April 2, 2006	8,979		$	10.64		$	2,940
Granted	3,253		$	8.18
Exercised	(227	)	$	7.76
Cancelled and forfeited	(772	)	$	13.16
Options outstanding at April 1, 2007	11,233		$	9.80	4.83	$	31,831
Vested and expected to vest at April 1, 2007	10,862		$	9.84	4.85	$	30,585
Exercisable at April 1, 2007	6,713		$	10.59	5.14	$	16,512

The total intrinsic value of options exercised was $445,591 during the year ended April 1, 2007. As of April 1, 2007, there was approximately $12.2 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock option grants, which will be recognized over the remaining weighted average vesting period of approximately 1.44 years.

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Restricted Stock and Restricted Stock Units

Restricted stock and restricted stock units were granted to employees at par value under the Company’s stock incentive plans and Key Contributor Long-Term Incentive Plan, or assumed in connection with an acquisition. In general, restricted stock and restricted stock unit awards vest over two to four years and are subject to the employees’ continuing service to the Company.

A summary of the changes in restricted stock outstanding during the year ended April 1, 2007 is presented below (in thousands, except per share amount):

	Number of Shares		Weighted Average Grant Date Fair Value per Share
Shares nonvested at April 2, 2006	389		$	11.87
Granted	385		$	7.97
Vested	(308	)	$	11.58
Forfeited	(54	)	$	10.82
Shares nonvested at April 1, 2007	412		$	9.63

As of April 1, 2007, the Company had $1.9 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to restricted stock awards, which will be recognized over the remaining weighted average vesting period of approximately 1.10 years.

A summary of the changes in restricted stock units outstanding during the year ended April 1, 2007 is presented below (in thousands, except year and per share amount):

	Number of Shares		Weighted Average Price per Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Shares nonvested at April 2, 2006	—		$	—
Granted	51		$	—
Vested	(21	)	$	0.0001
Forfeited	(3	)	$	0.0001
Shares nonvested at April 1, 2007	27		$	0.0001	4.19	$	325
Vested and expected to vest at April 1, 2007	26		$	0.0001	4.03	$	312

As of April 1, 2007, there was $0.2 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to restricted stock unit awards, which will be recognized over the remaining weighted average vesting period of approximately 1.01 years.

The total fair value of restricted stock and restricted stock units that were vested was $3.4 million during the year ended April 1, 2007.

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Employee Stock Purchase Plan

The weighted average estimated grant date fair value of purchase rights granted under the ESPP during the year ended April 1, 2007 was $2.75. The weighted average assumptions used in the model for the year ended April 1, 2007 were as follows:

	Year Ended April 1, 2007
Expected life (years)	1.13
Volatility	41 - 51	%
Risk-free interest rate	4.93 - 5.11	%
Expected dividend yield	0	%

As of April 1, 2007, the Company had $2.0 million of total unrecognized compensation expense, net of estimated forfeitures, related to ESPP, which will be recognized over the remaining weighted average vesting period of 0.59 years.

Stock-Based Compensation for Fiscal 2006 and Fiscal 2005

Prior to April 2, 2006, the Company accounts for stock-based employee compensation arrangements in accordance with provisions of APB 25 and related guidance. In fiscal 2006 and fiscal 2005, the Company recognized $4.6 million and $1.9 million, respectively, of stock-based compensation expense primarily for the intrinsic value of the restricted stock awards.

During the years ended April 2, 2006 and March 31, 2005, the Company complied with the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended. 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):

	Year Ended
	April 2, 2006			March 31, 2005
Net loss attributed to common stockholders:
As reported	$	(20,937	)	$	(8,581	)
Add: Stock-based employee compensation expense included in reported net loss		4,576			1,880
Deduct: Stock-based employee compensation expense determined under fair-value method for all awards		(22,972	)		(21,931	)
Pro forma	$	(39,333	)	$	(28,632	)
Net loss per share, basic and diluted:
As reported	$	(0.61	)	$	(0.25	)
Pro forma	$	(1.15	)	$	(0.80	)

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:

	Year Ended
	April 2, 2006		March 31, 2005
Stock options	$	3.84	$	4.56
Employee stock purchase plans		2.68		3.47

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	Year Ended
	April 2, 2006		March 31, 2005
Stock options:
Risk-free interest	4.02	%	3.00	%
Expected life	3.04 years		2.63 years
Expected dividend yield	0	%	0	%
Volatility	61	%	43	%
Employee stock purchase plans:
Risk-free interest	4.26	%	2.47	%
Expected life	1.16 years		1.03 years
Expected dividend yield	0	%	0	%
Volatility	62	%	44	%

Note 12.    Commitments and Contingencies

Commitments

The Company leases its facilities under several non-cancelable operating leases expiring at various dates through December 2011. The Company also leases its computer equipment under several capital leases. Approximate future minimum lease payments under these operating leases at April 1, 2007 are as follows (in thousands):

Fiscal Year	Operating Leases		Capital Leases
2008	$	4,954	$	1,970
2009		4,635		1,211
2010		4,043		388
2011		3,269		—
2012		1,898		—
	$	18,799	$	3,569

Rent expense for the years ended April 1, 2007, April 2, 2006 and March 31, 2005 was approximately $4.0 million, $4.2 million and $4.4 million, respectively.

Contingencies

The Company is subject to some legal proceedings described below and from time to time, The Company is also involved in other disputes that arise in the ordinary course of business. The number and significance of these litigation and disputes is increasing as our business expands and the Company grows larger. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. As a result, these litigation and disputes could harm our business and have an adverse effect on our consolidated financial statements. However, the results of any litigation or dispute are inherently uncertain and, at this time, other than the Synopsys litigation, no estimate could be made of the loss or range of loss, if any, from these litigation matters and disputes. Accordingly, except for the $12.5 million legal settlement fee in connection with the Synopsys

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litigation as discussed below, the Company has not recorded any liabilities relating to these contingencies as of April 1, 2007. Litigation settlement and legal fees are expensed in the period in which they are incurred.

Litigation with Synopsys

Synopsys California Case (Related Foreign Litigation)

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 us 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”).

On September 26, 2005, Synopsys, Inc. filed an action against us 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 the Company 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. The Complaint seeks unspecified monetary damages, an unspecified restitutionary/disgorgement award, injunctive relief, fees and costs, and an accounting of all revenues and profits derived from licensing the technology at issue. 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 our motion to relate the removed action with the preexisting patent infringement action, and both actions are now assigned to Judge Maxine M. Chesney.

On November 8, 2005, Synopsys filed a motion for sanctions against us based on our assertion of non-infringement defenses and counterclaims in the litigation. The Company opposed the motion, which was set for hearing on December 16, 2005. The hearing was vacated and the motion was taken under submission by the Court.

On July 29, 2005, Synopsys filed an action against us in Japan in Civil Department No. 40 of the Tokyo District Court seeking to obtain ownership of the Japanese patent application corresponding to our ‘446 Patent.

On April 18, 2005, Synopsys filed an action against us in Germany at the Landgericht München I (District Court in Munich) seeking to obtain ownership of the European patent application corresponding to our ‘446 Patent.

Synopsys Delaware Case

On September 26, 2005, Synopsys, Inc. filed an action against us 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”). 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 us as a result of our alleged infringement of the patents-in-suit.

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 ‘328 Patent relates to methods for designing integrated circuits. The Company seeks treble damages and an injunction against Synopsys for the sale and manufacture of products the Company alleges infringe the ‘328 Patent.

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On March 24, 2006, the Company filed a motion for leave to file a Second Amended Answer and Counterclaims, to add counterclaims for infringement of U.S. Patent Nos. 6,519,745 (“the ‘745 Patent”), 6,931,610 (“the ‘610 Patent”), 6,854,093 (“the ‘093 Patent”), and 6,857,116 (“the ‘116 Patent”). All four patents relate to methods for designing integrated circuits. Synopsys opposed the motion on April 7, 2006. The Company filed its reply brief on April 14, 2006. The Court granted our motion on May 25, 2006, and the Company filed its Second Amended Answer and Counterclaims on May 31, 2006.

Settlement

On March 29, 2007 Synopsys and Magma settled all pending litigation between the companies. As part of the settlement, Synopsys and Magma agree to release all claims in California, Delaware, Germany and Japan and to cross license the patents at issue in these jurisdictions as well as any related applications, both companies agree not to initiate future patent litigation against each other for 2 years provided certain terms are met, and Magma agreed to make a payment to Synopsys of $12.5 million toward the settlement of this dispute. All other terms of the settlement are confidential.

Other Litigation

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. In March 2006, defendants filed a motion to dismiss the consolidated amended complaint. Plaintiff filed a further amended complaint in June 2006, which defendants again moved to dismiss. Defendants’ motion was granted in part and denied in part by an order dated August 18, 2006, which dismissed claims against two of the individual defendants. The case is now proceeding on the remaining claims.

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 us 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 the action has been stayed pending further developments in the putative shareholder class action referenced above.

Narpat Bhandari v. Magma Design Automation, Inc. Cadence Design Systems, Inc., Dynalith Systems, Inc., Altera Corp., Mentor Graphics, Corp. and Aldec, Inc., Case No. 6:06-CV-480, United States District Court, Eastern District of Texas, Tyler Division. On November 8, 2006, a complaint was filed alleging that the Company and several other named defendants infringe United States Patent No. 5,663,900. The complaint identifies the Company’s FineSim software, and other unidentified devices or programs, as the products accused of infringement. The Company and the other Defendants moved to dismiss the complaint on the basis that the only named plaintiff, Bhandari, does not own the ‘900 Patent. On May 11, 2007, the Court issued a Memorandum Opinion and Order granting the motion to dismiss and dismissed the case without prejudice.

Cadence Design Systems, Inc., Magma Design Automation, Inc., Altera Corp., and Mentor Graphics, Corp. v. Narpat Bhandari and Vanguard Systems, Inc., Case No. C 07-00823, United States District Court, Northern District of California, San Francisco Division. Magma and the other named plaintiffs filed a complaint for

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declaratory judgment on February 8, 2007, which we amended on March 27, 2007. The amended complaint for declaratory judgment seeks five claims of relief: (1) declaratory judgment of non-infringement of the ‘900 Patent; (2) declaratory judgment of invalidity of the ‘900 Patent; (3) lack of ownership of the ‘900 Patent; (4) the ‘900 Patent is unenforceable due to laches; and (5) declaratory judgment that unclean bars enforcement of the ‘900 Patent. We and the other Plaintiffs contend that LSI Logic is a joint owner of the ‘900 Patent and we have obtained a license from LSI. On April 6, 2007, Defendants Narpat Bhandari and Vanguard Systems, Inc. answered the amended complaint and filed a counterclaim of patent infringement of the ‘900 Patent. As in the Texas Action, the claim for patent infringement against us identified our FineSim software, and other unidentified devices or programs, as the products accused of infringement. The counterclaim seeks unspecified monetary damages, pre- and post-judgment interest, attorneys’ fees, and costs. The Court conducted a case management conference on May 21, 2007 and issued a case management order on May 23, 2007 approving Plaintiffs’ and Defendants’ proposal to bifurcate the issue of LSI’s ownership from all other remaining issues, and stay activities relating to validity, enforceability, infringement, and damages until after a bench trial to resolve the ownership issue. A trial to the Court on the issue of ownership of the ‘900 Patent is set for October 9, 2007. While the Company intends to vigorously pursue this litigation against Bhandari and Vanguard Systems, the results of any litigation are inherently uncertain and we can not assure that the Company will be able to successfully defend against claims of patent infringement. The Company is currently unable to assess the extent of damages and/or other relief, if any, that could be awarded. The Company intends to vigorously defend against the claims asserted by Bhandari and Vanguard Systems. However, the results of any litigation are inherently uncertain and the Company can not assure that the Company will be able to successfully defend against the claims of Bhandari and Vanguard Systems. The Company is currently unable to assess the extent of damages and/or other relief, if any, that could be awarded to Bhandari and Vanguard Systems.

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 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 provide may exceed the amount received from the customer. The Company estimates the fair value of its indemnification obligations to be insignificant, based upon its historical experience concerning product and patent infringement claims. Accordingly, the Company has no liabilities recorded for indemnification under these agreements as of April 1, 2007.

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 and enables the Company to recover a portion of future amounts paid. 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 April 1, 2007.

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. No liabilities have been recorded for these agreements as of April 1, 2007.

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Warranties

The Company offers certain 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 April 1, 2007. 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 13.    Segment Information

The Company has adopted the provisions of SFAS 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 chief operating decision maker (“CODM”) for purposes of evaluating performance and allocating resources. Based on this approach, the Company has one reportable segment as the CODM reviews financial information on a basis consistent with that presented in the 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, except for percentages shown):

	Year Ended
	April 1, 2007			April 2, 2006			March 31, 2005
North America*	$	121,633		$	109,434		$	82,537
Europe		19,440			27,670			26,412
Japan		22,162			14,523			26,194
Asia-Pacific		14,918			12,417			10,798
Total	$	178,153		$	164,044		$	145,941
	Year Ended
	April 1, 2007			April 2, 2006			March 31, 2005
North America*		68	%		67	%		57	%
Europe		11			17			18
Japan		13			9			18
Asia-Pacific		8			7			7
Total		100	%		100	%		100	%

* Substantially all of the Company’s North America revenue related to the United States for all periods presented.

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

	Year Ended
	April 1, 2007		April 2, 2006		March 31, 2005
Customer A	*	*	16	%	16	%

** Less than 10% of total revenue.

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

Note 14.    Income Taxes

Income tax expense consisted of the following (in thousands):

	Year Ended
	April 1, 2007			April 2, 2006			March 31, 2005
Current:
Federal	$	(123	)	$	977		$	1,574
State		27			109			227
Foreign		1,152			1,531			1,335
		1,056			2,617			3,136
Deferred:
Foreign		(54	)		(68	)		—
Total income tax expenses	$	1,002		$	2,549		$	3,136

Net loss before provision for income taxes consisted of (in thousands):

	Year Ended
	April 1, 2007			April 2, 2006			March 31, 2005
United States	$	(64,458	)	$	(20,251	)	$	(8,067	)
International		3,954			1,863			2,622
Total net loss before provision for income taxes	$	(60,504	)	$	(18,388	)	$	(5,445	)

Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pretax loss as a result of the following (in thousands):

	Year Ended
	April 1, 2007			April 2, 2006			March 31, 2005
Federal tax benefit at statutory rate	$	(21,064	)	$	(6,436	)	$	(1,906	)
Permanent differences		147			111			333
In process research and development		455			158			1,527
Tax benefit from extraterritorial income exclusion		—			(158	)		(295	)
Goodwill and intangibles		—			601			672
State tax, net of federal benefit		—			85			479
Foreign tax withholding, not benefited for U.S. tax purposes		265			287			—
Foreign tax rate differential		(769	)		532			314
Credits		(4,212	)		(1,881	)		(1,470	)
Change in valuation allowance		26,275			9,289			3,552
Other		(95	)		(39	)		(70	)
Total income tax expense	$	1,002		$	2,549		$	3,136

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U.S. income taxes and foreign withholding taxes have not been provided for on a cumulative total of 6.9 million of undistributed earnings for certain non-U.S. subsidiaries. The company intends to reinvest these earnings indefinitely in operations outside of the U.S.

The types of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are as follows (in thousands):

	April 1, 2007			April 2, 2006
Deferred tax assets:
Capitalized costs	$	2,863		$	3,376
Accrued liabilities		3,138			2,988
Property and equipment		7,481			5,671
Accrued compensation related expenses		7,915			3,486
Net operating loss and credit carryforwards		62,173			51,783
Litigation settlement		4,809			—
Gross deferred tax assets		88,379			67,304
Valuation allowance		(71,516	)		(47,189	)
Total deferred tax assets		16,863			20,115
Deferred tax liabilities—acquired intangible assets		(16,863	)		(20,115	)
Net deferred tax liabilities	$	—		$	—

At April 1, 2007, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $132.5 million and $26.2 million, respectively, available to reduce future income subject to income taxes. The federal and state net operating loss carryforwards will begin to expire in 2019 and 2010, respectively. The Company also has research credit carryforwards for federal and California tax purposes of approximately $10.2 million and $9.4 million, respectively, available to reduce future income subject to income taxes. The federal research credit carryforwards will begin to expire in 2012 through 2027, and the California research credits carry forward indefinitely.

The Company management believes that, based on a number of factors, it is more likely than not, that all or some portion of the deferred tax assets will not be realized; and accordingly, for the year ended April 1, 2007 the company has provided a valuation allowance against the Company’s net deferred tax assets. The net change in the valuation allowance for the years ended April 1, 2007 and April 2, 2006 was an increase of $24.3 million and $5.2 million, respectively.

Approximately $21.4 million of the valuation allowance at April 1, 2007 is attributable to employee stock deductions and original issue discount deductions, the benefit of which will be allocated to additional paid-in capital if and when subsequently realized. Approximately $8.0 million of the valuation allowance at April 1, 2007 is attributable to deferred assets which were recorded in connection with various acquisitions. When recognized, the benefit of these assets will be applied, first, to reduce to zero any goodwill related to these acquisitions; second, to reduce to zero other non-current intangible assets related the acquisitions; and last, to reduce income tax.

The Company’s income taxes payable for federal and state purposes were reduced by the tax benefits associated with the exercise of employee stock options and original issue discount deductions. The benefits applicable to stock options and original issue discount were credited directly to stockholders’ equity and amounted to $0.2 million for fiscal 2006. No such tax benefits were recorded to additional paid-in capital in

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fiscal 2007 because the Company is in a taxable loss position. The tax benefits applicable to acquired entities were credited directly to goodwill and other intangible assets and amounted to $0.6 million in fiscal 2006. Again, no such benefits were recorded to reduce goodwill in fiscal 2007 due to taxable loss.

The Tax Reform Act of 1986 and similar state provisions impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an “ownership change” as defined in the Internal Revenue Code. If an ownership change occurs, the Company’s ability to utilize its net operating loss and tax credit carryforwards may be subject to an annual limitation on the amount that can be utilized in future years to offset future taxable income. The annual limitations may result in the expiration of the net operating loss and tax credit carryforwards prior to utilization. The Company has determined that the utilization of the net operating losses that were recorded as part of the acquisition of Silicon Metrics Corporation will be subject to an annual limitation. As of April 1, 2007 the company had approximately $25.7 million of federal net operating losses recorded from the acquisition and may utilize approximately $1.5 million of these net operating losses each year if the Company has taxable income. During fiscal 2006, the Company also determined that the utilization of its net operating losses generated prior to April 30, 2005 is subject to an annual limitation of approximately $16.2 million.

Congress passed the American Jobs Creation Act of 2004 on October 22, 2004 (“the Act”). The Act contains numerous changes to existing tax laws, including both domestic and foreign tax incentives. The Company completed evaluating the impact of the repatriation provisions in fiscal 2006 and decided not to repatriate any of its foreign earnings. Among other things, the Act repeals an export incentive and creates a new tax deduction for qualified domestic manufacturing activities. The company expects that such deduction will not have a material impact on its reported effective tax rate.

Note 15.    Related Party Transactions

In fiscal 2004, the Company began leasing a building for its corporate headquarters from one of its customers under a seven-year lease agreement, as amended in February 2007, which expires in 2010. Under the lease amendment, the Company vacated most of the building and is not obligated to make rent payments effective January 31, 2007. In fiscal 2007, 2006 and 2005, the Company recorded $1.5 million, $1.7 million and $1.7 million, respectively, of rent expense related to this lease and recognized $7.9 million, $4.8 million and $2.1 million, respectively, in revenue from the sale of software licenses to this customer. This customer had zero and $71,000 outstanding accounts receivable balance at April 1, 2007 and April 2, 2006, respectively.

As of April 1, 2007, Magma has invested approximately $0.9 million in a private company. The private company purchased software licenses from Magma and Magma recognized $0.5 million in revenue from the software licenses during fiscal year 2005 and did not recognized any revenue from the software licenses during fiscal 2006 and 2007.

Note 16.    Employee Benefit Plan

Effective April 1, 1997, the Company adopted a plan (the “401(k) Plan”) that is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986. The 401(k) Plan covers essentially all employees. Eligible employees may make voluntary contributions to the 401(k) Plan up to 20% of their annual eligible compensation. The Company is permitted to make contributions to the 401(k) Plan as determined by the Board of Directors. The Company has not made any contributions to the Plan.

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Schedule II—Valuation and Qualifying Accounts

Years Ended April 1, 2007, April 2, 2006 and March 31, 2005

(in thousands)

	Balance at Beginning of Period		Additions Charged to Costs and Expenses	Write-offs, Net of Recoveries		Balance at End of Period
Year ended April 1, 2007
Allowance for doubtful accounts	$	115	88	(148	)	$	55
Year ended April 2, 2006
Allowance for doubtful accounts	$	425	282	(592	)	$	115
Year ended March 31, 2005
Allowance for doubtful accounts	$	323	187	(85	)	$	425

Selected Consolidated Quarterly Financial Data (Unaudited)

The following table presents selected unaudited consolidated financial data for each of the eight quarters in the two-year period ended April 1, 2007. In the Company’s opinion, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the financial information for the period presented.

	Quarter
	First			Second			Third			Fourth
FY 2007
Revenue	$	40,959		$	41,962		$	45,094		$	50,138
Gross profit	$	28,393		$	28,751		$	31,075		$	35,355
Net loss	$	(10,713	)	$	(12,421	)	$	(13,561	)	$	(24,490	)
Net loss per share—Basic and diluted(1)	$	(0.30	)	$	(0.34	)	$	(0.37	)	$	(0.65	)
	Quarter
	First			Second			Third			Fourth
FY 2006
Revenue	$	38,832		$	39,886		$	41,320		$	44,006
Gross profit	$	30,561		$	28,878		$	30,435		$	32,455
Net loss	$	(23	)	$	(6,620	)	$	(8,068	)	$	(6,226	)
Net loss per share—Basic and diluted(1)	$	(0.00	)	$	(0.19	)	$	(0.23	)	$	(0.18	)

(1) Earnings per share is computed independently for each of the quarters presented. The sum of the quarterly earnings per share in fiscal 2007 and 2006 does not equal the total computed for the year due to rounding.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.    Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”.)

The evaluation of our disclosure controls and procedures included a review of our processes and implementation and the effect on the information generated for use in this Annual Report on Form 10-K. In the course of this evaluation, we sought to identify any significant deficiencies or material weaknesses in our internal control over financial reporting, which is part of our disclosure controls and procedures, to determine whether we had identified any acts of fraud involving personnel who have a significant role in our disclosure controls and procedures, and to confirm that any necessary corrective action, including process improvements, was taken. The overall goals of these evaluation activities are to monitor our disclosure controls and procedures and to make modifications as necessary. We intend to maintain these disclosure controls and procedures, modifying them as circumstances warrant.

Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that information relating to us, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this Annual Report on Form 10-K was being prepared.

Inherent Limitations on Effectiveness of Controls.    In designing and evaluating our disclosure controls and procedures, our management, including our principal executive officer and our principal financial officer, recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of a control system must take into account the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any disclosure controls and procedures also is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. However, our disclosure controls and procedures have been designed to meet, and our management believes that they meet, reasonable assurance levels.

Management’s Report on Internal Control over Financial Reporting.    Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-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 in accordance with generally accepted accounting principles.

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We assessed the effectiveness of our internal control over financial reporting as of April 1, 2007. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework. Based on our assessment using those criteria, we concluded that our internal control over financial reporting was effective as of April 1, 2007.

Our independent registered public accounting firm has issued an audit report on our assessment of the effectiveness of the Company’s internal control over financial reporting and on the effectiveness of internal control over financial reporting as of April 1, 2007. This report appears under Item 8 of this Annual Report.

Changes in Internal Control over Financial Reporting.    Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, we concluded that there has not been any change in our internal control over financial reporting during that quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

Not applicable.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to our directors and our compliance with Section 16(a) of the Exchange Act, will be presented under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance”, respectively, in our definitive proxy statement to be filed with the Securities and Exchange Commission and mailed to our stockholders in connection with our 2007 Annual Meeting of Stockholders to be held on August 29, 2007. That information is incorporated into this report by reference. Certain information required by this item concerning executive officers is set forth in Part I of this Report under the caption “Executive Officers of the Registrant.”

We have adopted a Code of Conduct and Ethics that applies to our principal executive officer, principal financial officer, controller and all of our other employees. This Code of Conduct and Ethics is posted on our website at http://investor.magma-da.com/governance/home.cfm. If applicable, we intend to satisfy our disclosure obligations regarding our amendment to, or waiver from, a provision of this Code of Conduct and Ethics by posting such information on our website at http://investor.magma-da.com/governance/home.cfm.

ITEM 11.    EXECUTIVE COMPENSATION

Information relating to executive compensation will be presented under the caption “Executive Compensation” in our definitive proxy statement. That information is incorporated into this report by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information relating to the security ownership of our common stock by our management and other beneficial owners will be presented under the caption “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement. That information is incorporated into this report by reference. Information relating to securities authorized for issuance under equity compensation plans will be presented under the caption “Securities Authorized for Issuance under Equity Compensation Plans” in our definitive proxy statement. That information is incorporated into this report by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item 13 is incorporated by reference from the information contained under the caption “Certain Relationships and Related Transactions” in our definitive proxy statement.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference from the information contained under the caption “Ratification of Independent Accountants—Audit and Non-Audit Fees” and “Ratification of Independent Accountants—Pre-Approval Policies and Procedures” contained in our definitive proxy statement.

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this report on Form 10-K:

(1) Consolidated Financial Statements.    Reference is made to the Index to Registrant’s Consolidated Financial Statements under Item 8 in Part II of this Form 10-K.

(2) Financial Statement Schedules.    Reference is made to the Index to Registrant’s Consolidated Financial Statements under Item 8 in Part II of this Form 10-K.

(3) Exhibits.    Reference is made to Item 15(b) below.

(b) Exhibits.

The exhibit list in the Exhibit Index is incorporated herein by reference as the list of exhibits required as part of this item.

(c) Financial statements schedules.

Reference is made to Item 15(a)(2) above.

112

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Dated: June 6, 2007

MAGMA DESIGN AUTOMATION, INC.
By	/s/    RAJEEV MADHAVAN
	Rajeev Madhavan, Chief Executive Officer
By	/s/    PETER S. TESHIMA
	Peter S. Teshima, Corporate Vice President, Finance and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/    RAJEEV MADHAVAN         Rajeev Madhavan	Chief Executive Officer and Director (Principal Executive Officer)	June 6, 2007
/s/    PETER S. TESHIMA         Peter S. Teshima	Corporate Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	June 6, 2007
/s/    ROY E. JEWELL         Roy E. Jewell	President, Chief Operating Officer and Director	June 6, 2007
/s/    KEVIN C. EICHLER         Kevin C. Eichler	Director	June 6, 2007
/s/    SUSUMU KOHYAMA         Susumu Kohyama	Director	June 6, 2007
/s/    THOMAS ROHRS         Thomas Rohrs	Director	June 6, 2007
/s/    TIMOTHY J. NG         Timothy J. Ng	Director	June 6, 2007
/s/    CHET SILVESTRI         Chet Silvestri	Director	June 6, 2007

113

EXHIBIT INDEX

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
2.1	Agreement and Plan of Reorganization, dated February 23, 2004, by and among the Registrant, Motorcar Acquisition Corp., Auto Acquisition Corp., Mojave, Inc. and Vivek Raghavan, as Representative	8-K	000-33213	2.1	May 14, 2004
3.1	Amended and Restated Certificate of Incorporation	10-K	000-33213	3.1	June 28, 2002
3.2	Certificate of Correction to the Amended and Restated Certificate of Incorporation	10-K	000-33213	3.2	June 28, 2002
3.3	Amended and Restated Bylaws	10-K	000-33213	3.3	June 28, 2002
4.1	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
4.2	Form of Common Stock Certificate	S-1/A	333-60838	4.1	November 15, 2001
4.3	Indenture, dated as of May 22, 2003, between the Registrant and U.S. Bank National Association, as Trustee (including form of Zero Coupon Convertible Subordinated Note due May 15, 2008)	10-K	0-33213	4.3	June 20, 2003
4.4	Form of Indenture, dated March 5, 2007, by and between Magma Design Automation, Inc. and U.S. Bank National Association, as Trustee (including form of 2.00% Convertible Senior Note due May 15, 2010)	8-K	000-33213	10.3	March 5, 2007
4.5	Registration Rights Agreement, dated as of May 22, 2003, between the Registrant, Credit Suisse First Boston LLC and UBS Warburg LLC	10-K	0-33213	4.4	June 20, 2003
4.6	Form of Registration Rights Agreement, dated March 5, 2007, by and between Magma Design Automation, Inc. and certain other party thereto	8-K	000-33213	10.2	March 5, 2007
4.7	Form of Supplemental Indenture, dated March 15, 2007, by and between Magma Design Automation, Inc. and U.S. Bank National Association, as Trustee (form of note is the same as the form of 2.00% Convertible Senior Note due May 15, 2010 and included in Exhibit 4.4)	8-K	000-33213	10.3	March 16, 2007

114

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
4.8	Form of Registration Rights Agreement Amendment, dated March 15, 2007, by and between Magma Design Automation, Inc. and certain other parties thereto	8-K	000-33213	10.2	March 16, 2007
10.1#	Registrant’s 2001 Stock Incentive Plan, as amended					X
10.2	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)	10-Q	000-33213	10.1	November 14, 2005
10.3#	Form Notice of Grant of Stock Options pursuant to Magma’s 2001 Stock Incentive Plan for Executive Officers	10-Q	000-33213	10.2	November 14, 2005
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 countries other than the United States, China, Israel, Italy and the United Kingdom	10-Q	000-33213	10.3	November 14, 2005
10.5	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	10-Q	000-33213	10.4	November 14, 2005
10.6	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	10-Q	000-33213	10.5	November 14, 2005
10.7	Notice of Restricted Share Award and Restricted Share Agreement pursuant to Magma’s 2001 Stock Incentive Plan for non-Executive Employees	10-Q	000-33213	10.6	November 14, 2005
10.8#	Notice of Restricted Share Award and Restricted Share Agreement pursuant to Magma’s 2001 Stock Incentive Plan for Executive Officers	10-Q	000-33213	10.7	November 14, 2005
10.9#	2005 Key Contributor Long-Term Incentive Plan	10-Q	000-33213	10.8	November 14, 2005
10.10#	Registrant’s 2001 Employee Stock Purchase Plan, as amended					X
10.11#	Registrant’s 2004 Employment Inducement Award Plan, as amended	8-K	000-33213	10.1	January 30, 2006
10.12#	1998 Stock Incentive Plan	S-1	333-60838	10.4	May 14, 2001

115

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
10.13#	Form of Stock Option Agreement in connection with the Registrant’s 1998 Stock Incentive Plan	S-1/A	333-60838	10.10	August 14, 2001
10.14#	Form of Amendment to Stock Option Agreement in connection with the Registrant’s 1998 Stock Incentive Plan	S-1/A	333-60838	10.11	August 14, 2001
10.15#	1997 Stock Incentive Plan	S-1	333-60838	10.5	May 14, 2001
10.16#	Moscape, Inc. 1997 Incentive Stock Plan	S-1	333-60838	10.6	May 14, 2001
10.17	Agreement and Plan of Merger and Reorganization, dated as of October 16, 2003, among the Company, Silicon Metrics Corporation, Silicon Correlation, Inc., and Vess Johnson and Austin Ventures V, L.P., as Stockholder Agents	8-K	000-33213	2.1	October 31, 2003
10.18	Second Amended and Restated Agreement and Plan of Reorganization, dated July 7, 2000, between the Registrant, Magma Acquisition Corp. and Moscape, Inc.	S-1	333-60838	2.3	May 14, 2001
10.19#	Stock Option Agreement entered into between the Registrant and Rajeev Madhavan dated September 29, 2000	S-1/A	333-60838	10.8	August 14, 2001
10.20#	Stock Option agreement entered into between the Registrant and Rajeev Madhavan dated September 29, 2000	S-1/A	333-60838	10.9	August 14, 2001
10.21#	Stock Option Agreement entered into between the Registrant and Roy E. Jewell dated March 30, 2001	S-1/A	333-60838	10.13	August 14, 2001
10.22#	Form of Stock Option Agreement for agreements between the Registrant and Roy E. Jewell dated March 30, 2001	S-1/A	333-60838	10.14	August 14, 2001
10.23	Lease for corporate headquarters dated June 19, 2003, between Registrant and 3Com Corporation (assumed by Marvell Semiconductor from 3Com)	10-Q	000-33213	10.2	November 14, 2003
10.24#	Summary of Standard Director Compensation Arrangements for Non-Employee Directors					X
10.25	Warrant Agreement	10-Q	000-33213	10.1	August 12, 2005
10.26	Form of Indemnification Agreement Between the Registrant and certain directors and officers	S-1	333-60838	10.1	May 14, 2001

116

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
10.27(a)#	Summary of Compensation Arrangement for Certain Executive Officers					X
10.27(b)#	Schedule of Certain Executive Officers for the Summary of Compensation Arrangement Set Forth in Exhibit 10.27(a)					X
10.28	Office Lease Agreement between Registrant and CA-Skyport I Limited Partnership dated December 28, 2006	10-Q	0-33213	10.1	February 8, 2007
10.29	Sub-Sub Lease Agreement between Registrant and Siemens Communications Inc. dated November 15, 2006 and becoming effective on December 28, 2006	10-Q	0-33213	10.2	February 8, 2007
10.30	Amendment Number One to Lease for corporate headquarters dated June 19, 2003, between Registrant and 3Com Corporation (assumed by Marvell Semiconductor from 3Com)					X
10.31	Form of Exchange Agreement, dated February 27, 2007, by and between Magma Design Automation, Inc. and certain other party thereto	8-K	000-33213	10.1	March 5, 2007
10.32	Form of Registration Rights Agreement, dated March 5, 2007, by and between Magma Design Automation, Inc. and certain other party thereto	8-K	000-33213	10.2	March 5, 2007
10.33	Form of Indenture, dated March 5, 2007, by and between Magma Design Automation, Inc. and U.S. Bank National Association, as Trustee	8-K	000-33213	10.3	March 5, 2007
10.34	Form of Exchange Agreement, dated March 14, 2007, by and between Magma Design Automation, Inc. and certain other party thereto	8-K	000-33213	10.1	March 16, 2007
10.35	Form of Registration Rights Agreement Amendment, dated March 15, 2007, by and between Magma Design Automation, Inc. and certain other parties thereto	8-K	000-33213	10.2	March 16, 2007
10.36	Form of Supplemental Indenture, dated March 15, 2007, by and between Magma Design Automation, Inc. and U.S. Bank National Association, as Trustee	8-K	000-33213	10.3	March 16, 2007
10.37	Settlement Agreement by and between Synopsys, Inc. and Registrant (Portions of this Settlement Agreement Exhibit have been omitted pursuant to a request for confidential treatment.)					X

117

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
21.1	List of Subsidiaries					X
23.1	Consent of Grant Thornton LLP					X
23.2	Consent of PricewaterhouseCoopers LLP					X
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer					X
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer					X
32.1*	Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
32.2*	Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X

# Indicates management contract or compensatory plan or arrangement.

* As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Annual Report on Form 10-K and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Magma Design Automation, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

118

EX-10.1

EXHIBIT 10.1

MAGMA DESIGN AUTOMATION, INC.

2001 STOCK INCENTIVE PLAN

(Adopted by the Board on May 4, 2001)

(Amended at the Annual Meeting of Stockholders on August 29, 2003)

(Amended by the Board on January 23, 2007)

TABLE OF CONTENTS

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

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

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

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

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MAGMA DESIGN AUTOMATION, INC.

2001 STOCK INCENTIVE PLAN

SECTION 1. ESTABLISHMENT AND PURPOSE.

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

SECTION 2. DEFINITIONS.

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

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

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

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

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

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

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

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

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

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

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

(v) Both:

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

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

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

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

- 2 -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION 3. ADMINISTRATION.

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

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

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

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

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

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

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

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

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

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

(v) To select the Offerees and Optionees;

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

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

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

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

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

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

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

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

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

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

SECTION 4. ELIGIBILITY.

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

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

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

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

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

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

(v)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION 5. STOCK SUBJECT TO PLAN.

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

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

(c) Additional Shares. If Restricted Shares or Shares issued upon the exercise of Options are forfeited, then such Shares shall again become available for Awards under the Plan. If Stock Units, Options or SARs are forfeited or terminate for any other reason before being exercised,

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

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

SECTION 6. RESTRICTED SHARES.

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

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

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

(d) Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other stockholders. A Restricted Stock Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid.

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

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

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

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

SECTION 8. TERMS AND CONDITIONS OF OPTIONS.

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

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

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

(d) Withholding Taxes. As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state

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

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

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

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

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

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

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

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

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

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

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

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

SECTION 9. PAYMENT FOR SHARES.

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

(b) Surrender of Stock. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by surrendering, or attesting to the ownership of, Shares which have already been owned by the Optionee or his representative for more than 12 months. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are

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purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes.

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

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

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

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

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

SECTION 10. STOCK APPRECIATION RIGHTS.

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

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

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

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

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

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

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

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

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

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SECTION 11. STOCK UNITS.

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

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

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

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

(e) Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Shares or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Section 12.

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

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

SECTION 12. ADJUSTMENT OF SHARES.

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

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

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

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

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

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

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

Except as provided in this Section 12, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class.

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

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

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

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

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

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

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

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

SECTION 13. DEFERRAL OF AWARDS.

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

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

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

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

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

SECTION 14. AWARDS UNDER OTHER PLANS.

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

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

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

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

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

SECTION 16. LEGAL AND REGULATORY REQUIREMENTS.

Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations and the regulations of any stock exchange on which the Company’s securities may then be listed, and the Company has obtained the approval or favorable ruling from any governmental agency which the Company determines is necessary or advisable.

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SECTION 17. WITHHOLDING TAXES.

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

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

SECTION 18. LIMITATION ON PARACHUTE PAYMENTS.

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

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

(c) Reduction of Payments. If the Auditors determine that any Payment would be nondeductible by the Company because of Section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Section 18, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Auditors under this Section 18 shall be binding upon the Company and the Participant and shall be made within 60 days of the date when a Payment becomes payable or

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transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan.

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

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

SECTION 19. NO EMPLOYMENT RIGHTS.

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

SECTION 20. DURATION AND AMENDMENTS.

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

(b) Right to Amend or Terminate the Plan. The Board of Directors may amend the Plan at any time and from time to time. Rights and obligations under any Option granted before amendment of the Plan shall not be materially impaired by such amendment, except with consent of the person to whom the Option was granted. An amendment of the Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable laws, regulations or rules.

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

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SECTION 21. EXECUTION.

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

MAGMA DESIGN AUTOMATION, INC.
By	/s/ Rajeev Madhavan
Title

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EX-10.10

EXHIBIT 10.10

MAGMA DESIGN AUTOMATION, INC.

2001 EMPLOYEE STOCK PURCHASE PLAN

(Originally Adopted by the Board on May 4, 2001.)

(Composite Plan Document incorporating Amendments adopted by the Board on

January 26, 2004, March 24, 2006, September 20, 2006, and January 23, 2007.)

MAGMA DESIGN AUTOMATION, INC.

2001 EMPLOYEE STOCK PURCHASE PLAN

SECTION 1 Purpose Of The Plan.

The Plan was adopted by the Board on May 4, 2001, effective as of the date of the IPO. The purpose of the Plan is to provide Eligible Employees with an opportunity to increase their proprietary interest in the success of the Company by purchasing Stock from the Company on favorable terms and to pay for such purchases through payroll deductions. The Plan is intended to qualify under section 423 of the Code, although the Company makes no undertaking nor representation to maintain such qualification. In addition, this Plan document authorizes the grant of rights to purchase Stock under a Non-423(b) Plan which do not qualify under Section 423(b) of the Code, pursuant to rules, procedures or sub-plans adopted by the Committee designed to achieve tax, securities law or other Company objectives in particular locations outside the United States.

SECTION 2 Definitions.

(a) “Accumulation Period” means a three-month period during which contributions may be made toward the purchase of Stock under the Plan, as determined pursuant to Section 4(b).

(b) “Board” means the Board of Directors of the Company, as constituted from time to time. “Code” means the Internal Revenue Code of 1986, as amended.

(c) “Affiliate” shall mean any Subsidiary or other entity in which the Company has an equity interest.

(d) “Code” means the Internal Revenue Code of 1986, as amended.

(e) “Code Section 423(b) Plan” means an employee stock purchase plan which is designed to meet the requirements set forth in Section 423(b) of the Code, as amended. The provisions of the Code Section 423(b) Plan shall be construed, administered and enforced in accordance with Section 423(b).

(f) “Committee” means a committee of the Board, as described in Section 3.

(g) “Company” means Magma Design Automation, Inc., a Delaware Corporation.

(h) “Compensation” means (i) the compensation paid in cash to a Participant by a Participating Company, including salaries, wages, incentive compensation, bonuses, overtime pay and shift premiums, plus (ii) any pre-tax contributions made by the Participant under section 401(k) or 125 of the Code. “Compensation” shall exclude all non-cash items, commissions, moving or relocation allowances, cost-of-living equalization payments, car allowances, tuition reimbursements, imputed income attributable to cars or life insurance, severance pay, fringe benefits, contributions or benefits received under employee benefit plans, income attributable to the exercise of stock options, and similar items. The Committee shall determine whether a particular item is included in Compensation.

(i) “Corporate Reorganization” means:

(i) The consummation of a merger or consolidation of the Company with or into another entity, or any other corporate reorganization;

(ii) or the sale, transfer or other disposition of all or substantially all of the Company’s assets or the complete liquidation or dissolution of the Company.

(j) “Eligible Employee” means any employee of a Participating Company whose customary employment is for more than five months per calendar year and for more than 20 hours per week.

The foregoing notwithstanding, an individual shall not be considered an Eligible Employee if his or her participation in the Plan is prohibited by the law of any country which has jurisdiction over him or her or if he or she is subject to a collective bargaining agreement that does not provide for participation in the Plan.

(k) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(l) “Fair Market Value” means the market price of Stock, determined by the Committee as follows:

(i) If Stock was traded on The Nasdaq National Market on the date in question, then the Fair Market Value shall be equal to the last-transaction price quoted for such date by The Nasdaq National Market;

(ii) If Stock was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite transactions report for such date; or (iii) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate.

Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in the Wall Street Journal or as reported directly to the Company by Nasdaq or a stock exchange. Such determination shall be conclusive and binding on all persons.

(m) “IPO” means the initial offering of Stock to the public pursuant to a registration statement filed by the Company with the Securities and Exchange Commission.

(n) “Non-423(b) Plan” means an employee stock purchase plan which does not meet the requirements set forth in Section 423(b) of the Code, as amended.

(o) “Offering Period” means a 24-month period with respect to which the right to purchase Stock may be granted under the Plan, as determined pursuant to Section 4(a).

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(p) “Participant” means an Eligible Employee who elects to participate in the Plan, as provided in Section 4(c).

(q) “Participating Company” means (i) the Company and (ii) each present or future Affiliate or Subsidiary designated by the Committee as a Participating Company. The Committee may determine that employees of any Affiliate or Subsidiary shall participate in the Non-423(b) Plan.

(r) “Plan” means this Magma Design Automation, Inc. 2001 Employee Stock Purchase Plan, as it may be amended from time to time, which includes a Code Section 423(b) Plan and a Non-Code Section 423(b) Plan.

(s) “Plan Account” means the account established for each Participant pursuant to Section 8(a).

(t) “Purchase Price” means the price at which Participants may purchase Stock under the Plan, as determined pursuant to Section 8(b).

(u) “Stock” means the Common Stock of the Company.

(v) “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

SECTION 3 Administration Of The Plan.

(a) Committee Composition. The Plan shall be administered by the Committee. The Committee shall consist exclusively of one or more directors of the Company, who shall be appointed by the Board.

(b) Committee Responsibilities. The Committee shall interpret the Plan and make all other policy decisions relating to the operation of the Plan. The Committee may adopt such rules, guidelines and forms, including sub-plans applicable to specific Affiliates or locations, as it deems appropriate to implement the Plan. The Committee’s determinations under the Plan shall be final and binding on all persons.

SECTION 4 Enrollment And Participation.

(a) Offering Periods. While the Plan is in effect, four Offering Periods shall commence in each calendar year. The Offering Periods shall consist of the 24-month periods commencing on each February 1, May 1, August 1 and November 1, except that the first Offering Period shall commence on the date of the IPO and end on October 31, 2003.

(b) Accumulation Periods. While the Plan is in effect, four Accumulation Periods shall commence in each calendar year. The Accumulation Periods shall consist of the three-month periods commencing on February 1, May 1, August 1 and November 1, except that the first Accumulation Period shall commence on the date of the IPO and end on January 31, 2002.

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(c) Enrollment. Any individual who, on the day preceding the first day of an Offering Period (other than the initial Offering Period), qualifies as an Eligible Employee may elect to become a Participant in the Plan for such Offering Period by executing the enrollment form prescribed for this purpose by the Committee. The enrollment form shall be filed with the Company at the prescribed location not later than 15 days prior to the commencement of such Offering Period. All Eligible Employees shall be automatically enrolled in the initial Offering Period under the Plan.

(d) Duration of Participation. Once enrolled in the Plan, a Participant shall continue to participate in the Plan until he or she ceases to be an Eligible Employee, withdraws from the Plan under Section 6(a) or reaches the end of the Offering Period in which his or her employee contributions were discontinued under Section 5(d) or 9(b). A Participant who discontinued employee contributions under Section 5(d) or 9(b) or withdrew from the Plan under Section 6(a) may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Subsection (c) above. A Participant whose employee contributions were discontinued automatically under Section 9(b) shall automatically resume participation at the beginning of the earliest Offering Period ending in the next calendar year, if he or she then is an Eligible Employee.

(e) Applicable Offering Period. For purposes of calculating the purchase price under Section 8(b), the applicable Offering Period shall be determined as follows:

(i) Once a Participant is enrolled in the Plan for an Offering Period, such Offering Period shall continue to apply to him or her until the earliest of: (A) the end of such Offering Period; (B) the end of his or her participation under Subsection (d) above; or (C) re-enrollment in a subsequent Offering Period under Paragraph (ii) below.

(ii) In the event that the Fair Market Value of Stock on the last trading day before the commencement of the Offering Period in which the Participant is enrolled is higher than on the last trading day before the commencement of any subsequent Offering Period, the Participant shall automatically be re-enrolled for such subsequent Offering Period.

(iii) When a Participant reaches the end of an Offering Period but his or her participation is to continue, then such Participant shall automatically be re-enrolled for the Offering Period that commences immediately after the end of the prior Offering Period.

SECTION 5 Employee Contributions.

(a) Frequency of Payroll Deductions. A Participant may purchase shares of Stock under the Plan solely by means of payroll deductions; provided, however, that in the initial Accumulation Period, Participants may also purchase shares of Stock by making a lump sum cash payment at the end of the Accumulation Period. Payroll deductions, as designated by the Participant pursuant to Subsection (b) below, shall occur on each payday during participation in the Plan.

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(b) Amount of Payroll Deductions. An Eligible Employee shall designate on the enrollment form the portion of his or her Compensation that he or she elects to have withheld for the purchase of Stock. Such portion shall be a whole percentage of the Eligible Employee’s Compensation, but not less than 1% nor more than 15%. During the initial Accumulation Period, no payroll deduction will be made unless a Participant timely files the proper form with the Company after a registration statement covering the Stock is filed and effective under the Securities Act of 1933, as amended.

(c) Changing Withholding Rate. If a Participant wishes to change the rate of payroll withholding, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. If filed on or after April 3, 2006, the new withholding rate shall be effective as soon as reasonably practicable after such form has been received by the Company, but in no event earlier than the start of the next Accumulation Period thereafter. If filed prior to April 3, 2006, the new withholding rate shall be effective as soon as reasonably practicable after such form has been received by the Company. The new withholding rate shall be a whole percentage of the Eligible Employee’s Compensation, but not less than 1% nor more than 15%.

(d) Discontinuing Payroll Deductions. If a Participant wishes to discontinue employee contributions entirely, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. Payroll withholding shall cease as soon as reasonably practicable after such form has been received by the Company. Discontinuation of employee contributions will be treated as a withdrawal from the Plan pursuant to Section 6(a) effective immediately after the next purchase of shares of Stock. In addition, employee contributions may be discontinued automatically pursuant to Section 9(b). A Participant who has discontinued employee contributions, and thereby withdrawn from the Plan, may re-enroll in the Plan under Section 4(c). Payroll withholding shall resume as soon as reasonably practicable after such form has been received by the Company.

(e) Limit on Number of Elections. No Participant shall make more than 1 election under Subsection (c) or (d) above during any Accumulation Period.

SECTION 6 Withdrawal From The Plan.

(a) Withdrawal. A Participant may elect to withdraw from the Plan by filing the prescribed form with the Company at the prescribed location at any time before the last day of an Accumulation Period; provided, however, that in the initial Accumulation Period, Participants may be deemed to withdraw from the Plan by declining or failing to remit timely payment to the Company for the shares of Stock. As soon as reasonably practicable thereafter, payroll deductions shall cease and the entire amount credited to the Participant’s Plan Account shall be refunded to him or her in cash, without interest. No partial withdrawals shall be permitted.

(b) Re-enrollment After Withdrawal. A former Participant who has withdrawn from the Plan shall not be a Participant until he or she re-enrolls in the Plan under Section 4(c). Re-enrollment may be effective only at the commencement of an Offering Period.

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SECTION 7 Change In Employment Status.

(a) Termination of Employment. Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under Section 6(a). A transfer from one Participating Company to another shall not be treated as a termination of employment.

(b) Leave of Absence. For purposes of the Plan, employment shall not be deemed to terminate when the Participant goes on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. Employment, however, shall be deemed to terminate 90 days after the Participant goes on a leave, unless a contract or statute guarantees his or her right to return to work. Employment shall be deemed to terminate in any event when the approved leave ends, unless the Participant immediately returns to work.

(c) Death. In the event of the Participant’s death, the amount credited to his or her Plan Account shall be paid to a beneficiary designated by him or her for this purpose on the prescribed form or, if none, to the Participant’s estate. Such form shall be valid only if it was filed with the Company at the prescribed location before the Participant’s death.

SECTION 8 Plan Accounts And Purchase Of Shares.

(a) Plan Accounts. The Company shall maintain a Plan Account on its books in the name of each Participant. Whenever an amount is deducted from the Participant’s Compensation under the Plan, such amount shall be credited to the Participant’s Plan Account. Amounts credited to Plan Accounts shall not be trust funds and may be commingled with the Company’s general assets and applied to general corporate purposes. No interest shall be credited to Plan Accounts.

(b) Purchase Price. The Purchase Price for each share of Stock purchased at the close of an Accumulation Period shall be the lower of:

(i) 85% of the Fair Market Value of such share on the last trading day in such Accumulation Period; or

(ii) 85% of the Fair Market Value of such share on the last trading day before the commencement of the applicable Offering Period (as determined under Section 4(e)) or, in the case of the first Offering Period under the Plan, 85% of the price at which one share of Stock is offered to the public in the IPO.

(c) Number of Shares Purchased. As of the last day of each Accumulation Period, each Participant shall be deemed to have elected to purchase the number of shares of Stock calculated in accordance with this Subsection (c), unless the Participant has previously elected to withdraw from the Plan in accordance with Section 6(a). The amount then in the Participant’s Plan Account shall be divided by the Purchase Price, and the number of shares that results shall be purchased from the Company with the funds in the Participant’s Plan Account. The foregoing notwithstanding, no Participant shall purchase more than 4,000 shares of Stock with respect to any Accumulation Period nor more than the amounts of Stock set forth in Sections 9(b) and 14(a). Any fractional share, as calculated under this Subsection (c), shall be rounded down to the next lower whole share.

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(d) Available Shares Insufficient. In the event that the aggregate number of shares that all Participants elect to purchase during an Accumulation Period exceeds the maximum number of shares remaining available for issuance under Section 14(a), then the number of shares to which each Participant is entitled shall be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the number of shares that such Participant has elected to purchase and the denominator of which is the number of shares that all Participants have elected to purchase.

(e) Issuance of Stock. Certificates representing the shares of Stock purchased by a Participant under the Plan shall be issued to him or her as soon as reasonably practicable after the close of the applicable Accumulation Period, except that the Committee may determine that such shares shall be held for each Participant’s benefit by a broker designated by the Committee (unless the Participant has elected that certificates be issued to him or her). Shares may be registered in the name of the Participant or jointly in the name of the Participant and his or her spouse as joint tenants with right of survivorship or as community property.

(f) Unused Cash Balances. An amount remaining in the Participant’s Plan Account that represents the Purchase Price for any fractional share shall be carried over in the Participant’s Plan Account to the next Accumulation Period. Any amount remaining in the Participant’s Plan Account that represents the Purchase Price for whole shares that could not be purchased by reason of Subsection (c) above, Section 9(b) or Section 14(a) shall be refunded to the Participant in cash, without interest.

(g) Stockholder Approval. Any other provision of the Plan notwithstanding, no shares of Stock shall be purchased under the Plan unless and until the Company’s stockholders have approved the adoption of the Plan.

SECTION 9 Limitations On Stock Ownership.

(a) Five Percent Limit. Any other provision of the Plan notwithstanding, no Participant shall be granted a right to purchase Stock under the Plan if such Participant, immediately after his or her election to purchase such Stock, would own stock possessing more than 5% of the total combined voting power or value of all classes of stock of the Company or any parent or Subsidiary of the Company. For purposes of this Subsection (a), the following rules shall apply:

(i) Ownership of stock shall be determined after applying the attribution rules of section 424(d) of the Code;

(ii) Each Participant shall be deemed to own any stock that he or she has a right or option to purchase under this or any other plan; and

(iii) Each Participant shall be deemed to have the right to purchase up to 4,000 shares of Stock under this Plan with respect to each Accumulation Period.

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(b) Dollar Limit. Any other provision of the Plan notwithstanding:

(i) For any Offering Period commencing after December 31, 2003, no Participant shall accrue the right to purchase Stock in an Offering Period at a rate greater than is then permitted under section 423(b)(8) of the Code (or any successor provision thereto); and

(ii) For any Offering Period commencing prior to January 1, 2004, no Participant shall purchase Stock with a Fair Market Value in excess of $25,000 per calendar year (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company).

For purposes of this Subsection (b), the Fair Market Value of Stock shall be determined in each case as of the beginning of the Offering Period in which such Stock is purchased. Employee stock purchase plans not intended to come within the scope of section 423 of the Code shall be disregarded for purposes of this calculation. If a Participant is precluded by this Subsection (b) from purchasing additional Stock under the Plan, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Accumulation Period ending in the next calendar year (if he or she then is an Eligible Employee).

SECTION 10 Rights Not Transferable.

The rights of any Participant under the Plan, or any Participant’s interest in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or in any other manner other than by beneficiary designation or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by beneficiary designation or the laws of descent and distribution, then such act shall be treated as an election by the Participant to withdraw from the Plan under Section 6(a).

SECTION 11 No Rights As An Employee.

Nothing in the Plan or in any right granted under the Plan shall confer upon the Participant any right to continue in the employ of a Participating Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Participating Companies or of the Participant, which rights are hereby expressly reserved by each, to terminate his or her employment at any time and for any reason, with or without cause.

SECTION 12 No Rights As A Stockholder.

A Participant shall have no rights as a stockholder with respect to any shares of Stock that he or she may have a right to purchase under the Plan until such shares have been purchased on the last day of the applicable Offering Period.

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SECTION 13 Securities Law Requirements.

Shares of Stock shall not be issued under the Plan unless the issuance and delivery of such shares comply with (or are exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company’s securities may then be traded.

SECTION 14 Stock Offered Under The Plan.

(a) Authorized Shares. A total of One Million (1,000,000) shares of Stock have been reserved for issuance under the Plan. The number of shares of Stock reserved for issuance under the Plan will be increased on the first day of each of the Company’s fiscal years 2003 and 2004, and thereafter on the first day of each calendar year commencing with calendar year 2004 and continuing through calendar year 2011, by the lesser of: (i) Three Million (3,000,000) shares of Stock, (ii) three percent (3%) of the number of shares of Stock issued and outstanding on the last day prior to the date of increase, and (iii) a lesser number of shares of Stock determined by the Board or the Compensation Committee of the Board. The aggregate number of shares available for purchase under the Plan shall at all times be subject to adjustment pursuant to this Section 14.

(b) Antidilution Adjustments. The aggregate number of shares of Stock offered under the Plan, the 4,000 share limitation described in Section 8(c) and the price of shares that any Participant has elected to purchase shall be adjusted proportionately by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, any other increase or decrease in such shares effected without receipt or payment of consideration by the Company, the distribution of the shares of a Subsidiary to the Company’s stockholders or a similar event.

(c) Reorganizations. Any other provision of the Plan notwithstanding, immediately prior to the effective time of a Corporate Reorganization, the Offering Period then in progress shall terminate and shares shall be purchased pursuant to Section 8, unless the Plan is assumed by the surviving corporation or its parent corporation pursuant to the plan of merger or consolidation. The Plan shall in no event be construed to restrict in any way the Company’s right to undertake a dissolution, liquidation, merger, consolidation or other reorganization.

SECTION 15 Rules for Foreign Jurisdictions.

(a) Compliance with Foreign Law. The Committee may adopt rules or procedures relating to the operation and administration of the Plan to accommodate the specific requirements of local laws and procedures. Without limiting the generality of the foregoing, the Committee is specifically authorized to adopt rules and procedures regarding handling of payroll deductions, payment of interest, conversion of local currency, payroll tax, withholding procedures and handling of stock certificates which vary with local requirements.

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(b) Non-423(b) Plan Component. The Committee may also adopt rules, procedures or sub-plans applicable to particular Affiliates or locations, which sub-plans may be designed to be outside the scope of Code Section 423. The rules of such sub-plans may take precedence over other provisions of this Plan, with the exception of Section 14(a), but unless otherwise superseded by the terms of such sub-plan, the provisions of this Plan shall govern the operation of such sub-plan. To the extent inconsistent with the requirements of Section 423, such sub-plan shall be considered part of the Non-423(b) Plan, and rights granted thereunder shall not be considered to comply with Code Section 423.

SECTION 16 Amendment Or Discontinuance.

The Board shall have the right to amend, suspend or terminate the Plan at any time and without notice. Except as provided in Section 14, any increase in the aggregate number of shares of Stock to be issued under the Plan shall be subject to approval by a vote of the stockholders of the Company. In addition, any other amendment of the Plan shall be subject to approval by a vote of the stockholders of the Company to the extent required by an applicable law or regulation.

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EX-10.24

EXHIBIT 10.24

MAGMA DESIGN AUTOMATION, INC.

Summary of Standard Director Compensation Arrangements for Non-Employee

Directors

Description of Director Compensation (effective as of April 25, 2006)

Directors who are employees of Magma do not receive separate compensation for service on the Board of Directors. Directors who are not employees of Magma receive a cash retainer of $25,000 per year and $2,500 per Board or committee meeting attended ($500 for teleconference meetings) for services as a member of the Board of the Directors. In addition, the Chairman of the Audit Committee and the Chairman of the Compensation Committee each receive a fee of $10,000 per year; the other members of the Audit Committee receive a fee of $5,000 per year, and the other members of the Compensation Committee receive a fee of $2,500 per year. Magma reimburses its non-employee Directors for out-of-pocket expenses incurred in attending meetings of the board or its Committees.

Pursuant to the 2001 Stock Incentive Plan, which was approved by Magma’s stockholders, each non-employee director receives an initial stock option grant to purchase 50,000 shares of Magma common stock upon appointment or election. The initial option vests as to 25% of the shares on the first anniversary of the date of grant with the remaining shares vesting monthly over the following three years. Following the conclusion of each regular annual meeting of stockholders, each continuing non-employee director receives an additional option to purchase 20,000 shares at an exercise price equal to the fair market value of the common stock on the date of grant. When a non-employee director is appointed to the Board of Directors at a time other than at an annual meeting, such director receives a pro rata portion of the 20,000 share grant. The annual grants and the interim grants vest in full on the day immediately prior to the annual meeting of stockholders in the year immediately following the year of the grant if the director continues as a member of the Board on that date. All options will vest fully upon a change in control of Magma, as set forth under the 2001 Stock Incentive Plan.

EX-10.27(A)

EXHIBIT 10.27(a)

MAGMA DESIGN AUTOMATION, INC.

Summary of Compensation Arrangement for Certain Executive Officers

Exhibit 10.27(b) lists the executives for which this Exhibit 10.27(a) applies. In addition, Exhibit 10.27(b) sets forth the annualized base salary and target bonus percentage for such named executive officers. Additional employees other than the executives set forth in Exhibit 10.27(b) may have the same or similar compensation as set forth in this Exhibit 10.27(a) and in Exhibit 10.27(b).

Description of Compensation for Certain Executive Officers

Each such executive officer’s compensation package consists of three elements:

• base compensation, which compensates for the underlying job;

• variable or bonus compensation, which rewards based on the achievement of financial and individual performance goals; and

• equity-based incentive compensation, which rewards for Magma’s growth and increased stockholder value.

In addition to the above, each such executive officer is eligible to participate in various employee benefit plans, including (without limitation) 401(k) plans , life, disability, health, accident and other insurance programs, paid vacations, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the applicable plan or program.

Each such executive officer’s employment is at-will.

Employment, Severance and Change of Control Agreements

Magma does not have formal employment or severance agreements with any of the executive officers set forth in Exhibit 10.27(b) except that Magma has agreed to pay to Mr. Peter S. Teshima a severance amount equal to six months’ of Mr. Teshima’s initial annual base salary (which initial annual base salary was $200,000.00) if Mr. Teshima’s employment with Magma is involuntarily terminated without Cause. Such executive officers are parties to stock option agreements that provide for acceleration of vesting upon specified events.

EX-10.27(B)

EXHIBIT 10.27(b)

MAGMA DESIGN AUTOMATION, INC.

Schedule of Certain Executive Officers for the Summary of Compensation Arrangement set forth in Exhibit

10.27(a)

The compensation arrangements for the below listed executives are set forth in Exhibit 10.27(a).

Name	Title	Annualized Base Salary For Fiscal Year 2008		Target Bonus Percentage
Rajeev Madhavan	Chief Executive Officer and Chairman of the Board	$	475,000	90	%
Roy E. Jewell	President and Chief Operating Officer and Director	$	475,000	90	%
Saeid Ghafouri	Corporate Vice President, Field Operations	$	330,000	120	%
Peter S. Teshima	Corporate Vice President-Finance and Chief Financial Officer	$	300,000	60	%
David H. Stanley	Corporate Vice President, Corporate Affairs & Secretary	$	290,000	60	%
Gregory C. Walker*	Former Senior Vice President-Finance and Chief Financial Officer		0	0

* Mr. Walker resigned as Senior Vice President-Finance and Chief Financial Officer on April 27, 2006.

EX-10.30

EXHIBIT 10.30

AMENDMENT NUMBER ONE

TO OFFICE LEASE AGREEMENT

This AMENDMENT NUMBER ONE (the “Amendment”) dated as of January 24, 2007 (the “Amendment Effective Date”) amends that certain OFFICE LEASE AGREEMENT (the “Lease”) entered into and effective on June 19, 2003 (the “Effective Date”), to which MARVELL TECHNOLOGY, INC., a Delaware corporation (“Marvell”), became the owner of landlord’s interest in the lease between 3COM CORPORATION, a Delaware corporation, and MAGMA DESIGN AUTOMATION, INC., a California corporation, having its principal place of business at 5460 Bayfront Plaza, Santa Clara, CA 95052 (“Tenant”). Marvell and Tenant are each a “party” and, collectively, are the “parties” to this Amendment. All terms not defined herein shall have the meanings ascribed to such terms in the Lease.

RECITALS

WHEREAS, Marvell became owner of the landlord’s interest in the Lease effective August 18, 2003;

WHEREAS, Marvel and Tenant desire to modify the Lease to provide for early termination; and,

WHEREAS, the parties intend to republish each and every other term of the Lease subject to the amendments set forth herein.

NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants set forth herein and in the Lease, the parties hereby agree to the following:

1. Amendment to Summary Section 3.1: Summary section 3.1 which currently establishes the length of lease term as follows: the language “subject to extension under Section 2.2 for one (1) Extended Term of five (5) years” is deleted in its entirety.

2. Amendment to Summary Section 3.3: Summary section 3.3 which currently establishes the Lease Expiration Date as follows: “July 31, 2010, subject to extension under Section 2.2 for one (1) Extended Term of five (5) years” is deleted in its entirety and replaced with the following:

“March 9, 2007 with respect to all Tenant occupied areas except for the Data Center and associated support rooms on the first floor (the “Modified Lease Expiration Date”). Tenant shall continue to occupy said Data Center and associated support rooms as shown on Exhibits C and C-1 attached hereto and incorporated herein by reference through the original Lease Expiration Date of July 31, 2010.”

3. Amendment to Summary Section 4: Summary section 4 which currently establishes the Base Rent due under Article 3 is amended as follows:

Months	Monthly Installment of Base Rent
40 through 43	$	154,383.46
44 through 84	$	0.00

Notwithstanding the foregoing, it is understood and agreed by the parties that as of the Amendment Effective Date herein, Tenant has paid all Monthly Installments of Base Rent due under the Lease and this Amendment.

4. Amendment to Summary Section 8: Summary section 8 which currently establishes the parking ratio as follows: “Approximately three and three tenths (3.3) unreserved parking spaces for every 1,000 square feet of the Premises” is deleted in its entirety and replaced with the following:

“Ten unreserved parking spaces”.

5. Amendment to Article 2.2: Section 2.2 which establishes the Option to Extend is hereby deleted in its entirety.

6. Amendment to Article 3: Article 3 which currently establishes the Free Rent Period which currently establishes the Free Rent Period is amended as follows: Insert at the end of the first full paragraph:

“Subject to the foregoing provisions, Tenant’s obligation to pay Base Rent will terminate after February 1, 2007, and Tenant shall not be responsible for the payment of Base Rent thereafter (the “Rent Termination Date”). Should Tenant fail to vacate or holds over after the Modified Lease Expiration Date, with or without the express or implied consent of the Landlord, such tenancy shall be from month-to-month only, and in such case Rent shall be payable pursuant to the original Base Rent Schedule in Summary Section 4.”

7. Amendment to Article 4.1: Article 4. which currently establishes Tenant’s obligation to pay Additional Rent is amended as follows: Insert at the end of the first full paragraph:

“Subject to the foregoing provisions, and save for the obligations under Section 4.5.1, Tenant shall not be obligated to pay Additional Rent after the Rent Termination Date including any Additional Rent that may be due or may become due pursuant to Section 4.4, “Calculation and Payment of Additional Rent”, or under any other provision of the Lease. Additional Rent paid through the effective date herein, shall be considered full and final payment of all Additional Rent payment obligations by the Tenant under the Lease and this Amendment.

8. Amendment to Article 6.2: Article 6.2 which currently establishes the Tenant’s obligation to pay utilities is amended as follows: Insert at the end of the first full sentence:

“Tenant, at its sole expense, shall use all commercially reasonable efforts to arrange for a separate electrical meter for the first floor Data Center and associated support rooms (the “Data

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Center Meter”) and shall be solely responsible for all utility and other charges related thereto. Except for utilities and other charges directly related to the Data Center Meter, Landlord shall contract directly with utility providers for all other Building utilities (including but not limited to electricity, gas and water). In the event installation of the Data Center Meter is either (i) not physically feasible, or (ii) is not permitted by building codes, Tenant may either (a) install a separate meter on the electrical panels feeding the main computer rooms within the Data Center (the “Panel Meter”). Landlord will then contract for all Building electricity and Tenant shall reimburse Landlord for all excess electrical usage attributed to the Data Center and associated support rooms by the Panel Meter or (b) reimburse Landlord for the Baseline Electricity usage as measured after Tenant’s personnel has vacated the building and prior to Landlord’s reoccupation.”

9. Amendment to Article 8.1: Article 8.1 which currently establishes Landlord’s Consent to Alterations is amended as follows: Insert at the end of the paragraph:

“Subject to the provisions of this Article 8, Tenant shall alter the access to the Data Center and associated areas in such a manner to ensure that the areas are properly separated and secured from the remainder of the tenantable space. Tenant shall bear any and all expenses related to such separation.”

10. Amendment to Article 8.5: Article 8.5, which currently establishes Tenant’s requirement to remove and restore the premises including the conditions under which any Tenant Alterations or Tenant fixtures and Equipment will become Landlord’s property, is hereby deleted in its entirety.

11. Amendment to Article 15.2: Article 15.2 which currently establishes the surrender of the premises and removal of all alterations, fixtures and equipment upon termination is hereby deleted in its entirety and replaced with the following:

“(a) Upon the expiration of the Modified Lease Expiration Date, Tenant shall, subject to the provisions of Articles 15 and 29, quit and surrender possession of the Premises, except for the Data Center and associated support rooms, to the Landlord. Landlord agrees to accept the Premises in an ‘as is’ condition, and Tenant shall not be required to remove or restore or cause to be removed or restored any permanent Alterations, fixtures, or equipment. Upon such expiration or at any time earlier and save for that Personal Property described in Exhibit A, attached hereto and incorporated herein by reference., Tenant shall have the right to remove all property and equipment purchased and/or owned by the Tenant including all furniture, equipment, business and trade fixtures, free-standing cabinet work, movable partitions and other articles of personal property owned, installed or placed by Tenant at its expense in the Premises. Additionally, Tenant is allowed to remove all the Landlord Personal Property listed in Exhibit B, attached hereto and incorporated herein by reference. Such Landlord Personal Property shall be owned by Tenant, and Landlord hereby transfers all its right, title and interest in and to such Landlord Personal Property to Tenant on or before the Modified Lease Expiration Date.

Any Tenant Personal Property, including furniture, furnishings and equipment listed in Exhibit A shall be owned by Landlord upon the Expiration of the Lease Term and Tenant hereby transfers all its right, title and interest in and to such Tenant Personal Property to Landlord effective July 31, 2010.”

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(b) Upon the expiration of the Lease Term, Tenant shall, subject to the provisions of this Article 15, quit and surrender possession of the Data Center and associated support rooms, to the Landlord. Landlord agrees to accept the Premises in an ‘as is’ condition, and Tenant shall not be required to remove or restore or cause to be removed or restored any permanent Alterations, fixtures, or equipment. Upon such expiration or at any time earlier, Tenant shall have the right to remove all property and equipment purchased and/or owned by the Tenant including all furniture, equipment, business and trade fixtures, free-standing cabinet work, movable partitions and other articles of personal property owned, installed or placed by Tenant at its expense in the Premises except for those articles described in Exhibit A.

12. Amendment to Article 21.2: Article 21.2, which currently establishes the terms of Tenant’s irrevocable letter of credit, is amended as follows: Insert at the end of the paragraph:

“Notwithstanding anything to the contrary in this Article 21, Tenant shall not be required to renew its existing Letter of Credit. Upon Tenant’s vacation of the Premises pursuant to the Modified Lease Expiration Date, Marvell shall release Tenant’s current Letter of Credit as provided under this Article 21.2.”

13. Amendment to Article 29: Article 29, which currently establishes Tenant’s right to purchase the existing Personal Property as follows: “So long as this Lease is not terminated due to any default beyond applicable notice and cure periods by the Tenant, then Tenant shall be entitled to purchase the Personal Property from Landlord concurrently with the expiration of the Lease Term for Ten Dollars ($10.00); provided, however that Tenant shall not be entitled to purchase the generators or power screens included in the Personal Property. If Tenant is not entitled to purchase the Personal Property or elects not to do so, then upon the expiration or earlier termination of this Lease, Tenant shall return the Personal Property to Landlord in its condition existing as of the Effective Date, reasonable wear and tear excepted” is deleted in its entirety and is replaced with the following language:

“Except for Tenant’s Personal Property in the Data Center and associated support rooms (collectively, the “Data Center Personal Property”), and Landlords Property listed in the attached Exhibit B, upon the termination of the lease pursuant to the Modified Lease Expiration Date, Tenant shall return the Personal Property to Landlord in its condition existing as of the Effective Date, reasonable wear and tear excepted.

14. No Further Amendments. The parties agree that, except as otherwise provided for in this Amendment, each and every other term and condition of the Agreement, including the exhibits thereto, shall remain in full force and effect for the term set forth in the Agreement, as amended by Sections 1 through 12 of this Amendment. Unless the context otherwise expressly requires, all words, capitalized terms and expressions used in this Amendment shall have the same meaning as assigned to them in the Lease, as the context requires. In the event of any conflict between this Amendment and the terms of the Lease with respect to the subject matter herein, the provisions of this Amendment shall prevail.

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IN WITNESS WHEREOF, Tenant and Marvell, respectively, have caused this Amendment to be duly executed in duplicate on their behalf to be effective as of the Amendment Effective Date.

MARVELL TECHNOLOGY, INC.

By:

Title:

Date:

MAGMA DESIGN AUTOMATION, INC.

By:

Title:

Date:

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EXHIBIT A

TENANT PROPERTY

1) One (1) 1500 kw Cummins Power Generator diesel driven generator, model year 2006.

2) One (1) 150 kw Cummins Life Safety generator.

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EXHIBIT B

LANDLORD PROPERTY

1) Nine (9) small square metal tables currently located in the cafeteria.

2) Eight (8) small round metal tables currently located in the cafeteria.

3) Sixty Eight (68) cafeteria chairs.

4) Five (5) bar stools currently located in cafeteria.

5) Four (4) leather lounge chairs in the reception area with two (2) side tables.

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EXHIBIT C

FIRST FLOOR DATA CENTER

First Floor Data Center is contained within the shaded area as depicted in Exhibit C-1 attached hereto and incorporated herein.

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EXHIBIT C-1

FIRST FLOOR DATA CENTER AREA

EX-10.37

FOIA

CONFIDENTIAL

TREATMENT

REQUESTED

EXHIBIT 10.37

SETTLEMENT AGREEMENT

This Settlement Agreement (“Settlement Agreement”) is made and entered into as of the last date of signature below (the “Effective Date”), by and between Synopsys, Inc., a Delaware corporation, having offices at 700 East Middlefield Road, Mountain View, California 94043 USA (“Synopsys”), and Magma Design Automation, Inc. (“Magma”), a Delaware corporation, having offices at 1650 Technology Dr., San Jose, CA 95110 USA (Synopsys and Magma are individually referred to herein as a “party,” and collectively as the “parties”).

WHEREAS, Synopsys and Magma have asserted claims against each other in the Actions;

WHEREAS, Synopsys and Magma desire to settle all claims that were ever asserted in the Actions on the terms and conditions recited below;

NOW, THEREFORE, in consideration of the above recitals and the terms and conditions hereinafter contained, the parties agree as follows:

ARTICLE 1 — DEFINITIONS

As used in this Settlement Agreement, the following terms shall have the following meanings:

1.1 “Actions” means the following legal proceedings:

(a) Synopsys, Inc. v. Magma Design Automation, Inc., United States District Court for the Northern District of California, Case No. 3:04-CV-03923-MMC (“the First California Case”);

(b) Synopsys, Inc. v. Magma Design Automation, Inc., United States District Court for the Northern District of California, Case No. 3:05-CV-04243-MMC (“the Second California Case”);

(c) Synopsys, Inc. v. Magma Design Automation, Inc., United States District Court for the District of Delaware, Case No. 05-CV-701-GMS (“the Delaware Case”);

(d) Synopsys, Inc. v. Magma Design Automation, Inc., Landgericht München I (District Court Munich I), File No. 7 O 7714/05, filed August 16, 2005; and,

(e) Synopsys, Inc. v. Magma Design Automation, Inc., Civil Department No. 40 of the Tokyo District Court, Case No. (Wa) 15454/2005, filed July 29, 2005.

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1.2 “Change Of Control” means, as to a subject party, a transaction or a series of related transactions in which either:

(a) (i) one or more related Third Parties (who did not previously Control or were Controlled by the subject party) obtain Control of the subject party, or (ii) the subject party merges with, or transfers substantially all of its assets or business to, a one or more related Third Parties, or (iii) one or more related Third Parties otherwise acquires all or substantially all of the assets or stock of the subject party; or

(b) the subject party acquires through merger, acquisition of stock, acquisition of assets, or otherwise, a Third Party, a portion of a Third Party, or some or all of the assets of a Third Party, such that any one or more of the (i) value (as determined by market capitalization for a public company or as reasonably determined pursuant to GAAP for a private company), (ii) assets and/or (iii) revenue, in each case of (i), (ii) and/or (iii), of the subject party after such acquisition are at least one and one half (1- ¹/2) times their respective values prior to such transaction.

1.3 “Control” (including “Controlled” and other forms) of an entity means (i) either (A) beneficial ownership (whether direct, or indirect through Controlled entities or other means) of fifty percent (50%) or more of the outstanding voting securities of that entity or (B) in the case of an entity that has no outstanding voting securities, having the right (directly or indirectly) to fifty percent (50%) or more of the profits of the entity, or having the right (directly or indirectly) in the event of dissolution to more than fifty percent (50%) of the assets of the entity; or (ii) having the contractual power (directly or indirectly) presently to designate more than fifty percent (50%) of the directors of a corporation, or in the case of unincorporated entities, of individuals exercising similar functions. (By way of example only, an entity has indirect Control of a Subsidiary of its Subsidiary).

1.4 “Magma Patent(s)” mean U.S. Patent No. 6,505,328 (the “‘328” Patent), U.S. Patent No. 6,519,745 (the “‘745” Patent), U.S. Patent No. 6,857,116 (the “‘116” Patent), U.S. Patent No. 6,854,093 (the “‘093” Patent), U.S. Patent No. 6,931,610 (the “‘610” Patent), all reissues, reexaminations and extensions of any of such patents, and any other patents issuing from continuations, continuations-in-part and divisions of the applications on which such patents are based, and all patent applications and issued patents (both foreign and domestic) which claim priority from the same application or applications as any of the ‘328, ‘745, ‘116, ‘093, and ‘610 Patents.

1.5 “Person” shall mean an individual, trust, corporation, partnership, joint venture, limited liability company, association, unincorporated organization or other legal or governmental entity.

1.6 “Subsidiary” means, for an identified entity, any entity Controlled by the identified entity, but only so long as such Control exists. Subsidiary shall not include any entity that meets the definition set forth in the foregoing sentence as a consequence of a Change Of Control of a party.

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1.7 “Synopsys Patents” means U.S. Patent No. 6,453,446 (the “‘446” Patent), U.S. Patent No. 6,725,438 (the “‘438” Patent), U.S. Patent No. 6,378,114 (the “‘114” Patent), U.S. Patent No. 6,192,508 (the “‘508” Patent), U.S. Patent No. 6,434,733 (the “‘733” Patent), U.S. Patent No. 6,766,501 (the “‘501” Patent), all reissues, reexaminations and extensions of any of such patents, and any other patents issuing from continuations, continuations-in-part and divisions of the applications on which such patents are based, and all patent applications and issued patents (both foreign and domestic) which claim priority from the same application or applications as any of the ‘446, ‘438, ‘114, ‘508, ‘733 and ‘501 Patents.

1.8 “Third Party” means a Person other than a party to this Settlement Agreement or a Subsidiary of a party to this Settlement Agreement.

ARTICLE 2 — DISMISSALS, RELEASES, LICENSES AND STANDSTILL

2.1 Dismissal Within five (5) business days of the Payment Date (as defined in Article 4.1), the parties shall jointly execute and file dismissals with prejudice of all of the Actions, with each party bearing its own attorney’s fees and costs. With respect to the Actions pending in Germany and Japan, the parties shall jointly request withdrawal of those Actions based upon the settlement reflected herein, including without limitation, Magma’s agreement, in Article 3 below, to quitclaim any ownership rights and assign the European and Japanese patent applications to Synopsys and IBM Corporation. Notwithstanding the foregoing, in the event that Magma fails to make the payment to Synopsys on the Payment Date as required by Article 4 below, then Synopsys shall not be required to dismiss any of the claims or counterclaims it asserted in the Actions, but Magma shall be required to dismiss with prejudice all claims and counterclaims it asserted in the Actions.

2.2 Synopsys Release Subject to the exceptions set forth in Article 2.8 below, Synopsys, and Synopsys’s successors, predecessors, parents, subsidiaries, affiliates, officers, directors, shareholders, employees and agents, hereby release, relinquish and discharge Magma, and all of Magma’s successors, predecessors, parents, subsidiaries, affiliates, officers, directors, shareholders, employees, and agents from any and all claims, causes of action, demands, damages, liabilities and losses of any nature (1) which ever were asserted by Synopsys in the Actions, or (2) which arise out of Lukas van Ginneken’s misappropriation of the information disclosed in the patent applications that led to the issuance of the ‘446 and ‘438 Patents, including but not limited to any trade secret information.

2.3 Magma Release Subject to the exceptions set forth in Article 2.9 below, Magma, and Magma’s successors, predecessors, parents, subsidiaries, affiliates, officers, directors, shareholders, employees and agents, hereby release, relinquish and discharge Synopsys, and all of Synopsys’s successors, predecessors, parents, subsidiaries, affiliates, officers, directors, shareholders, employees, and agents from any and all claims, causes of action, demands, damages, liabilities and losses of any nature which ever were asserted by Magma in the Actions.

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2.4 Magma License

2.4.1 Subject to the exceptions set forth in Article 2.9 below, Magma hereby grants to Synopsys and its Subsidiaries a perpetual (unless terminated in accordance with Article 2.4.4), fully paid-up, royalty free, worldwide, non-exclusive, non- transferable (except as provided in Article 2.4.4 below), non-sublicensable license under the Magma Patents to make, use, sell (including by means of a software license), offer to sell, and import Synopsys Licensed Products. No license is granted to Synopsys to practice any Magma Patent except in the form of a Synopsys Licensed Product.

2.4.2 “Synopsys Licensed Product(s)” means a software product where (i) substantially all of the code has been authored by employees of, or consultants, to Synopsys, (ii) Synopsys owns the copyright in such software, (iii) such product is marketed and sold under a Synopsys trademark, and (iv) such product is licensed to an end-user customer of Synopsys by Synopsys under an industry standard license.

2.4.3 Synopsys shall not engage in any practice or conduct that would have the effect of granting, or result in any third party or other entity being granted, any sublicense to any of the Magma Patents.

2.4.4 The foregoing license is personal to Synopsys and its Subsidiaries and may not be transferred or assigned, directly or indirectly to any third party or other entity except in the event of a Change Of Control of Synopsys (or any successor resulting from a Change Of Control of Synopsys); provided that in the event of such Change Of Control, the license set forth in Article 2.4.1 above shall extend only to those Synopsys Licensed Products that are the same as those Synopsys Licensed Products (the “Original Synopsys Products”) that were being commercially sold by Synopsys (but not the successor resulting from a Change Of Control of Synopsys) or its Subsidiaries on or before the date that is six months prior to Synopsys (but not the successor resulting from a Change of Control of Synopsys) signing a definitive agreement for such Change Of Control. For the purposes of the foregoing, a product shall only be considered a Synopsys Licensed Product if it is substantially identical to an Original Synopsys Product or differs from an Original Synopsys Product only with respect to bug fixes, error corrections, or product updates, upgrades or enhancements for the Original Synopsys Product made available as such to licensees of the Original Synopsys Product. For absence of doubt, “Original Synopsys Products” does not include replacement or successor products and refers to the Synopsys Licensed Products being sold by Synopsys prior to a Change Of Control of Synopsys and not any

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products being sold by a successor to Synopsys prior to such subsequent Change Of Control. Any purported assignment or transfer in violation of the foregoing shall result in the termination of the license set forth in this Section 2.4.

2.5 Synopsys License.

2.5.1 Subject to the exceptions set forth in Article 2.8 below, Synopsys hereby grants to Magma and its Subsidiaries a perpetual (unless terminated in accordance with Article 2.5.4), fully paid-up, royalty free, worldwide, non-exclusive, non- transferable (except as provided in Article 2.5.4 below), non-sublicensable license under the Synopsys Patents to make, use, sell (including by means of a software license), offer to sell, and import Magma Licensed Products. No license is granted to Magma to practice any Synopsys Patent except in the form of a Magma Licensed Product.

2.5.2 “Magma Licensed Product(s)” means a software product where (i) substantially all of the code has been authored by employees of, or consultants, to Magma, (ii) Magma owns the copyright in such software, (iii) such product is marketed and sold under a Magma trademark, and (iv) such product is licensed to an end-user customer of Magma by Magma under an industry standard license.

2.5.3 Magma shall not engage in any practice or conduct that would have the effect of granting, or result in any third party or other entity being granted, any sublicense to any of the Synopsys Patents.

2.5.4 The foregoing license is personal to Magma and its Subsidiaries and may not be transferred or assigned, directly or indirectly to any third party or other entity except in the event of a Change Of Control of Magma (or any successor resulting from a Change Of Control of Magma); provided that in the event of such Change Of Control, the license set forth in Article 2.5.1 above shall extend only to those Magma Licensed Products that are the same as those Magma Licensed Products (the “Original Magma Products”) that were being commercially sold by Magma (but not the successor resulting from a Change Of Control of Magma) or its Subsidiaries on or before the date that is six months prior to Magma (but not the successor resulting from a Change Of Control of Magma) signing a definitive agreement for such Change Of Control. For the purposes of the foregoing, a product shall only be considered a Magma Licensed Product if it is substantially identical to an Original Magma Product or differs from an Original Magma Product only with respect to bug fixes, error corrections, or product updates, upgrades or enhancements for the Original Magma Product made available as such to licensees of the Original Magma Product. For absence of doubt, “Original Magma Products” does not include replacement or successor products and refers to the Magma Licensed Products being sold by Magma prior to a Change Of Control of Magma and not any products being sold by a successor to

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Magma prior to such subsequent Change Of Control. Any purported assignment or transfer in violation of the foregoing shall result in the termination of the license set forth in this Section 2.5.

2.6 Magma Standstill Subject to the exceptions set forth in Article 2.9 below, and for a period of two years commencing on the Effective Date (the “Standstill Period”), Magma and its Subsidiaries shall not commence, or join in, any legal or administrative proceeding (i) accusing Synopsys or its Subsidiaries of infringing any patent as to which, during the Standstill Period, Magma or its Subsidiaries has the right to sue for, or control the suit for, infringement, (ii) for a declaratory judgment that Magma, its Subsidiaries or either of their direct or indirect customers do not infringe any patent owned by Synopsys, (iii) for a declaratory judgment that any patent owned by Synopsys or its Subsidiaries is invalid and/or unenforceable, and/or (iv) challenging the validity or patentability of any patent or patent application owned by Synopsys or its Subsidiaries, including but not limited to reexamination proceedings (collectively “the Magma Patent Claims”). If during the Standstill Period, Synopsys or its Subsidiaries commences legal proceedings against Magma or its Subsidiaries that are not prohibited by Article 2.7 below, then in such legal proceedings, the provisions of the first sentence of this Article 2.6 shall not prevent Magma or its Subsidiaries from asserting by way of counterclaim any of the Magma Patent Claims. If during the Standstill Period, there is a Change Of Control in Synopsys, then the provisions of the first sentence of this Article 2.6 shall terminate. Upon expiration of the Standstill Period, Magma and its Subsidaries shall have the right to commence any legal or administrative proceedings otherwise prohibited by the first sentence of this Article 2.6. In any patent infringement action commenced by Magma or its Subsidiaries against Synopsys or its Subsidiaries upon expiration or termination of the Standstill Period, the provisions of the first sentence of this Article 2.6 shall not prevent Magma or its Subsidiaries from recovering damages for any alleged infringement by Synopsys or its Subsidiaries that occurred during the Standstill Period. If during the Standstill Period, Magma or its Subsidiaries transfers to any Person (i) any patent that it or its Subsidiaries owns or controls, or (ii) any right it or its Subsidiaries has to sue for infringement of any patent, Magma or its Subsidiaries shall require as a condition of such transfer that the transferee assume, in writing, the obligation not to commence legal proceedings against Synopsys and its Subsidiaries for infringement of any such patent during the Standstill Period. In the event that the transferee commences such legal proceedings during the Standstill Period, then the standstill provisions of Article 2.7 shall terminate.

If Magma or its Subsidiaries commence or join in any legal or administrative proceeding against Synopsys or its Subsidiaries not prohibited by this Article 2.6 during the Standstill Period, Magma shall immediately give notice to Synopsys, and both parties and their Subsidiaries shall keep such commencement or joinder confidential and shall not serve or otherwise prosecute such action until 30 days after such commencement or joinder, during which 30 day period senior executives of the parties shall meet in person to discuss a resolution.

During the Standstill Period, neither Magma nor its Subsidiaries shall (i) take any further active role in the reexamination of the ‘446 Patent, the ‘438 Patent or the ‘114 Patent

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currently pending in the United States Patent and Trademark Office (“USPTO”), except as required by law; (ii) respond to any inquiries from the USPTO with respect to such reexamination of the ‘446, ‘438 and ‘114 Patents, except as required by law; or (iii) materially assist any Third Party in challenging the validity or enforceability of the ‘446, ‘438 and ‘114 Patents or responding to any inquiry from the USPTO with respect to any such Third Party reexamination of the ‘446, ‘438 and ‘114 Patents, except as required by law.

2.7 Synopsys Standstill Subject to the exceptions set forth in Article 2.8 below, and during the Standstill Period, Synopsys and its Subsidiaries shall not commence, or join in, any legal or administrative proceeding (i) accusing Magma or its Subsidiaries of infringing any patent as to which, during the Standstill Period, Synopsys or its Subsidiaries has the right to sue for, or control the suit for, infringement, (ii) for a declaratory judgment that Synopsys, its Subsidiaries or either of their direct or indirect customers do not infringe any patent owned by Magma or its Subsidiaries, (iii) for a declaratory judgment that any patent owned by Magma or its Subsidiaries is invalid and/or unenforceable, and/or (iv) challenging the validity or patentability of any patent or patent application owned by Magma or its Subsidiaries, including but not limited to reexamination proceedings (collectively “the Synopsys Patent Claims”). If during the Standstill Period, Magma or its Subsidiaries commences legal proceedings against Synopsys or its Subsidiaries that are not prohibited by Article 2.6 above, then in such legal proceedings, the provisions of the first sentence of this Article 2.7 shall not prevent Synopsys or its Subsidiaries from asserting by way of counterclaim any of the Synopsys Patent Claims. If during the Standstill Period, there is a Change Of Control in Magma, then the provisions of the first sentence of this Article 2.7 shall terminate. Upon expiration of the Standstill Period, Synopsys and its Subsidiaries shall have the right to commence any legal or administrative proceedings otherwise prohibited by the first sentence of this Article 2.7. In any patent infringement action commenced by Synopsys or its Subsidiaries against Magma or its Subsidiaries upon expiration or termination of the Standstill Period, the provisions of the first sentence of this Article 2.7 shall not prevent Synopsys or its Subsidiaries from recovering damages for any alleged infringement by Magma or its Subsidiaries that occurred during the Standstill Period. If during the Standstill Period, Synopsys or its Subsidiaries transfers to any Person (i) any patent that it or its Subsidiaries owns or controls, or (ii) any right it or its Subsidiaries has to sue for infringement of any patent, Synopsys or its Subsidiaries shall require as a condition of such transfer that the transferee assume, in writing, the obligation not to commence legal proceedings against Magma and its Subsidiaries for infringement of any such patent during the Standstill Period. In the event that the transferee commences such legal proceedings during the Standstill Period, then the standstill provisions of Article 2.6 shall terminate.

If Synopsys or its Subsidiaries commence or join in any legal or administrative proceeding against Magma or its Subsidiaries not prohibited by this Article 2.7 during the Standstill Period, Synopsys shall immediately give notice to Magma, and both parties and their Subsidiaries shall keep such commencement or joinder confidential and shall not serve or otherwise prosecute such action until 30 days after such commencement or joinder, during which 30 day period senior executives of the parties shall meet in person to discuss a resolution.

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During the Standstill Period, neither Synopsys nor its Subsidiaries shall (i) take any further active role in the reexamination or declaration of reexamination of the ‘328 Patent the request for which is pending in the United States Patent and Trademark Office (“USPTO”), except as required by law; (ii) respond to any inquiries from the USPTO with respect to such reexamination or order for reexamination of the ‘328 Patent, except as required by law; or (iii) materially assist any Third Party in challenging the validity or enforceability of the ‘328 Patent or responding to any inquiry from the USPTO with respect to any such Third Party reexamination of the ‘328 Patent, except as required by law.

2.8 Exceptions Applicable to Magma If after the Effective Date, Magma or its Subsidiaries materially breach this Settlement Agreement, including without limitation the standstill provisions set forth in Article 2.6 above, the payment provisions set forth in Article 4 below and/or the assignment provisions set forth in Article 3.1 below, then Synopsys shall provide Magma with notice of the breach. If the breach is not cured within five business days of the notice, then any release and license granted pursuant to Articles 2.2 and 2.5 above shall immediately terminate and be deemed null and void, and Synopsys and its Subsidiaries shall be relieved of their obligations under the standstill provisions of Article 2.7. Without limiting the availability of any remedies for such breaches, Synopsys shall be entitled to injunctive relief for any breach by Magma of the standstill provisions set forth in Article 2.6 above. In the event of such termination, the parties further agree that notwithstanding any other provision of this Settlement Agreement, including the filing of any dismissal with prejudice in any of the Actions, Synopsys shall not be estopped, precluded, deemed to have waived, or otherwise prohibited from asserting, interposing or otherwise raising any claim or other form of action against Magma, even if such claim or other form of action was raised or could have been raised in any of the Actions, including any claim or other form of action that, absent this Article 2, would otherwise be foreclosed or released by the settlement, dismissals, licenses and releases provided for elsewhere under this Settlement Agreement.

2.9 Exceptions Applicable to Synopsys If after the Effective Date, Synopsys or its Subsidiaries materially breach this Settlement Agreement, including without limitation the standstill provisions set forth in Article 2.7 above, then Magma shall provide Synopsys with notice of the breach. If the breach is not cured within five business days of the notice, then any release and license previously granted pursuant to Articles 2.3 and 2.4 above shall immediately terminate and be deemed null and void, and Magma and its Subsidiaries shall be relieved of their obligations under the standstill provisions of Article 2.6. Without limiting the availability of any remedies for such breaches, Magma shall be entitled to injunctive relief for any breach by Synopsys of the standstill provisions set forth in Article 2.7 above. In the event of such termination, the parties further agree that notwithstanding any other provision of this Settlement Agreement, including the filing of any dismissal with prejudice in any of the Actions, (i) Magma shall not be estopped, precluded, deemed to have waived, or otherwise prohibited from asserting, interposing or otherwise raising any claim or other form of action against Synopsys, even if such claim or other form of action was raised or could have been raised in any of the Actions, including any claim or other form of action that, absent this Article 2, would otherwise be foreclosed or released by the settlement, dismissals, licenses and releases provided for elsewhere under this Settlement Agreement.

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2.10 No Admission The parties agree that the settlement of the Actions is intended solely as a compromise of disputed claims, counterclaims and defenses, all as more particularly described in this Settlement Agreement. Neither the fact of a party’s entry into this Settlement Agreement nor the terms hereof nor any acts undertaken pursuant hereto shall constitute an admission or concession by any party relating to any Action regarding liability or the validity of any claim, counterclaim, or defense in the Actions.

ARTICLE 3 — ASSIGNMENT OF PATENTS AND APPLICATIONS

3.1 Assignment Within 30 calendar days of the Effective Date, Magma shall deliver to Synopsys (1) executed quitclaims and (2) Magma-executed assignment forms assigning to Synopsys and IBM Corporation the entire right, title and interest in and to the following patent applications: U.S. Application Nos. 10/828,547, 11/388,325, 11/388,357; Korean Application No. 10-2000-7007136; Israeli Application No. 136709; Canadian Application No. 2317538; and International PCT Application No. PCT/US98/27488, and any other patents or patent applications which claim priority from the same application or applications as any of the ‘446 and ‘438 Patents. Within 10 calendar days of the Effective Date, Magma shall assign to Synopsys (1) executed quitclaims and (2) Magma-executed assignment forms assigning to Synopsys and IBM Corporation the entire right, title and interest in and to the following patent applications: Japanese Application No. 2000-526885; and European Application No. 98964899.3.

ARTICLE 4 — PAYMENT

4.1 Magma shall pay to Synopsys the sum of 12.5 million dollars in United States currency (US $12,500,000). The sum shall be due and payable ten calendar days after the Effective Date (the “Payment Date”), and shall be made by wire transfer of funds to the following account:

[***]

[***]

[***]

Beneficiary: Synopsys, Inc.

[***]¹

¹ Information in Section 4.1 of this Agreement has been omitted pursuant to a request for confidential treatment and filed separately with the Securities Exchange Commission. This Information was omitted because it is confidential, financial information obtained from Synopsys, Inc.

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ARTICLE 5 – WARRANTIES AND DISCLAIMERS

5.1 Synopsys Warranty Synopsys warrants and represents that it has the full right and power to enter into this Settlement Agreement, and to grant the rights and incur the obligations recited in this Settlement Agreement.

5.2 Magma Warranty Magma warrants and represents that it has the full right and power to enter into this Settlement Agreement, and to grant the rights and incur the obligations recited in this Settlement Agreement.

5.3 Disclaimers Nothing in this Settlement Agreement shall be construed as:

(a) a warranty or representation by any party as to the validity or scope of any of its patents;

(b) a warranty or representation by any party that any manufacture, sale, use or other disposition of products by the other party has been or will be free from infringement of any patents;

(c) an agreement by any party to bring or prosecute actions or suits against any Third Party for infringement, or conferring any right to any other party to bring or prosecute actions or suits against any Third Party for infringement;

(d) conferring upon any party any right to include in advertising, packaging or other commercial activities related to any product, any reference to another party, its trade names, trademarks or service marks in a manner which would be likely to cause confusion or to indicate that such product is in any way certified by any other party or its Subsidiaries;

(e) conferring by implication, estoppel or otherwise, upon any party, any right or license not expressly set forth herein under any patent or other intellectual property right; or

(f) an obligation to furnish any technical information, copyrights, mask works or know-how, or any tangible embodiments thereof.

ARTICLE 6 — MISCELLANEOUS PROVISIONS

6.1 Remedies for Breach In the event of a breach of this Settlement Agreement, the non-defaulting party shall have all rights and remedies available to it at law or equity, in addition to the rights and remedies provided for in this Settlement Agreement.

6.2 Confidentiality No party shall disclose the terms of this Settlement Agreement, or information relating to this Settlement Agreement, without the prior written consent of the other party except:

(a) to Subsidiaries of the parties in confidence;

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(b) to any governmental body having jurisdiction and specifically requiring such disclosure (in confidence to the extent allowed);

(c) in response to a valid subpoena or as otherwise may be required by law (in confidence to the extent allowed);

(d) as otherwise may be required by law or legal process (including legal requirements and regulations of the U.S. Securities and Exchange Commission and rules of NASDAQ), as determined by such party based on advice and counsel from such party’s outside securities counsel that such disclosure is advisable under such law or legal process;

(e) as set forth in the mutually agreed press release set forth in Exhibit A, provided that no further press releases regarding this Settlement Agreement shall be made by any party or any Person employed or retained by a party;

(f) to a party’s or its Subsidiaries’ accountants, legal counsel and other financial and legal advisors in their capacity of advising a party in such matters, subject to obligations of confidentiality and/or other legal duties preventing disclosure consistent with this Article 6.2;

(g) if a party is required to do so by a subpoena (or other legal process) or court order seeking disclosure of the terms set forth in this Settlement Agreement, such party or Subsidiary shall, before responding thereto, provide the other parties with prior written notice of such subpoena, legal process, order or legal requirement in sufficient time (if reasonably feasible) to permit the other parties the opportunity to object (or, if the timing of such litigation makes advance notice impracticable, such notice is provided within ten (10) days after such disclosure), to seek a court-entered protective order or comparable court-ordered restriction, and shall reasonably cooperate with the other party in its efforts to obtain such protective order and provided further that, the disclosing party shall seek to have the disclosure of such terms and conditions restricted, as authorized or permitted by the court, in the same manner as is the confidential information of other litigating Persons; and

(h) to a Third Party in connection with a potential merger or acquisition by, of or with the party, or any other potential Change Of Control of a party, provided that such disclosure shall (i) be on a strictly limited, need-to-know basis, (ii) when the party believes that such transaction is reasonably likely to take place, and (iii) on terms applicable to other highly confidential information disclosed by such party in connection with such transaction provided such terms prohibit disclosure, prohibit use for any purpose other than as required for due diligence in connection with the potential transaction and provide for reasonable care.

6.3 Representation Each party hereby declares and represents that it is executing this Settlement Agreement after consultation with its own independent legal counsel.

6.4 Further Acts Each party agrees to perform any further acts, and to execute and deliver any further documents that may be reasonably necessary to carry out the provisions of this Settlement Agreement.

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6.5 Notices All notices required or permitted to be given hereunder shall be in writing and shall be made by depositing the writing with Federal Express, expenses prepaid for overnight delivery with receipt signature required. Notices shall be deemed effective upon execution of the receipt signature. Notices shall be addressed as follows:

If to Synopsys:	Synopsys, Inc.
	700 East Middlefield Road
	Mountain View, CA 94043
	Attention: General Counsel
If to Magma:	Magma Design Automation, Inc
	1650 Technology Drive
	San Jose, CA 95110
	Attention: General Counsel

6.6 Governing Law This Settlement Agreement and matters connected with the performance thereof shall be construed, interpreted, applied and governed in all respects in accordance with the laws of the United States of America and the State of California, without reference to conflict of laws principles.

6.7 Jurisdiction The parties agree (i) that all disputes and litigation regarding this Settlement Agreement and matters connected with its performance be subject to the exclusive jurisdiction of the state or federal courts located in Santa Clara County, California, and (ii) to submit any disputes, matters of interpretation, or enforcement actions arising with respect to the subject matter of this Settlement Agreement exclusively to these courts. The parties hereby waive any challenge to the jurisdiction or venue of these courts over these matters.

6.8 Severability If any provision of this Settlement Agreement is held to be illegal or unenforceable, such provision shall be limited or eliminated to the minimum extent necessary so that the remainder of this Settlement Agreement will continue in full force and effect and be enforceable. The parties agree to negotiate in good faith an enforceable substitute provision for any invalid or unenforceable provision that most nearly achieves the intent and effect of such provision.

6.9 Entire Agreement This Settlement Agreement, with Exhibit A, embodies the entire understanding of the parties with respect to the subject matter hereof, and merges all prior discussions and agreements (written or oral) between them, and none of the parties shall be bound by any conditions, definitions, warranties, understandings, or representations with respect to the subject matter hereof other than as expressly provided herein. No oral explanation or oral information by any party hereto shall alter the meaning or interpretation of this Settlement Agreement.

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6.10 Modification No modification or amendment to this Settlement Agreement will be effective unless it is in writing and executed by authorized representatives of the parties, nor will any waiver of any rights be effective unless assented to in writing by the party to be charged. The waiver of any breach or default will not constitute a waiver of any subsequent breach or default.

6.11 Construction Any rule of construction to the effect that ambiguities are to be resolved against the drafting party will not be applied in the construction or interpretation of this Settlement Agreement. As used in this Settlement Agreement, the words “include” and “including,” “for example”, “such as” and variations thereof, will not be deemed to be terms of limitation, but rather will be deemed to be followed by the words “without limitation.” The headings in this Settlement Agreement will not be referred to in connection with the construction or interpretation of this Settlement Agreement.

6.12 Counterparts This Settlement Agreement may be executed in identical counterparts or duplicate originals, both of which shall be regarded as one and the same instrument, and which shall be the official and governing version in the interpretation of this Settlement Agreement. This Settlement Agreement may be executed by facsimile signatures and such signatures shall be deemed to bind each party as if they were original signatures.

6.13 Assignability Subject to the Change Of Control provisions set forth above, this Settlement Agreement shall not be assignable by either party to any Person without the prior written consent of the other party. Consent may be withheld for any reason.

IN WITNESS WHEREOF, the parties hereto have caused this Settlement Agreement to be signed below by their respective duly authorized officers.

Synopsys, Inc.		Magma Design Automation, Inc.
By:		By:
Name:	Dr. Chi-Foon Chan	Name:	Roy Jewell
Title:	President & COO	Title:	President & COO
Date:		Date:

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By:		By:
Name:	Brian Cabrera, Esq.	Name:	Clayton Parker, Esq.
Title:	Vice President & General Counsel	Title:	Vice President & General Counsel
Date:		Date:

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Exhibit A

NEWS RELEASE

Synopsys Contacts:	Magma Contact:
Editorial:
Yvette Huygen	Milan G. Lazich
Synopsys, Inc.	Magma Design Automation
(650) 584-4547	(408) 565-7706
yvetteh@synopsys.com	Milan.lazich@magma-da.com
Investor
Lisa Ewbank
Synopsys, Inc.
650.584.1901

Synopsys and Magma Agree to Settle All Litigation

MOUNTAIN VIEW and SAN JOSE, Calif., March 29, 2007 — Synopsys, Inc. (Nasdaq: SNPS) and Magma Design Automation (Nasdaq: LAVA) today announced the companies have agreed to settle all pending litigation between them. As part of the settlement,

• Synopsys and Magma agree to release all claims in both California and Delaware and to cross license the patents at issue in these jurisdictions as well as any related applications;

• Both companies agree not to initiate future patent litigation against each other for 2 years provided certain terms are met;

• Magma agrees to make a payment to Synopsys of $12,500,000 toward the settlement of this dispute; and,

• All other terms of the settlement are confidential.

“For us, this case has always been about the return of Synopsys technology and the protection of our IP, and we have achieved this,” said Aart de Geus, chairman and CEO of Synopsys, Inc. “Looking forward, we will focus our energy fully toward our customers’ success and concentrate on growing our business.”

“This unfortunate episode involved significant expense to both sides,” said Rajeev Madhavan, chairman and CEO of Magma. “I am pleased we found common ground for a resolution that makes business sense for both of us.”

About Synopsys

Synopsys, Inc. is a world leader in EDA software for semiconductor design. The company delivers technology-leading semiconductor design and verification platforms and IC manufacturing software products to the global electronics market, enabling the development and production of complex systems-on-chips (SoCs). Synopsys also provides intellectual property and design services to simplify the design process and accelerate time-to-market for its customers. Synopsys is headquartered in Mountain View,

California and has offices in more than 60 locations throughout North America, Europe, Japan and Asia. Visit Synopsys online at http://www.synopsys.com.

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Synopsys is a registered trademark of Synopsys, Inc. All other trademarks mentioned in this release are the intellectual property of their respective owners.

About Magma

Magma’s software for integrated circuit (IC) design is recognized as embodying the best in semiconductor technology. The world’s top chip companies use Magma’s EDA software to design and verify complex, high-performance ICs for communications, computing, consumer electronics and networking applications, while at the same time reducing design time and costs. Magma provides software for IC implementation, analysis, physical verification, characterization and programmable logic design, and the company’s integrated RTL-to-GDSII design flow offers “The Fastest Path from RTL to Silicon”™. Magma is headquartered in Santa Clara, Calif. with offices around the world. Magma’s stock trades on Nasdaq under the ticker symbol LAVA. Visit Magma Design Automation on the Web at www.magma-da.com.

Magma is a registered trademark and “The Fastest Path from RTL to Silicon” is a trademark of Magma Design Automation Inc. All other product and company names are trademarks and registered trademarks of their respective companies.

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EX-21.1

EXHIBIT 21.1

MAGMA DESIGN AUTOMATION, INC.

List of Subsidiaries

1. Magma Design Automation Corp. (Canada)

2. Magma Design Automation Cayman Limited (Cayman)

3. Beijing Magma Design Automation, Inc. (Peoples Republic of China)

4. Magma Design Automation SARL (France)

5. Magma Design Automation GmbH (Germany)

6. Magma Design Automation India Private Limited (India)

7. FEI Software (India) Private Limited (India)

8. Magma Design Automation Ltd. (Israel)

9. Magma Design Automation K.K. (Japan)

10. Magma Design Automation Korea, Inc. (Korea)

11. ACAD Corporation Limited (Korea)

12. Magma Design Automation BV (Netherlands)

13. MDA Netherlands C.V. (Netherlands)

14. Magma Design Automation, Inc., Taiwan Limited (Taiwan)

15. Magma Design Automation Ltd. (United Kingdom)

16. Magma Services, Inc. (Delaware)

17. Knights Technology, Inc. (Oregon)

18. Silicon Correlation, Inc. (Delaware)

1

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our reports dated June 1, 2007, accompanying the consolidated financial statements (which report expressed an unqualified opinion and contains an explanatory paragraph relating to Magma Design Automation’s adoption of the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment) and management’s assessment of the effectiveness of internal control over financial reporting (which report expressed an unqualified opinion on management’s assessment and on the effective operation of internal control over financial reporting) included in the Annual Report of Magma Design Automation, Inc. on Form 10-K for the year ended April 1, 2007. We hereby consent to the incorporation by reference of said reports in the Registration statements of Magma Design Automation, Inc. on Forms S-3 (File No. 333-141886 and File No. 333-108346) and Forms S-8 (File No. 333-74278, File No. 333-92324, File No. 333-108348, File No. 333-112326, File No. 333-122656, and File No. 333-132333).

/s/ Grant Thornton LLP

San Jose, California

June 1, 2007

EX-23.2

EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-74278, No. 333-92324, No. 333-108348, No. 333-112326, No. 333-122656 and No. 333-132333) and the Registration Statements on Form S-3 (No. 333-108346 and No. 333-141886) of Magma Design Automation, Inc. of our report dated June 14, 2005 relating to the financial statements and financial statement schedule, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

San Jose, California

June 1, 2007

EX-31.1

Exhibit 31.1

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

as Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

for the Period Ended April 1, 2007

I, Rajeev Madhavan, certify that:

1. I have reviewed this annual report on Form 10-K 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 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 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 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: June 6, 2007

/s/    RAJEEV MADHAVAN        

Rajeev Madhavan

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

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

as Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

for the Period Ended April 1, 2007

I, Peter S. Teshima, certify that:

1. I have reviewed this annual report on Form 10-K 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 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 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 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: June 6, 2007

/s/    PETER S. TESHIMA        

Peter S. Teshima

Corporate 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 Annual Report of Magma Design Automation, Inc. (the “Company”) on Form 10-K for the year ended April 1, 2007, as filed with the Securities and Exchange Commission on the date hereof, I, Rajeev Madhavan, Chief Executive Officer of the Company, certify for the purposes of Section 1350 of Chapter 63 of Title 18 of the United States Code that, to the best of my knowledge,

(i) the Annual Report of the Company on Form 10-K for the year ended April 1, 2007 (the “Report”), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    RAJEEV MADHAVAN        

Rajeev Madhavan

Chief Executive Officer

June 6, 2007

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.

The foregoing certification is being furnished with the Company’s Form 10-K for the period ending April 1, 2007 pursuant to 18 U.S.C. § 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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 Annual Report of Magma Design Automation, Inc. (the “Company”) on Form 10-K for the year ended April 1, 2007, as filed with the Securities and Exchange Commission on the date hereof, I, Peter S. Teshima, Chief Financial Officer of the Company, certify for the purposes of Section 1350 of Chapter 63 of Title 18 of the United States Code that, to the best of my knowledge,

(i) the Annual Report of the Company on Form 10-K for the year ended April 1, 2007 (the “Report”), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    PETER S. TESHIMA        

Peter S. Teshima

Corporate Vice President, Finance and

Chief Financial Officer

June 6, 2007

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.

The foregoing certification is being furnished with the Company’s Form 10-K for the period ending April 1, 2007 pursuant to 18 U.S.C. § 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.