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 6, 2008

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 $0.0001 per share	The Nasdaq Stock Market LLC (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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨	Accelerated filer  x
Non-accelerated filer  ¨    (Do not check if a smaller reporting company)	Smaller reporting company  ¨

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 registrant’s common stock on September 28, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the Nasdaq Global Market, was $560,538,923. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose.

As of June 2, 2008, the registrant had outstanding 44,006,912 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 the registrant’s 2008 Annual Meeting of Stockholders to be held on August 29, 2008, are incorporated by reference into Part III of this Form 10-K to the extent stated herein. The registrant’s definitive proxy statement is expected to be filed within 120 days after the registrant’s fiscal year ended April 6, 2008.

MAGMA DESIGN AUTOMATION, INC.

ANNUAL REPORT ON FORM 10-K

Year ended April 6, 2008

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	2
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	29
Item 2.	Properties	29
Item 3.	Legal Proceedings	29
Item 4.	Submission of Matters to a Vote of Security Holders	30
	Executive Officers of the Registrant	30
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32
Item 6.	Selected Financial Data	34
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
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	104
Item 9A.	Controls and Procedures	104
Item 9B.	Other Information	105
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	106
Item 11.	Executive Compensation	106
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	106
Item 13.	Certain Relationships and Related Transactions, and Director Independence	106
Item 14.	Principal Accountant Fees and Services	106
PART IV
Item 15.	Exhibits and Financial Statement Schedules	107
Signatures		108
Exhibit Index		109

Magma, Blast Fusion, Blast Noise, QuickCap, SiliconSmart, Talus and YieldManager are registered trademarks, and ArchEvaluator, Blast Power, Blast Plan, Blast Rail, Blast Create, Quartz, Blast Yield, Camelot, “The Fastest Path from RTL to Silicon,” FineSim, Native Parallel Technology, “Sign-off in the Loop”, and Titan 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. Our Titan platform for custom integrated chip design provides an integrated chip-finishing solution for mixed-signal designs.

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 the Consolidated Financial Statements—“Segment Information” in Item 8 of this Annual Report. Revenues, profits and losses and total assets for fiscal 2008, fiscal 2007 and fiscal 2006 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 and below. 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 and below. 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) of 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 and smaller 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.

Custom/Mixed-Signal

Analog design flows and teams historically have been isolated from digital design. Analog integrated circuits have typically been full-custom and painstakingly crafted by hand. In addition to being time-consuming and prone to error, this transistor-level design style does not allow an existing design to be easily transferred to a new foundry or process/technology node. With Magma’s Titan platform, analog designers can apply their expertise in defining the first circuit topology, but porting to new geometry nodes is easier.

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^™ 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.

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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 our 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 are 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 is 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.

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.

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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^™ is 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.

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.

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

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

FineSim^™ SPICE is a unique, native parallel, true SPICE simulator which may enable users to simulate circuits at full SPICE accuracy, which previously could only be simulated with fast-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.

Titan^™ is a mixed-signal design platform that is integrated with our digital implementation and verification products, as well as with our circuit simulation and parasitic extraction products.

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 Toshiba, Samsung, Qualcomm, Broadcom, Renesas, Intel, Infineon Technologies, NEC, Marvell, Texas Instruments, LSI Logic, and NVIDIA. No customer accounted for 10% or more of our consolidated revenues during fiscal 2008.

Product Backlog

As of April 6, 2008 and April 1, 2007, we had greater than $390 million and $420 million, respectively, in backlog, which represents contractual commitments by our customers through purchase orders or contracts. As of April 6, 2008 and April 1, 2007, approximately 14% and 12%, respectively, of the backlog is variable based on volume of usage of our products by the customers, approximately 4% and 1%, respectively, includes specific future deliverables, and approximately 6% and 4%, 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 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.

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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 invoice the entire amount of the unbilled accounts receivable within one year from the contract inception. As of April 6, 2008 and April 1, 2007, unbilled accounts receivable were approximately $12.0 million and $7.6 million, respectively. These amounts were included in accounts receivable on our consolidated balance sheets for these periods.

Revenue by Geographic Areas

We generated 40% of our total revenue from sales outside the United States for fiscal 2008, compared to 32% in fiscal 2007 and 33% in fiscal 2006. Additional disclosure regarding financial information on geographic areas is included in Note 13 to 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, North Carolina, Pennsylvania, Texas, Washington and Canada. Internationally, we have European offices in Germany, France and the United Kingdom, offices in Israel and the United Arab Emirates, and Asian offices in China, India, Japan, South 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 6, 2008, we had 428 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 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.

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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 2008, 2007 and 2006 were $76.9 million, $63.6 million and $50.1 million, respectively. There have not been any customer-sponsored research activities since our inception.

As of April 6, 2008, our research and development group consisted of 494 employees. We have engineering centers in California and Texas in the United States, and in China, India, the Netherlands and South 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 80 issued patents. Patent protection affords only limited protection for our technology. Our patents will expire on various dates between May 2009 and July 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 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

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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. Third 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: “Because much of our business is international, we are exposed 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 6, 2008, we had 1,030 full-time employees, including 494 in research and development, 428 in sales and marketing and 108 in general and administrative. None of our employees are covered by collective bargaining agreements. We believe our relations with our employees are good.

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 on or accessible through 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 reports 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

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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 2008 annual meeting is scheduled to be held on August 29, 2008 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 may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following 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. 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 fail to adopt our proprietary technologies and 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 $229.5 million as of April 6, 2008. If we continue to incur losses, the trading price of our stock would likely decline.

We had an accumulated deficit of approximately $229.5 million as of April 6, 2008. 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 continue to incur 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. Further, 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 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;

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• 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 general compensation levels as well as increases in incentive compensation payments that may be associated with future revenue growth;

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

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

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

We have faced lawsuits 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.

We have faced lawsuits related to patent infringement and other claims in the past. For example, 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 other parties may assert intellectual property infringement claims against us or our customers. We may have acquired or may in the future acquire software as a result of our acquisitions, and we could be subject to claims that such software infringes the intellectual property rights of third parties. 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 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 generally 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 result in our loss of critical proprietary rights and 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

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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 also be prevented from distributing all or some of our products, and we may also 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 has fluctuated significantly in recent periods.

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.

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. Recent problems with the financial system, such as problems involving banks as well as the mortgage markets, might increase such market fluctuations.

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 qualify new sales opportunities technically 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 area where our headquarters are 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

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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 new executives or 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.

Our lengthy and unpredictable sales cycle and the large size of some orders, make it difficult for us to forecast revenue and increase 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 customers’ organizations 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.

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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 directors and officers insurance 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 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 6, 2008. 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.

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 6, 2008, our top three customers together accounted for approximately 19% 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 latter 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,

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the revenue from these contracts is recognized as amounts become due and payable. Revenue recognized under these arrangements will be higher in the latter part of the contract term, which potentially puts our future revenue recognition at greater risk of the customer’s continued 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 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.

Acquisitions are an important element of our strategy. We may not find suitable acquisition candidates and we may not be successful in integrating the operations of acquired companies and acquired technology.

Part of our growth strategy is to pursue acquisitions. 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

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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 we will find suitable acquisition candidates or that acquisitions we complete will be successful. Assimilating previously acquired companies such as Sabio Labs, Inc. (“Sabio”), Rio Design Automation, Inc. (“Rio”), 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;

• adverse effects on existing licensor or supplier relationships, such as termination of certain license agreements;

• 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 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.

Our operating results may be harmed if our customers do not adopt, or are slow to adopt, 65-nanometer and smaller design geometries on a large scale.

Our customers are currently working on a range of design geometries, including without limitation 45-nanometer, 65-nanometer and 90-nanometer designs. We continue to work toward developing and enhancing our product line in anticipation of increased customer demand for 65-nanometer and other smaller design geometries. Notwithstanding our efforts to support 65-nanometer, and other smaller design geometries, customers may fail to adopt these geometries on a large scale and we may be unable to persuade 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 and other smaller design geometries on a large scale, our operating results may be harmed. In addition, if customers are not able successfully to generate 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 or continue to use Blast Fusion, Talus, FineSim, the Quartz family of products, Titan 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, the Quartz family of products and Titan will account for most of our

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revenue for the foreseeable future. In addition, we have dedicated significant resources to developing and marketing Talus, Titan and other products. We must gain market penetration of Talus, FineSim, the Quartz family of products, Titan and other products in order to achieve our growth strategy and financial success. Moreover, if integrated circuit designers do not continue to adopt or use Blast Fusion, Talus, FineSim, the Quartz family of products, Titan 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 and in fiscal 2008 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, and we made some additional changes to our organizational structure in fiscal 2008. If this 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 organizational structure is not successful, we could experience delays in new product development that could cause us to lose customer orders and thereby could harm our operating results.

If the industries into which we sell our products experience a 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 Middle East and North Korea, recent problems with the financial system, such as problems involving banks as well as the mortgage markets, global climate change and other worldwide events have increased uncertainty in the United States economy. If the economy declines as a result of this economic, political, social, and environmental 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.

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 or 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 that we incur to develop those technologies and products. 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.

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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, which we either developed internally or 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. In addition, 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.

Because much of our business is international, we are exposed 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.

In fiscal 2008, we generated 40% of our total revenue from sales outside North America, compared to 32% in fiscal 2007 and 33% in fiscal 2006. 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;

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• 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;

• current events in North Korea, Iran, Iraq and the Middle East;

• the effects of terrorist attacks in the United States;

• recent problems with the financial system, such as problems involving banks as well as the mortgage markets; and

• any related conflicts or similar events worldwide.

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

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 continue to impose additional financial and administrative obligations on us and may continue to cause us to incur substantial implementation costs from third party consultants, which could adversely affect our results.

We have incurred and will continue to incur significant costs as a result of being a public company.

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission and the Nasdaq Stock Market, required changes in the corporate governance practices of public companies, which increased our legal and financial compliance costs. In particular, we have incurred and will continue to incur administrative expenses relating to compliance with Section 404 of the Sarbanes-Oxley Act, which requires that we implement and maintain an effective system of internal controls and annual certification of our compliance by our independent auditor. In addition, we incur other costs associated with our public company reporting requirements.

We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), we are required to furnish a report by our management on our internal control over financial reporting. The report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. In addition, our independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the internal control over financial reporting. Although we review our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, if our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if the independent registered public accounting firm interprets the requirements, rules and/or

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regulations differently from our interpretation, then they may decline to attest to management’s assessment or may issue a report that is qualified. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact our stock price.

While we have determined in our Management’s Report on Internal Control over Financial Reporting included in this Annual Report, that our internal control over financial reporting was effective as of April 6, 2008, we must continue to monitor and assess our internal control over financial reporting. 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 2% Convertible Senior Notes due May 15, 2010 (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.

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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 develop or acquire new products and enhance existing products continuously. 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 declined significantly for 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 addition, our stock price has declined significantly in light of our financial results for fiscal year 2008 (including our backlog as of April 6, 2008, which backlog is described in Item 1 above) as well as our outlook for fiscal year 2009.

As a result, many of our outstanding stock options have exercise prices per share that are currently below the trading price per share of our common stock. Therefore, 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 did 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 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

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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. 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. However, in the first quarter of fiscal 2008, we decreased our workforce by 21 employees; and in May 2008, we initiated a restructuring plan and expected to incur restructuring charges of approximately $1.2 million to $2.2 million in fiscal 2009 primarily for employee termination costs. 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 manage our growth adequately, 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 efforts by us or by our customers 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 persuade 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 persuade other software companies to work with us to interface our software 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;

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

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

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

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

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

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

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

• competitors may independently develop similar technologies and software;

• 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 influence significantly 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

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existing stockholders. If adequate funds are not available or are not available on acceptable terms, our ability to expand, develop or enhance services or products, or respond to competitive pressures would be limited.

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

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

• authorize 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.

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 6, 2008, we had approximately $6.3 million of cash and money market funds in foreign currencies. During the third quarter of fiscal 2008, we entered into foreign exchange forward contracts to mitigate the effects of our currency exposure risk for foreign currency transactions in Japanese Yen. While we assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis, our assessments may prove incorrect. Therefore, movements in exchange rates could negatively impact our business operating results and financial condition.

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A portion of our marketable securities is invested in auction rate securities. Failures in these auctions may affect our liquidity and value of these investments.

A portion of our marketable securities portfolio is invested in auction rate securities which are structured to provide liquidity through an auction process that resets the applicable interest rate generally every 28 days. During the fourth quarter of fiscal 2008, the $18.35 million auction rate securities held by us failed auction due to sell orders exceeding buy orders. These auctions have historically provided a liquid market for these securities. All of the auction rate securities that failed are AAA rated and are secured by pools of student loans guaranteed by state regulated higher education agencies and reinsured by the U.S. Department of Education. However, the liquidity and fair value of these investments have been impacted primarily by the uncertainty of the credit markets. In the event we need to liquidate our investments in these types of securities, we will not be able to do so until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured. Given these circumstances and the lack of liquidity, we have classified all of our auction rate securities as long-term investments as of April 6, 2008. Based on an impairment analysis performed during the fourth quarter of fiscal 2008, we have recorded temporary unrealized losses of $0.8 million in other comprehensive income as a reduction in stockholders’ equity. If a certain concentration of the underlying reference portfolios default, if the issuing agent fails to make the required interest payments or the final principal payment upon the ultimate maturity of the notes, or if the credit ratings on the underlying reference portfolios deteriorate significantly, we may be required to adjust the carrying value of these investments through an other-than-temporary impairment charge, which could materially affect our results of operations and financial condition.

The convertible notes we issued in March 2007 must be repaid in cash in May 2010, 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 Zero Coupon Convertible Subordinated Notes due May 15, 2008 (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 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 repaid the $15.2 million remaining principal amount of the 2008 Notes in full in May 2008 and we will be required to repay 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 is $15.00 for the 2010 Notes, subject to adjustment in certain circumstances. 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.

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 2010 Notes. The 2010 Notes have an aggregate outstanding principal amount of $49.9 million and bear interest at 2% per annum, with interest payable on May 15 and November 15 of each year, commencing on 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 2010 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 2010 Notes when due.

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The conversion of our outstanding convertible notes would result in dilution to our current stockholders, and there may be additional dilution to our current stockholders upon achievement of various milestones pursuant to our mergers and acquisitions.

The terms of the 2010 Notes permit the holders to convert the 2010 Notes into shares of our common stock. The 2010 Notes are convertible into shares of our common stock at an initial conversion price of $15.00 per share, which would result in an aggregate of approximately 3.3 million shares of our common stock being issued upon conversion, subject to adjustment. Upon the occurrence of certain triggering events, approximately 1.1 million additional shares of our common stock may be issued upon conversion of the 2010 Notes. The conversion of some or all of the 2010 Notes will dilute the voting power and ownership interest of our existing stockholders. Sales in the public market of a substantial number of shares of our common stock issuable upon conversion of the 2010 Notes, 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. In addition, there may be additional dilution to our current stockholders upon achievement of various milestones pursuant to our mergers and acquisitions, and such dilution would also dilute the voting power and ownership interest of our existing stockholders and could cause the market price of our common stock to decline and could increase the fluctuations in our stock price.

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

Upon a change in control, which is defined in the indentures relating to the 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 licensing or 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.

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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, North Carolina, Pennsylvania, Texas, Washington and Canada. In addition, we have European offices in Germany, the Netherlands, France and the United Kingdom, offices in Israel and the United Arab Emirates, and Asian offices in China, India, Japan, South 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.

ITEM 3.       LEGAL PROCEEDINGS

We are subject to certain 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 proceedings and disputes are 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 proceedings 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 such litigation matters and disputes unless they are or are close to being settled. Liabilities are recorded when a loss is probable and the amount can be reasonably estimated. Accordingly, as of April 6, 2008, we recorded a liability of $1.1 million to cover legal settlement exposure related to the shareholder class action lawsuit and the derivative complaint, as described below, and have not recorded any liabilities related to other contingencies. However, any estimates of losses or any such recording of legal settlement exposure is not assurance that there will be any court approval of any settlement, and there is no assurance that there will be any final, court approved settlement. Litigation settlement and legal fees are expensed in the period in which they are incurred.

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. On November 30, 2007, the parties agreed to a settlement. Plaintiffs filed a motion for preliminary approval of the settlement on June 6, 2008. There is no assurance that the court will grant preliminary approval of the settlement or that the settlement will subsequently obtain final court approval.

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. On January 8, 2008, the parties reached an agreement in principle with respect to certain aspects of settlement of the case and agreed upon the remaining terms of the settlement on February 21, 2008. We anticipate that plaintiff will file a motion for preliminary approval of the settlement on June 18, 2008. There is no assurance that the court will grant preliminary approval of the settlement or that the settlement will subsequently obtain final court approval.

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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 June 2, 2008:

Name	Age	Position
Rajeev Madhavan	42	Chief Executive Officer and Chairman of the Board of Directors
Roy E. Jewell	53	President, Chief Operating Officer and Director
Peter S. Teshima	50	Corporate Vice President, Finance and Chief Financial Officer
Bruce Eastman	53	Corporate Vice President, Worldwide Sales
David H. Stanley	61	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.

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.

Bruce Eastman has served as our Corporate Vice President, Worldwide Sales since April 2008. From September 2005 to April 2008, he served as an advisor to Silicon Navigator, Inc., a provider of electronic design automation software, as well as various other technology startups. From about May 2001 to September 2005, he served as President and Chief Executive Officer of Hitachi Storage Software, Inc., a provider of IT storage management products and an independent subsidiary of Hitachi, Ltd. From September 1999 to May 2001,

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Mr. Eastman served as a founder and Chief Executive Officer of Comstock Systems, an IT management company which was acquired by Hitachi, Ltd. Mr. Eastman has extensive experience in sales and sales management in the electronic design automation industry. His prior experience includes experience in sales management with ECAD through that company’s initial public offering and eventual merger with SDA to form Cadence Design Systems, Inc. While at Cadence, he served as Vice President of Worldwide Major Accounts and Technology Partners. He later served as Vice President of North America Sales for Quickturn Systems through its initial public offering, and as Executive Vice President of Sales for Avant! Corporation, which went public during his tenure. His prior experience also includes having served as Worldwide Vice President of Sales of InterHDL, which was acquired by Avant! Corporation, and also as Worldwide Vice President of Sales and Marketing of Silicon Architects, which was acquired by Synopsys.

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 advisor. 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 June 2, 2008, there were 543 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.

	High		Low
Fiscal 2008:
Fourth quarter	$	13.42	$	8.48
Third quarter	$	15.40	$	11.35
Second quarter	$	15.44	$	12.02
First quarter	$	15.70	$	11.64
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

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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, 2003 and tracks it (including reinvestment of dividends) through April 6, 2008. 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.

	3/31/03	3/31/04	3/31/05	4/2/06	4/1/07	4/6/08
Magma Design Automation, Inc.	100.00	269.42	153.16	111.61	154.32	130.58
NASDAQ Composite	100.00	151.41	152.88	181.51	190.24	177.63
NASDAQ Computer & Data Processing	100.00	125.27	135.69	157.98	172.44	164.86

* $ 100 Invested on 3/31/03 in stock or index-including reinvestment of dividends. Indexes calculated on month-end basis.

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 Annual Report by reference.

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Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer

The following table shows repurchases of shares of our common stock in the fourth quarter of fiscal 2008:

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 7 – January 31, 2008	7,934	$	3.80	0	N/A
February 1 – February 29, 2008	338,945	$	10.20	298,000	N/A
March 1 – April 6, 2008	210,877	$	9.74	201,500	N/A
Total	557,756	$	10.08	499,500	N/A

* Includes purchases of 499,500 shares of treasury stock at an average price of $9.98 in the open market pursuant to the repurchase program announced in February 2008, and 50,515 shares repurchased at prices ranging from $10.07 to $11.52, 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 Annual Report. The selected consolidated balance sheet data as of April 6, 2008 and April 1, 2007 and selected consolidated statements of operations data for the years ended April 6, 2008, April 1, 2007 and April 2, 2006, are derived from our audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated balance sheet data as of April 2, 2006, March 31, 2005 and March 31, 2004 and the selected consolidated statements of operations data for the years ended March 31, 2005 and 2004 were derived from audited consolidated financial statements not included in this Annual Report. Our historical results are not necessarily indicative of our future results.

	Fiscal Year Ended
	April 6, 2008			April 1, 2007			April 2, 2006			March 31, 2005			March 31, 2004
	(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue	$	214,419		$	178,153		$	164,044		$	145,941		$	113,729
Cost of revenue(1)	$	49,354		$	54,579		$	41,715		$	22,216		$	16,647
Operating income (loss)(1)(2)(3)	$	(24,732	)	$	(67,773	)	$	(26,529	)	$	(5,654	)	$	13,633
Other income (expense), net(4)	$	(1,037	)	$	7,269		$	8,141		$	209		$	1,418
Net income (loss)	$	(30,835	)	$	(61,185	)	$	(20,937	)	$	(8,581	)	$	11,475
Net income (loss) per share—basic	$	(0.76	)	$	(1.67	)	$	(0.61	)	$	(0.25	)	$	0.36
Net income (loss) per share—diluted	$	(0.76	)	$	(1.67	)	$	(0.61	)	$	(0.25	)	$	0.29

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	As of
	April 6, 2008		April 1, 2007		April 2, 2006		March 31, 2005		March 31, 2004
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents, short-term and long-term investments	$	67,508	$	56,038	$	97,158	$	135,518	$	150,842
Total assets	$	244,296	$	239,646	$	284,064	$	319,224	$	314,475
Convertible notes, net	$	63,734	$	63,077	$	105,500	$	150,000	$	150,000
Other non-current liabilities	$	14,243	$	4,689	$	5,727	$	1,749	$	5,999
Total stockholders’ equity	$	107,228	$	82,767	$	113,903	$	121,399	$	117,739

(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 $2.3 million, $1.3 million, $0.5 million $4.4 million and $0.2 million for fiscal 2008, 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 consolidated financial statements and results appearing elsewhere in this Annual 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 products, research and development expense, sales and marketing expense, general and administrative expense, cash expenditures, various other operating expenses and acquisitions.

Although we believe that the expectations reflected in the forward-looking statements contained herein 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 the risks discussed under the heading “Risk Factors” in Item 1A of this Annual Report and the following factors:

• 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 potentially higher-than-anticipated costs of litigation and 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;

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• 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;

• difficulties in developing and achieving market acceptance of new products and delays in planned release dates of our software products and upgrades;

• 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 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.

Change in Fiscal Year End

We have a 52-53 week fiscal year ending on the first Sunday subsequent to March 31. Our 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. Our fiscal year 2008 consisted of 53 weeks. The result of the additional week was included in this Annual Report, and did not have a material impact on our consolidated financial position or results of operations.

On January 28, 2008, our Board of Directors approved a change of fiscal year from a fiscal year ending on the first Sunday subsequent to March 31 to a fiscal year ending on the first Sunday subsequent to April 30 (except for any given year in which April 30 is a Sunday, in which case the fiscal year will end on April 30), starting with fiscal 2009. Information covering the transition period from April 7, 2008 to May 4, 2008 will be included in our quarterly report on Form 10-Q for the quarterly period ending August 3, 2008, the first quarterly report of our newly adopted fiscal year. The separate audited financial statements required for the transition period will be included in our annual report on Form 10-K for the fiscal year ending May 3, 2009.

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.

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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 2008 include:

• We successfully completed three transactions during fiscal 2008 to broaden our product offerings and to incorporate key technologies into our existing products.

• The number of our employees increased to 1,030 as of April 6, 2008, up from 843 as of April 1, 2007. Most of the increase in employees represents additions to our R&D and application engineering organizations. We believe our investments in these organizations will enable us to continue to provide advanced design solutions for our customers in all key areas of chip design.

• Revenue for fiscal 2008 was $214.4 million, an increase of 20% from the prior year. Licenses and bundled licenses and services sales for fiscal 2008 and 2007 accounted for approximately 84% and 81%, respectively, of our revenue. For fiscal 2008, 61% of our revenue was derived from orders recognized on a ratable basis or due-and-payable or cash-receipts basis, and 23% of our revenue was derived from short-term time-based and perpetual licenses recognized up-front (of which 19% of our revenue was from new contracts entered into during fiscal 2008 and the remaining 4% of our revenue from orders received prior to fiscal 2008 but recognized as revenue in fiscal 2008).

• Domestic sales revenue increased by $6.0 million or 5% in fiscal 2008 compared to the prior year. This increase was primarily due to large orders executed during fiscal 2008 in North America. These orders came from new customers and existing customers who extended license periods and added license capacity due to the continued use of existing and new Magma products among their design group designers.

• For fiscal 2008, cash flows generated from operations were $13.2 million, or 6% of fiscal 2008 revenue. If excluding the $12.5 million one-time payment on Synopsys litigation settlement, the cash flows generated from operations for fiscal 2008 would have been $25.7 million, or 12% of fiscal 2008 revenue.

Recent Acquisitions

During fiscal 2008, we acquired companies and purchased technologies that enable us to expand into new markets. We believe that these acquisitions will be a significant factor in Magma’s ability 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, as a result, increased our research and development and sales and marketing expenses. These 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.

On February 26, 2008, we acquired Sabio Labs, Inc., a privately-held developer of analog design solutions for mixed-signal designers. Sabio’s software enables designers to create robust analog designs, port complex circuits to new process technologies in foundries efficiently, and explore system design trade-offs early in the design process. The total purchase price for the acquisition was $16.5 million, consisting of approximately 1,574,000 shares of our common stock valued at $16.2 million and transaction costs of $270,000. As part of the

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initial consideration, 127,000 shares of our common stock valued at $1.3 million was associated with employee retention and will be earned and recorded as compensation expenses in accordance with such employees’ vesting schedules. In addition, we agreed to pay up to $7.5 million of contingent consideration in the form of cash or shares of Magma common stock, at our discretion, to the former Sabio stockholders upon achieving certain product integration and booking milestones.

On September 19, 2007, we acquired Rio Design Automation, Inc., a privately-held EDA software company that provides package-aware chip design software. Rio’s software enables designers to analyze and optimize integrated circuit design within the context of the package and electronic system, further expanding our product offering. Prior to acquiring Rio, we had an 18% ownership interest in Rio. The total purchase price for the step acquisition was $4.5 million, consisting of $526,000 in cash, approximately 278,700 shares of our common stock valued at $3.8 million, and transaction costs of $168,000.

On April 13, 2007, we acquired certain assets from a privately-held developer of EDA technology. Pursuant to the asset purchase agreement, we paid total consideration of $200,000 in cash. Based on management’s estimates and appraisal, the $200,000 consideration was allocated to patents and intellectual property.

During fiscal 2008, a total of $9.6 million in gross contingent cash consideration and a total of $3.8 million in gross contingent stock consideration were earned by various acquired businesses upon their achievement of certain milestones under various prior asset purchase and business combination agreements.

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, cash equivalent, short-term and long-term investments, 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 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 to the Consolidated Financial Statements in Item 8 of this Annual Report. 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.

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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 is recognized when customer installments are due and payable.

In order for an arrangement to be considered to have fixed or determinable fees, 100% of the license, services and initial post contract support fee is to be paid 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 twelve 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 lesser extent, from licenses of our analysis and verification products. We license our products under time-based and perpetual licenses whereby license revenue is recognized after the execution of a license agreement and the delivery of the product to the customer, provided that there are no uncertainties surrounding the product acceptance, fees are fixed or determinable, collection is probable and there are no remaining obligations other than maintenance.

For perpetual licenses and unbundled time-based license arrangements, where maintenance is included for the first period of the license term, with maintenance thereafter renewable by the customer at the substantive rates stated in their agreements with us, the stated rate for maintenance renewal is vendor-specific objective evidence (“VSOE”) of the fair value of maintenance in these arrangements. For these arrangements license revenue is recognized using the residual method in the period in which the license agreement is executed assuming all other revenue recognition criteria are met. Where an arrangement involves extended payment terms, revenue recognized using the residual method is limited to amounts due and payable.

For transactions that include bundled maintenance for the entire license term we have no VSOE of fair value of maintenance. Therefore, we recognize license revenue ratably over the maintenance period. If an arrangement involves extended payment terms—that is, where payment for less than 100% of the arrangement fee is due within one year of the contract date—we recognize revenue to the extent of the lesser of the amount due and payable or the ratable portion. We classify the revenue recognized from these transactions separately as bundled licenses and services revenue in our consolidated statements of operations.

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,

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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 SFAS No. 123 (revised 2004), “Share-Based Payment” using the modified prospective transition method. 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.

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 estimated 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. 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, in which 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 6, 2008, two of our customers each 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.

Cash equivalent, short-term investments and long-term investments

We account for our 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

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balance sheet at fair market value as of the balance sheet date, with unrealized gains or losses considered to be temporary in nature reported as a component of other comprehensive income (loss) within the stockholders’ equity on our consolidated balance sheets.

The fair value of our investments is generally determined from quoted market prices based upon transactions in active markets. We have investments in auction rate securities recorded at cost, which approximates fair market value (unless the auction fails) due to their variable interest rates, which reset through an auction process generally every 28 days. When auctions fail, trading essentially ceases and the securities are deemed to be not liquid, we may use other alternatives, such as broker-dealer valuation methodologies, to determine the fair value of these securities, which could be materially different from the actual market performance of these securities.

We periodically evaluate our investments for possible other than temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. Once a decline in fair value is determined to be other than temporary, an impairment charge is recorded to the extent that the carrying value of the securities exceeds the estimated fair market value of the securities. Assessing the above factors involves inherent uncertainty. Write-downs, if recorded, could be materially different from the actual market performance of investments in our portfolio, if, among other things, relevant information related to our investments was not publicly available or other factors not considered by us would have been relevant to the determination of impairment.

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.

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 units, and determining the fair value of the reporting units. 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

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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 from what was 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 the 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.

On April 2, 2007, we adopted FIN 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109.” Under FIN 48, we 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. As a result of the implementation of FIN 48, we recognized a $0.5 million increase to liabilities for uncertain tax positions, which was accounted for as an adjustment to the April 2, 2007 balance of accumulated deficit. At April 2, 2007, we had approximately $10.4 million of gross unrecognized tax benefits, $3.5 million of which, if recognized, would favorably affect our effective tax rate in future periods. Upon adoption of FIN 48, we also recognized additional long-term income tax assets of $6.9 million and additional long-term income tax liabilities of $6.9 million to present the unrecognized tax benefits as gross amounts on the consolidated balance sheet.

We recognize interest and/or penalties related to uncertain tax positions in income tax expenses. As of April 6, 2008, we had approximately $0.35 million of accrued interest and penalties related to uncertain tax positions.

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. The carrying value of our portfolio of strategic

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equity investments totaled $2.2 million at April 6, 2008. Our ability to recover our investments in private, non-marketable equity securities and convertible notes and to earn a return on these investments is primarily dependent on how successfully these companies are able to execute on their business plans and how well their products are accepted, as well as their ability to obtain additional capital funding to continue operations.

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%, or where we have significant influence on the investee’s operating or financial decisions, we record our share of net equity income (loss) of the investee based on our proportionate ownership. During the second quarter of fiscal 2008, with the purchase of the remaining 82% ownership of one of our equity investments, Rio Design Automation, Inc., we ceased accounting for our investment in Rio under the equity method and began accounting for our 100% ownership on a consolidated basis. The equity investment balance of $220,000 on the acquisition date was reclassified from other assets and was allocated to the book value of the previously owned assets and liabilities on our consolidated balance sheets. We recorded $0.5 million of net loss on our equity investments during fiscal 2008.

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 did not record any impairment charges related to these non-marketable equity investments during fiscal 2008.

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 under the heading “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

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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 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 6, 2008		% of Revenue		Year Ended April 1, 2007		% of Revenue		Year Ended April 2, 2006		% of Revenue
Revenue category:
Licenses and bundled licenses and services revenue
Ratable	$	43,859	20	%	$	33,199	19	%	$	34,123	21	%
Due & Payable		81,320	38	%		75,506	42	%		55,004	34	%
Cash Receipts		6,116	3	%		9,199	5	%		8,465	5	%
Up-Front*		48,282	23	%		27,012	15	%		41,659	25	%
		179,577	84	%		144,916	81	%		139,251	85	%
Services revenue		34,842	16	%		33,237	19	%		24,793	15	%
Total Revenue	$	214,419	100	%	$	178,153	100	%	$	164,044	100	%

* Includes $40,278 or 19% of revenue from new contracts for fiscal 2008, $32,141 or 18% of revenue from new contracts for fiscal 2007 and $50,552 or 31% of revenue from new contracts for fiscal 2006.

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

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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 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 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 2007 to fiscal 2008 and from fiscal 2006 to fiscal 2007 (in thousands, except percentage data):

	Year Ended									% Change
	April 6, 2008			April 1, 2007			April 2, 2006			2007 / 2008		2006 / 2007
Revenue:
Licenses	$	139,062		$	101,991		$	86,418		36	%	18	%
Bundled licenses and services.		40,515			42,925			52,833		(6	)%	(19	)%
Services		34,842			33,237			24,793		5	%	34	%
Total revenue		214,419			178,153			164,044		20	%	9	%
Cost of revenue
Licenses		19,151			24,125			16,267		(21	)%	48	%
Bundled licenses and services.		9,474			12,935			13,404		(27	)%	(4	)%
Services		20,729			17,519			12,044		18	%	46	%
Total cost of revenue		49,354			54,579			41,715		(10	)%	31	%
Gross profit	$	165,065		$	123,574		$	122,329		34	%	1	%
Percentage of total revenue:
Licenses revenue		65	%		57	%		53	%
Bundled licenses and services revenue		19	%		24	%		32	%
Services revenue		16	%		19	%		15	%
Cost of revenue		23	%		31	%		25	%
Gross profit		77	%		69	%		75	%

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We market our products and related services to customers in four geographic regions: North America, Europe (Europe, the Middle East and Africa), Japan, and Asia-Pacific. Internationally, we market our products and services primarily through our subsidiaries and various distributors. Revenue is attributed to geographic areas based on the country in which the customer is domiciled. The table below sets forth the fluctuations in geographic distribution of revenue from fiscal 2007 to fiscal 2008 and from fiscal 2006 to fiscal 2007 (in thousands, except percentage data):

	Year Ended									% Change
	April 6, 2008			April 1, 2007			April 2, 2006			2007 / 2008		2006 / 2007
Revenue:
Domestic	$	127,664		$	121,633		$	109,434		5	%	11	%
International		86,755			56,520			54,610		54	%	4	%
Total revenue	$	214,419		$	178,153		$	164,044		20	%	9	%
Percentage of total revenue:
Domestic		60	%		68	%		67	%
International		40	%		32	%		33	%
Total revenue		100	%		100	%		100	%

Revenue

• Licenses revenue increased by 36% in fiscal 2008 compared to fiscal 2007 primarily due to large orders executed during fiscal 2008 in all regions. These orders came from new and existing customers who extended license periods or added license capacity due to the continued use of existing and new Magma products among their design group designers. We do not factor any of our receivables to obtain revenue. No customer accounted for greater than 10% of total revenue for fiscal 2008. Licenses revenue as a percentage of total revenue increased by 8% in fiscal 2008 compared to fiscal 2007.

License revenue increased by 18% 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 use of existing and new Magma products, among 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 by 4% in fiscal 2007 compared to fiscal 2006.

• Bundled licenses and services revenue decreased by 6% in fiscal 2008 compared to fiscal 2007 primarily due to a decrease in bundled licenses and services revenue in North America, Japan and Asia-Pacific, partially offset by an increase in bundled licenses and services revenue in Europe. The decreases were primarily driven by revenue from a few large orders executed during fiscal 2007 that either shifted to unbundled license revenue or ended in fiscal 2008. Bundled licenses and services revenue as a percentage of total revenue decreased by 5% in fiscal 2008 compared to fiscal 2007.

Bundled licenses and services revenue decreased by 19% in fiscal 2007 compared to fiscal 2006 primarily driven by revenue from a few large orders executed during fiscal 2006 that either shifted 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 by 8% in fiscal 2007 compared to fiscal 2006.

• Services revenue increased by 5% in fiscal 2008 compared to fiscal 2007 primarily due to a $1.2 million increase in maintenance revenue and a $0.4 million increase in consulting and training revenue, primarily driven by large orders of a few of our customers executed during fiscal 2008 throughout all regions. Services revenue as a percentage of total revenue decreased by 3% in fiscal 2008 compared to fiscal 2007.

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Services revenue increased by 34% 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 as a percentage of total revenue increased by 4% in fiscal 2007 compared to fiscal 2006.

• Domestic revenue increased by 5% in fiscal 2008 compared to fiscal 2007 primarily due to an increase in total licenses revenue and bundled licenses and services revenue from existing customers. Domestic revenue as a percentage of total revenue decreased by 8% in fiscal 2008 compared to fiscal 2007.

Domestic revenue increased by 11% in fiscal 2007 compared to fiscal 2006 primarily due to large orders executed during fiscal 2007 from a few major customers. Domestic revenue as a percentage of total revenue was approximately the same in fiscal 2007 as compared to fiscal 2006.

• International revenue increased by 54% in fiscal 2008 compared to fiscal 2007 primarily due to an increase in purchases from new and existing customers in all three international regions.

International revenue increased by 4% in fiscal 2007 compared to fiscal 2006 primarily due to an increase in purchases from new and existing customers in Japan and Asia-Pacific, partially offset by decreases in purchases from existing customers in Europe, who required less capacity for existing licenses and fewer licenses to new technology products.

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 licenses revenue decreased by 21% in fiscal 2008 compared to fiscal 2007, primarily due to a decrease in amortization charges related to existing intangible assets in fiscal 2008 compared to fiscal 2007 as several acquired technology licenses were fully amortized prior to or during fiscal 2008. The decreases were partially offset by increases in amortization charges related to newly acquired intangible assets and decreases in costs allocated to cost of bundled licenses and services revenue in fiscal 2008 compared to fiscal 2007.

Cost of license revenue increased by 48% 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 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 by 27% in fiscal 2008 compared to fiscal 2007 primarily due to decreases in allocated cost of licenses revenue in fiscal 2008 compared to fiscal 2007. Cost of bundled licenses and services revenue decreased by 4% 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 services revenue primarily consists of personnel and related costs to provide product support, training and consulting services. Cost of services revenue also includes stock-based compensation expenses, asset depreciation and allocated outside sales representative expenses. Cost of services revenue increased by 18% in fiscal 2008 compared to fiscal 2007 primarily due to increases in payroll related costs and stock-based compensation expenses for application engineers resulting from increases in the number of employees and annual salary increases.

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Cost of services revenue increased by 46% 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.

Operating expenses

The table below sets forth the fluctuations in operating expenses from fiscal 2007 to fiscal 2008 and from fiscal 2006 to fiscal 2007 (in thousands, except percentage data):

	Year Ended									% Change
	April 6, 2008			April 1, 2007			April 2, 2006			2007 / 2008		2006 / 2007
Operating expenses:
Research and development	$	76,920		$	63,625		$	50,085		21	%	27	%
Sales and marketing		70,711			60,041			46,539		18	%	29	%
General and administrative		31,576			42,870			39,935		(26	)%	7	%
Amortization of intangible assets		8,043			11,011			11,849		(27	)%	(7	)%
In-process research and development		2,256			1,300			450		74	%	189	%
Restructuring costs		291			—			—
Litigation settlement		—			12,500			—
Total operating expenses	$	189,797		$	191,347		$	148,858		(1	)%	29	%
Percentage of total revenue:
Research and development		36	%		36	%		31	%
Sales and marketing		33	%		34	%		28	%
General and administrative		15	%		24	%		24	%
Amortization of intangible assets		4	%		6	%		7	%
In-process research and development		1	%		1	%		0	%
Restructuring costs		0	%		—			—
Litigation settlement		—			7	%		—
Total operating expenses		89	%		107	%		91	%

• Research and development expense increased by $13.3 million in fiscal 2008 compared to fiscal 2007 primarily due to increases in payroll related expenses of $6.2 million, allocations of increased common expenses, such as information technology and facility related expenses, of $3.9 million, and increases in other individually insignificant items such as stock-based compensation expense and professional fees in fiscal 2008 compared to fiscal 2007. The increase in payroll related expenses was primarily due to increases in the number of employees and annual salary increases. We increased the number of our research and development employees by 30% through direct hiring and acquisitions during fiscal 2008.

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.

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We expect our research and development expense in fiscal 2009 to increase moderately, but to remain at levels comparable to fiscal 2008 as a percentage of fiscal 2009 revenue.

• Sales and marketing expense increased by $10.7 million in fiscal 2008 compared to fiscal 2007 primarily due to an increase in payroll related and commission expenses of $8.7 million, stock-based compensation expense of $1.4 million and travel expenses of $1.2 million, partially offset by a $1.0 million increase in expenses allocated to cost of services revenue (primarily application engineering costs). The remainder of the fluctuation in sales and marketing expense was accounted for by other individually insignificant items. The increases in payroll related charges were primarily due to increases in the number of employees and annual salary increases. In fiscal 2008, the number of employees in sales and marketing increased by 19% over fiscal 2007 primarily due to growth in the number of application engineer employees.

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 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.

We expect our sales and marketing expenses in fiscal 2009 to increase moderately compared to fiscal 2008, and to remain at levels comparable to fiscal 2008 as a percentage of fiscal 2009 revenue.

• General and administrative expense decreased by $11.3 million in fiscal 2008 compared to fiscal 2007 primarily due to a decrease of $11.5 million in legal fees related to patent litigation with Synopsys, a decrease of $2.1 million in moving expenses and write-off of unamortized leasehold improvements, and an increase of $6.0 million in allocated cost to other functional areas due to higher common expenses in fiscal 2008. The decreases were partially offset by increases in office and facility related expenses of $3.8 million, payroll related expenses of $1.2 million and other professional fees of $1.0 million in fiscal 2008. The remainder of the fluctuation in general and administrative expense was accounted for by other individually insignificant items.

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 improvements 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.

We expect our general and administrative expenses in fiscal 2009 to remain at levels comparable to fiscal 2008, and to decrease as a percentage of fiscal 2009 revenue.

• Amortization of intangible assets decreased by 27% in fiscal 2008 compared to fiscal 2007 primarily due to several existing developed technologies and patents having been fully amortized prior to or during fiscal 2008.

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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.

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

• In-process research and development (“IPR&D”) expense of $2.3 million in fiscal 2008 consisted of charges of $1.6 million and $0.7 million recorded in connection with our acquisitions of Sabio and Rio, respectively, during fiscal 2008. 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. 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 expenses of $450,000 in fiscal 2006 consisted of a charge recorded in connection with our acquisition of ACAD in November 2005. 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 Knights and ACAD were completed in fiscal 2008 and 2007, respectively, and we expect to bring the in-process products of Sabio and Rio to completion during fiscal 2009.

• Restructuring costs of $0.3 million in fiscal 2008 represented employee termination charges resulting from our realignment to current business objectives. No such charge was incurred in fiscal 2007 and fiscal 2006.

• 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 2008 and fiscal 2006.

Other items

The table below sets forth the fluctuations in other items from fiscal 2007 to fiscal 2008 and from fiscal 2006 to fiscal 2007 (in thousands, except percentage data):

	Year Ended									% Change
	April 6, 2008			April 1, 2007			April 2, 2006			2007 / 2008		2006 / 2007
Other income (expense), net:
Interest income	$	2,021		$	2,729		$	2,875		(26	)%	(5	)%
Interest and amortization of debt discount expense		(2,467	)		(723	)		(849	)	241	%	(15	)%
Gain on extinguish of debt		—			6,532			8,781		(100	)%	(26	)%
Other expense, net		(591	)		(1,269	)		(2,666	)	(53	)%	(52	)%
Total other income (expense), net	$	(1,037	)	$	7,269		$	8,141
Income tax provision	$	5,066		$	1,002		$	2,549		406	%	(61	)%

• Interest income decreased by 26% in fiscal 2008 compared to fiscal 2007 primarily due to our lower averaged cash and investments balance resulting from our use of cash to acquire intangible assets and fixed assets, and to repurchase our common stock during fiscal 2008.

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 fiscal 2007.

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• Interest expense primarily represents amortization of debt discount and issuance costs in connection with our 2010 Notes and 2008 Notes. Interest expense increased in fiscal 2008 compared to fiscal 2007 primarily due to an additional $1.6 million expense related to debt discount amortization and the 2% interest payment on the 2010 Notes. The 2010 Notes offering was completed in the fourth quarter of fiscal 2007. The remainder of the fluctuation in interest expense was accounted for by other individually insignificant items, such as amortization of debt issuance costs and interest expenses on the line of credit and capital leases.

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 compared to fiscal 2006. The decrease was partially offset by an increase in interest expense on capital leases in fiscal 2007.

• 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 $0.7 million in fiscal 2008 compared to fiscal 2007 primarily due to a $0.6 million change in foreign exchange gain/loss in fiscal 2008. The changes in foreign exchange gain/loss were primarily caused by favorable exchange rate fluctuations between the U.S. Dollar and the Japanese Yen.

During fiscal 2008, we entered into foreign currency forward contracts to mitigate exposure in movements between the U.S. dollar and Japanese Yen. The derivatives do not qualify for hedge accounting treatment under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” We recognize the gain and loss on foreign currency forward contracts in the same period as the remeasurement loss and gain of the related foreign currency-denominated exposures. In fiscal 2008, net foreign exchange loss totaled $110,000 and was included in other income (expense), net in our consolidated statements of operations.

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 loss on our equity 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.

• Provision for income taxes.    Our effective tax rate was 19.7%, 1.7%, and 13.9% in fiscal 2008, 2007 and 2006, 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, in-process research and development, research and development tax credits, and foreign withholding taxes for which no U.S. tax benefits were received due to our full valuation allowance. U.S. income tax expense was $5.1 million, $1.0 million, and $2.5 million in fiscal 2008, 2007 and 2006, 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.

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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 6, 2008			April 1, 2007			April 2, 2006
	(in thousands)
As of:
Cash and cash equivalents	$	46,970		$	45,338		$	58,550
Short-term investments		3,000			10,700			38,608
Long-term investments		17,538			—			—
Cash, cash equivalents, short-term and long-term investments	$	67,508		$	56,038		$	97,158
For the Year Ended:
Net cash provided by operating activities	$	13,214		$	21,315		$	40,210
Net cash provided by (used in) investing activities	$	(22,564	)	$	(8,340	)	$	43,082
Net cash provided by (used in) financing activities	$	10,932		$	(26,189	)	$	(45,233	)

As of April 6, 2008, our total cash, cash equivalents, short-term investments and long-term investments, excluding restricted cash, was $67.5 million, as compared to $56.0 million as of April 1, 2007 and $97.2 million as of April 2, 2006. In fiscal 2008 and 2007, our primary sources of cash consisted of cash provided by operations and proceeds from issuance of common stock to employees, and our primary uses of cash consisted of the repurchase of a portion of the 2008 Notes, repurchases of our common stock, purchases of property and equipment, and payments related to business combination and intangible asset acquisitions.

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 are structured to provide liquidity through an auction process that resets the applicable interest rate generally every 28 days.

During the fourth quarter of fiscal 2008, the $18.35 million auction rate securities held by us failed auction due to sell orders exceeding buy orders. As of April 6, 2008, we have written down our auction rate securities from their par value of approximately $18.35 million to the estimated fair value of approximately $17.5 million. The $0.8 million decline in market value was deemed temporary as we believe that these investments generally are of high credit quality, as substantially all of the investments carry an AAA credit rating and are secured by pools of student loans guaranteed by state-regulated higher education agencies and reinsured by the U.S. Department of Education. In addition, we have the intent and ability to hold these investments until anticipated recovery in market value occurs. Accordingly, we have recorded an unrealized loss on these securities of $0.8 million in other comprehensive loss as a reduction in stockholders’ equity. The funds invested in auction rate securities that have experienced failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured. Based on our ability to access our cash, cash equivalents and short-term investments, our expected operating cash flows, and our other sources of cash, we do not anticipate the current lack of liquidity on these investments to have a material impact on our financial condition or results of operations.

As of April 6, 2008, we believe that our existing cash and cash equivalents will be sufficient to meet our anticipated operating and working capital expenditure requirements in the ordinary course of business for at least

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the next 12 months, as well as the repayment of the remaining 2008 Notes, which we completed in May 2008. 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.

Net cash provided by operating activities

Net cash provided by operating activities decreased by $8.1 million in fiscal 2008 compared to fiscal 2007. The decrease was primarily due to a $36.5 million increase in payments on accounts payable and accrued liabilities balances (including the $12.5 million one-time payment on the Synopsys litigation settlement), and a $7.1 million increase in costs and expenses in fiscal 2008. These decreases in cash flow were partially offset by a $36.2 million increase in cash from customers in fiscal 2008. The increase in cash from customers was primarily due to growth in revenue and strong cash collections in fiscal 2008. The decrease in accrued liabilities balances in fiscal 2008 was primarily due to payments on legal fees, employee bonuses and the Synopsys litigation settlement fee of $12.5 million.

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/used in investing activities

Net cash used in investing activities was $22.6 million in fiscal 2008. We used a total of $8.3 million in cash to make earnout payments relating to prior acquisitions, acquire Rio, purchase technology licenses and made an investment of $1.3 million in a privately held technology company for business and strategic purposes. We also acquired property and equipment totaling $7.2 million in cash and $2.9 million through capital leases. The primary sources of cash were the net proceeds of $10.6 million from sales of marketable securities and the $4.9 million from the releases of restricted cash. In connection with the establishment of the $10.0 million credit facility in July 2007, we are no longer required to maintain restricted cash balances relating to the $1.9 million letters of credit and to the $3.0 million borrowing under the prior credit facility which was paid off in the second quarter of fiscal 2008. We expect to make capital expenditures of approximately $8.3 million during fiscal 2009. These capital expenditures will be used to support selling, marketing and product development activities. We will use capital lease financing as well as our cash and cash equivalents to fund these purchases. In addition, we may make earnout payments related to prior acquisitions and acquire additional technologies and strategic equity investments in the future using our cash and cash equivalents.

Net cash used in investing activities was $8.3 million in fiscal 2007. 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 office leases, we maintain restricted cash of $4.7 million as securities to the borrowings and deposits for the new leases. The primary source of cash was the net proceeds of $28.0 million from sales of marketable securities as we liquidated these investments to repurchase a portion of the 2008 Notes.

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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 provided by/used in financing activities

Net cash provided by financing activities was $10.9 million in fiscal 2008. The primary source of cash was $21.4 million in net cash received from the exercise of stock options and shares purchased under the employee stock purchase plan during fiscal 2008. We used $5.0 million to repurchase 499,500 shares of our common stock in the open market. In addition, we used $3.0 million to payoff the borrowings under our line of credit facility and made payments of $2.4 million on our capital lease obligations.

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 lease obligations. 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 our common stock in the open market, as authorized by our Board of Directors in April 2005, and made payments of $0.8 million on our capital lease obligations. The primary source of cash was $6.3 million in net cash received from the exercise of stock options and shares purchased under the employee stock purchase plan during the period.

Convertible 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 did not bear coupon interest and were convertible into shares of our common stock at an initial conversion price of $22.86 per share. 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. 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 $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 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

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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 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 $10.0 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 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.

Approximately $15.2 million principal amount of the 2008 Notes was 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. We repaid the $15.2 million principal amount of the 2008 Notes in May 2008. The remaining portion of the hedging arrangements expired at the same time.

Repurchases of common stock

On February 21, 2008, we announced that our Board of Directors authorized us to repurchase up to $20.0 million of our common stock. In March 2008, we used approximately $5.0 million to repurchase 499,500 shares of our common stock in the open market. The repurchased shares are to be used for general corporate purposes.

Line of credit

In July 2007, we established a $10.0 million unsecured revolving line of credit facility with Wells Fargo Bank, N.A. This credit facility, which replaces the $5.0 million revolving line of credit facility previously established in November 2006, is available through July 2010 and bears an interest rate equal to the bank’s prime rate less 1.20% or LIBOR plus 1.00%. 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 requires that we maintain certain financial conditions and pay fees of 0.125% per year, which was subsequently reduced to 0.075% per year effective February 2008, on the unused amount of the facility. 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. Letters of credit under the prior facility were transferred to the new $10.0 million credit facility. As of April 6, 2008, two letters of credit totaling $1.7 million were outstanding and we had a borrowing base availability of $8.3 million under the credit facility. Since the new credit facility is unsecured, we are no longer required to maintain restricted cash balances relating to the letters of credit under the credit facility.

Contractual obligations

As of April 6, 2008, our principal contractual obligations consisted of operating lease commitments, with an aggregate future amount of $18.2 million through fiscal 2013 for office facilities, repayments of the convertible notes of $15.2 million due in May 2008 and $49.9 million due in May 2010, capital lease obligations for computer equipment and purchase obligations. Although we have no material commitments for capital expenditures, we anticipate a substantial increase in our capital expenditures and lease commitments with our

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anticipated growth in operations and infrastructure. Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the normal course of business for which we have not received the goods or services as of April 6, 2008. 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. In addition, we have other obligations for goods and services entered into in the normal course of business. These obligations, however, either are not enforceable or legally binding or are subject to change based on our business decisions.

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. The total amount of cash contingent consideration that could be paid under our acquisition agreements, assuming all contingencies are met, was $42.1 million as of April 6, 2008. These contingent consideration obligations are not expected to affect our estimate that our existing cash and cash equivalents will be sufficient to meet our anticipated operating and working capital expenditure requirements in the ordinary course of business for at least the next 12 months, as well as the repayment of the remaining 2008 Notes of $15.2 million, which we completed in May 2008.

The table below summarizes our significant contractual obligations at April 6, 2008, 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 6, 2008.

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 Years		4-5 Years		After 5 Years
Operating lease obligations	$	18.2	$	6.7	$	9.1	$	2.4	$	—
Capital lease obligations		4.1		2.4		1.7		—		—
Convertible notes		65.1		15.2		49.9		—		—
Purchase obligations		7.8		4.9		2.9		—		—
Total	$	95.2	$	29.2	$	63.6	$	2.4	$	—

Income taxes

As of April 6, 2008, our unrecognized tax benefits amounted to $11.8 million and were included in our long-term tax liabilities on our consolidated balance sheet. We are not able to estimate the amount or timing of any cash payments required to settle these liabilities; however, we do not anticipate the settlement of the liabilities will require payment of cash within the next twelve months and do not believe that the ultimate settlement of these obligations will materially affect our liquidity.

Off-balance sheet arrangements

As of April 6, 2008, we did not have any significant “off-balance-sheet arrangements,” as defined in Item 303(a)(4)(ii) of Regulation S-K.

Warranties

We warrant to our customers that our products will conform to the documentation provided. 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 6, 2008. 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 6, 2008, a hypothetical 100 basis point increase in interest rates would not result in a material impact on the fair value of our cash equivalents and short-term investments.

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

During the fourth quarter of fiscal 2008, the $18.35 million auction rate securities we held failed auction due to sell orders exceeding buy orders. As of April 6, 2008, we have written down our auction rate securities from their par value of approximately $18.35 million to the estimated fair value of approximately $17.5 million. The $0.8 million decline in market value was deemed temporary as we believe that these investments generally are of high credit quality, as substantially all of the investments carry an AAA credit rating and are secured by pools of student loans guaranteed by state regulated higher education agencies and reinsured by the U.S. Department of Education. In addition, we have the intent and ability to hold these investments until anticipated recovery in market value occurs. Accordingly, we have recorded an unrealized loss on these securities of $0.8 million in other comprehensive loss as a reduction in stockholders’ equity. The funds invested in auction rate securities that have experienced failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured. Based on our ability to access our cash, cash equivalents and other short-term investments, our expected operating cash flows, and our other sources of cash, we do not anticipate the current lack of liquidity on these investments to have a material impact on our financial condition or results of operations.

In May 2003, we completed an offering of $150.0 million principal amount of the 2008 Notes. In order to minimize the dilutive effect from the issuance 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 was held by Credit Suisse First Boston International. In May 2005 and May 2006, we repurchased $44.5 million and $40.3 million, respectively, face value of our 2008 Notes for $34.8 million and $35.0 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 6, 2008, we had approximately $6.3 million of cash and money market funds in foreign currencies. During the third quarter of fiscal 2008, we entered into foreign currency forward contracts to mitigate exposure in movements between the U.S. dollar and Japanese Yen. The derivatives do not qualify for hedge accounting treatment under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” We recognize the gain and loss on foreign currency forward contracts in the same period as the remeasurement loss and gain of the related foreign currency-denominated exposures. In fiscal 2008, net foreign exchange loss totaled $110,000 and was included in “Other Income, Net” in our consolidated statements of operations.

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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	59
Consolidated Balance Sheets as of April 6, 2008 and April 1, 2007	61
Consolidated Statements of Operations for each of the three fiscal years ended April 6, 2008	62
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for each of the three fiscal years ended April 6, 2008	63
Consolidated Statements of Cash Flows for each of the three fiscal years ended April 6, 2008	65
Notes to Consolidated Financial Statements	67
Financial Statement Schedules:
II—Valuation and Qualifying Accounts	103
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)	103

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of

Magma Design Automation, Inc.

We have audited Magma Design Automation, Inc. and subsidiaries’ (a Delaware Corporation) internal control over financial reporting as of April 6, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Magma Design Automation, Inc.’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, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Magma Design Automation, Inc. and subsidiaries’ 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, Magma Design Automation, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of April 6, 2008, based on criteria established in Internal Control—Integrated Framework issued by 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. and subsidiaries as of April 6, 2008 and April 1, 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended April 6, 2008. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). Our report dated June 12, 2008 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/    GRANT THORNTON LLP

San Jose, CA

June 12, 2008

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of

Magma Design Automation, Inc.

We have audited the accompanying consolidated balance sheets of Magma Design Automation, Inc. and subsidiaries (a Delaware corporation) as of April 6, 2008 and April 1, 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended April 6, 2008. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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. and subsidiaries as of April 6, 2008 and April 1, 2007, and the consolidated results of their operations and cash flows for each of the years in the three-year period ended April 6, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 14 to the consolidated financial statements, effective April 2, 2007 Magma Design Automation, Inc. and subsidiaries adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109. 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), Magma Design Automation, Inc. and subsidiaries’ internal control over financial reporting as of April 6, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 12, 2008, expressed an unqualified opinion on the effective operation of internal control over financial reporting.

/s/    GRANT THORNTON LLP

San Jose, California

June 12, 2008

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MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	April 6, 2008			April 1, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	46,970		$	45,338
Restricted cash		—			4,997
Short-term investments		3,000			10,700
Accounts receivable, net		38,310			41,086
Prepaid expenses and other current assets		5,244			4,126
Total current assets		93,524			106,247
Property and equipment, net		15,553			17,866
Intangible assets, net		40,436			56,874
Goodwill		64,877			48,499
Restricted cash		—			4,700
Deferred tax assets		6,901			—
Long-term investments		17,538			—
Other assets		5,467			5,460
Total assets	$	244,296		$	239,646
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,971		$	7,442
Accrued expenses		29,866			53,254
Deferred revenue		25,254			28,417
Convertible notes		15,216			—
Total current liabilities		74,307			89,113
Convertible notes, net of debt discount of $1,421 and $2,078 at April 6, 2008 and April 1, 2007, respectively		48,518			63,077
Line of credit		—			3,000
Long-term tax liabilities		11,869			—
Other long-term liabilities		2,374			1,689
Total liabilities		137,068			156,879
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; 43,473,403 and 38,533,351 shares issued and outstanding at April 6, 2008 and April 1, 2007, respectively		5			4
Additional paid-in capital		374,183			310,825
Accumulated deficit		(229,479	)		(197,808	)
Treasury stock at cost, 3,044,607 and 2,679,426 shares at April 6, 2008 and April 1, 2007, respectively		(32,697	)		(29,162	)
Accumulated other comprehensive loss		(4,784	)		(1,092	)
Total stockholders’ equity		107,228			82,767
Total liabilities and stockholders’ equity	$	244,296		$	239,646

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

61

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended
	April 6, 2008			April 1, 2007			April 2, 2006
Revenue:
Licenses	$	139,062		$	101,991		$	86,418
Bundled licenses and services		40,515			42,925			52,833
Services		34,842			33,237			24,793
Total revenue		214,419			178,153			164,044
Cost of revenue:
Licenses		19,151			24,125			16,267
Bundled licenses and services		9,474			12,935			13,404
Services		20,729			17,519			12,044
Total cost of revenue		49,354			54,579			41,715
Gross profit		165,065			123,574			122,329
Operating expenses:
Research and development		76,920			63,625			50,085
Sales and marketing		70,711			60,041			46,539
General and administrative		31,576			42,870			39,935
Amortization of intangible assets		8,043			11,011			11,849
In-process research and development		2,256			1,300			450
Restructuring charge		291			—			—
Litigation settlement		—			12,500			—
Total operating expenses		189,797			191,347			148,858
Operating loss		(24,732	)		(67,773	)		(26,529	)
Other income (expense):
Interest income		2,021			2,729			2,875
Interest and amortization of debt discount expense		(2,467	)		(723	)		(849	)
Gain on extinguishment of debt		—			6,532			8,781
Other expense, net		(591	)		(1,269	)		(2,666	)
Other income (expense), net		(1,037	)		7,269			8,141
Net loss before income taxes		(25,769	)		(60,504	)		(18,388	)
Provision for income taxes		5,066			1,002			2,549
Net loss before cumulative effect of change in accounting principle		(30,835	)		(61,506	)		(20,937	)
Cumulative effect of change in accounting principle		—			321			—
Net loss	$	(30,835	)	$	(61,185	)	$	(20,937	)
Net loss per common share before cumulative effect of change in accounting principle—basic and diluted	$	(0.76	)	$	(1.68	)	$	(0.61	)
Net loss per share—basic and diluted	$	(0.76	)	$	(1.67	)	$	(0.61	)
Shares used in calculation—basic and diluted		40,518			36,605			34,348

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

62

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

(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, 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
Total 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
Issuance of common stock under stock incentive plans	1,866,841			1		8,652			—			—		15,099			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	)							305,475			3,325						—			—
Comprehensive loss:
Net loss	—			—		—			—			(61,185	)	—			—		$	(61,185	)					(61,185	)
Reissuance of treasury stock												(42	)													(42	)
Cumulative translation adjustments																				29			29			29
Net unrealized gain on investments	—			—		—			—			—		—			—			65			65			65
Other comprehensive income																							94
Total comprehensive loss	—			—		—			—			—		—			—		$	(61,091	)
BALANCES AT APRIL 1, 2007	38,533,351		$	4	$	310,825		$	—		$	(197,808	)	(2,679,426	)	$	(29,162	)				$	(1,092	)	$	82,767

63

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)—(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 1, 2007 (CONTINUED)	38,533,351		$	4	$	310,825		$	—	$	(197,808	)	(2,679,426	)	$	(29,162	)				$	(1,092	)	$	82,767
Issuance of common stock under stock incentive plans	3,324,196			1		22,319			—		—		134,319			1,460						—			23,780
Issuance of common stock in connection with asset purchase	281,269			—		2,662			—		—		—			—						—			2,662
Issuance of common stock in connection with business combination	1,979,833			—		19,970			—		—		—			—									19,970
Retirement of common stock	(145,746	)		—		(2,070	)		—		—		—			—						—			(2,070	)
Repurchase of common stock	(499,500	)		—		—			—		—		(499,500	)		(4,995	)					—			(4,995	)
Stock-based compensation expense, net of forfeitures						20,424			—		—		—			—						—			20,424
Tax benefits associated with exercise of stock options and debt issuance costs	—			—		53			—		—		—			—						—			53
Comprehensive loss:
Net loss	—			—		—			—		(30,835	)	—			—		$	(30,835	)					(30,835	)
Effect of FIN 48 adoption											(502	)													(502	)
Reissuance of treasury stock											(334	)													(334	)
Cumulative translation adjustments																			(2,885	)		(2,885	)		(2,885	)
Net unrealized loss on investments	—			—		—			—		—		—			—			(807	)		(807	)		(807	)
Other comprehensive loss																						(3,692	)
Total comprehensive loss	—			—		—			—		—		—			—		$	(34,527	)
BALANCES AT APRIL 6, 2008	43,473,403		$	5	$	374,183		$	—	$	(229,479	)	(3,044,607	)	$	(32,697	)				$	(4,784	)	$	107,228

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

64

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended
	April 6, 2008			April 1, 2007			April 2, 2006
Cash flows from operating activities:
Net loss	$	(30,835	)	$	(61,185	)	$	(20,937	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of change in accounting principle		—			(321	)		—
Depreciation and amortization		9,883			10,364			9,467
Amortization of intangible assets		30,277			42,149			35,524
In-process research and development		2,256			1,300			450
Provision for (recovery from) doubtful accounts		562			88			(282	)
Amortization of debt discount and debt issuance costs		1,165			506			725
Loss on strategic equity investments		481			605			1,003
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		17			2,557			93
Stock-based compensation		20,424			15,565			4,576
Tax benefit realized from gain on repurchase of convertible debt		—			—			128
Tax benefits associated with exercise of stock options and debt issuance costs		53			223			110
Other non-cash items		28			—			—
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(648	)		(7,298	)		687
Prepaid expenses and other current assets		(1,262	)		1,225			2,125
Other assets		(299	)		(327	)		(417	)
Accounts payable		(1,447	)		3,082			(704	)
Accrued expenses		(15,692	)		16,316			12,396
Deferred revenue		(3,373	)		3,795			3,877
Long-term tax liabilities		1,346			—			—
Other long-term liabilities		278			(800	)		(491	)
Net cash flows provided by operating activities		13,214			21,315			40,210
Cash flows from investing activities:
Cash paid for business and asset acquisitions, net of cash acquired		(8,288	)		(25,257	)		(26,085	)
Purchase of property and equipment		(7,208	)		(5,453	)		(6,485	)
Purchase of available-for-sale investments		(49,593	)		(29,395	)		(97,588	)
Proceeds from maturities and sales of available-for-sale investments		38,950			57,365			173,990
Purchase of strategic investments		(1,275	)		(900	)		(750	)
Restricted cash		4,850			(4,700	)		—
Net cash flows provided by (used in) investing activities		(22,564	)		(8,340	)		43,082
Cash flows from financing activities:
Proceeds from issuance of common stock, net		21,377			8,180			6,259
Repurchase of common stock		(4,995	)		—			(16,044	)
Repurchase of convertible notes, net		(83	)		(35,889	)		(34,668	)
Proceeds from (repayments of) line of credit		(3,000	)		3,000			—
Repayment of lease obligations		(2,367	)		(1,480	)		(780	)
Net cash provided by (used in) financing activities		10,932			(26,189	)		(45,233	)
Effect of foreign currency translation changes on cash and cash equivalents		50			2			(131	)
Net change in cash and cash equivalents		1,632			(13,212	)		37,928
Cash and cash equivalents, beginning of year		45,338			58,550			20,622
Cash and cash equivalents, end of year	$	46,970		$	45,338		$	58,550

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

65

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(in thousands)

	Year Ended
	April 6, 2008		April 1, 2007		April 2, 2006
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Deferred stock-based compensation recorded in connection with asset purchase	$	—	$	514	$	(246	)
Purchase of fixed assets under capital leases	$	2,875	$	2,791	$	2,352
Issuance of common stock in connection with acquisitions	$	22,632	$	6,220	$	15,407
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	$	990	$	141	$	126
Income taxes	$	1,488	$	740	$	572

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

66

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

The Company has a 52-53 week fiscal year ending on the first Sunday subsequent to March 31. The Company’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. The Company’s fiscal year 2008 consisted of 53 weeks. The result of the additional week was included in the Company’s Form 10-K for the fiscal year, and did not have a material impact on the Company’s consolidated financial position or results of operations. All references to years or quarters in these notes to consolidated financial statements represent fiscal years or fiscal quarters, respectively, unless otherwise noted.

On January 28, 2008 the Company’s Board of Directors adopted a new fiscal year end. The Company’s new fiscal year will end on the first Sunday subsequent to April 30 (except for any given year in which April 30 is a Sunday, in which case the fiscal year will end on April 30), beginning with the fiscal year ending May 3, 2009. Information covering the transition period from April 7, 2008 to May 4, 2008 will be included in the Company’s quarterly report on Form 10-Q for the quarterly period ending August 3, 2008, the first quarterly report of the Company’s newly adopted fiscal year. The separate audited financial statements required for the transition period will be included in the Company’s annual report on Form 10-K for the fiscal year ending May 3, 2009.

Reclassifications

Certain immaterial amounts in the fiscal 2007 and 2006 consolidated financial statements have been reclassified to conform to the fiscal 2008 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.

67

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. 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.

68

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 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

69

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 6, 2008 and April 1, 2007, unbilled receivables were approximately $12.0 million and $7.6 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 Statement of Financial Accounting Standards (“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 6, 2008, April 1, 2007 and April 2, 2006, cumulative foreign currency translation loss is included in accumulated other comprehensive loss on the consolidated balance sheets.

Cash equivalents, short-term and long-term investments

The Company invests its excess cash in money market accounts and debt securities. Cash equivalents consist of highly liquid debt instruments purchased with an original or remaining maturity of three months or less. 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.

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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 considered to be temporary in nature reported as a component of other comprehensive income (loss) within the stockholders’ equity. The Company evaluates its investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. The Company reviews impairment associated with the above in accordance with Emerging Issue Task Force (“EITF”) 03-01 and Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) SFAS 115-1 and 124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” to determine the classification of the impairment as “temporary” or “other-than-temporary”. An impairment charge is recorded to the extent that the carrying value of available-for-sale securities exceeds the estimated fair market value of the securities and the decline in value is determined to be other-than-temporary.

Auction rate securities are securities that are structured to provide liquidity through an auction process that resets the applicable interest rate generally every 28 days but have contractual maturities that can be well in excess of ten years. At the end of each reset period, investors can sell or continue to hold the securities at par. During the fourth quarter of fiscal 2008, the $18.35 million auction rate securities held by the Company failed auction due to sell orders exceeding buy orders. Typically, the fair value of auction rate securities approximates par value (unless auction fails) due to the frequent resets through the auction rate process. While the Company continues to earn interest on these investments at the contractual rates, the estimated market value of these auction rate securities no longer approximates par value. As of April 6, 2008, based in part on price valuation information provided by the broker-dealer managing the Company’s investments, the Company wrote down its auction rate securities from their par value of approximately $18.35 million to the estimated fair value of approximately $17.5 million. The $0.8 million decline in market value was deemed temporary as the Company believes that these investments generally are of high credit quality, as substantially all of the investments carry an AAA credit rating and are secured by pools of student loans guaranteed by state regulated higher education agencies and reinsured by the U.S. Department of Education. In addition, the Company currently has the intent and ability to hold these investments until anticipated recovery in market value occurs. Accordingly, the Company has recorded an unrealized loss on these securities of $0.8 million in other comprehensive loss as a reduction in stockholders’ equity.

The funds invested in auction rate securities that have experienced failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured. As a result, the Company has classified those securities with failed auctions as long-term assets in the consolidated balance sheet as of April 6, 2008.

The Company continues to monitor the market for auction rate securities and consider the market’s impact (if any) on the fair market value of its investments. If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, the Company may be required to record additional unrealized losses in other comprehensive income or impairment charges in future periods.

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Cash, cash equivalents, short-term and long-term investments are included in the consolidated balance sheets as follows (in thousands):

	Cost		Gross Unrealized Gains		Gross Unrealized Loss (less than 12 months)			Estimated Fair Value
April 6, 2008
Cash and cash equivalents:
Cash (U.S. and international)	$	17,351	$	—	$	—		$	17,351
Money market funds (U.S.)		11,975		—		—			11,975
Money market funds (International)		173		—		—			173
Commercial paper		17,479		—		(8	)		17,471
		46,978	$	—	$	(8	)		46,970
Short-term investments:
Government agencies		3,000		—		—			3,000
Long-term investments:
Auction rate certificates		18,350		—		(812	)		17,538
Total	$	68,328	$	—	$	(820	)	$	67,508
April 1, 2007
Cash and cash equivalents:
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
		45,345		—		(7	)		45,338
Short-term investments:
Auction rate certificates		10,700		—		—			10,700
	$	56,045	$	—	$	(7	)	$	56,038

As of April 6, 2008, the stated maturities of the Company’s current investments (including $17.5 million classified as cash equivalent investments in the table above) are $20.5 million within one year and $18.35 million after ten years.

As of April 6, 2008 and April 1, 2007, all unrealized losses have a duration of less than twelve months. The unrealized losses for the year ended April 6, 2008 were primarily associated with failed auction rate securities as discussed above. Gross realized gains and losses from the sales of marketable securities were immaterial for all periods presented.

Restricted cash

The Company’s total restricted cash balance was zero as of April 6, 2008 and was $9.7 million (of which $5.0 million was classified as current assets and $4.7 million was classified as long-term assets) as of April 1, 2007. The restricted cash at April 1, 2007 primarily represented the portion of cash consideration maintained in escrow accounts to secure certain indemnification obligations related to certain business combination and asset purchase transactions, as well as a total of $4.85 million as securities to the borrowings under the $5.0 million line of credit and letters of credit issued under the credit facility. The cash consideration in the escrow accounts

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

were released in fiscal 2008 and the Company is no longer required to maintain restricted cash balances relating to the letters of credit after replacing the $5.0 million line of credit with a new unsecured credit facility in fiscal 2008.

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 6, 2008, two customers accounted for 14% and 13%, respectively, of accounts receivable. At April 1, 2007, one customer accounted for 12% of accounts receivable. See Note 13, “Segment Information”, for disclosure on customers accounting for greater than 10% of revenue for each of the three years ended April 6, 2008.

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 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 6, 2008			April 1, 2007
Property and equipment, net:
Computer equipment	$	36,281		$	31,522
Software		8,366			7,599
Furniture and fixtures		4,137			3,561
Leasehold improvements		6,075			5,144
		54,859			47,826
Accumulated depreciation and amortization		(39,306	)		(29,960	)
	$	15,553		$	17,866

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Depreciation expense was $9.9 million, $10.4 million and $9.5 million, respectively, for the years ended April 6, 2008, April 1, 2007 and April 2, 2006.

The cost of equipment acquired under capital leases included in property and equipment was $8.0 million and $5.8 million, respectively, as of April 6, 2008 and April 1, 2007. Accumulated amortization of the leased equipment was $4.2 million and $2.4 million, respectively, as of April 6, 2008 and April 1, 2007. Amortization of assets reported under capital leases was included with depreciation expense.

Impairment of long-lived assets

In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 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 as 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 investments are included in other long-term assets in the consolidated balance sheets. 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. During the second quarter of fiscal 2008, with the purchase of the remaining 82% ownership of one of our equity investments, Rio Design Automation, Inc. (“Rio”), we ceased accounting for our investment in Rio under the equity method and began accounting for our 100% ownership on a consolidated basis. The equity investment balance of $220,000 on the acquisition date was reclassified from other assets and was allocated to the book value of the previously owned assets and liabilities on our 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 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 6, 2008, April 1, 2007 and April 2, 2006, the Company recorded net loss on equity investments of $0.5 million, $0.6 million and $1.0 million, respectively. At April 6, 2008 and April 1, 2007, the carrying value on the strategic investments was $2.2 million and $2.0 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

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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 years ended April 6, 2008 and April 1, 2007, the Company recorded $334,000 and $42,000, respectively, of such charges to accumulated deficit.

Stock-based compensation

Effective April 3, 2006, the Company accounts for stock-based employee compensation arrangements under SFAS 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.

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.

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The Company has not provided an income tax benefit for stock-based compensation expense for current and prior year periods because 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 fiscal 2008 and 2007. The tax benefits recorded in fiscal 2008 and 2007 under additional paid-in capital on the consolidated stockholders’ equity statement represented the true-up adjustment on its prior year tax provision. In addition, upon adoption of SFAS 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 6, 2008 and April 1, 2007 (in thousands):

	Carrying Value			Estimated Fair Value
April 6, 2008
Convertible subordinated notes due 2008	$	15,216		$	15,178
Convertible senior notes due 2010	$	48,518		$	45,944
Convertible bond hedge	$	(5,696	)	$	—
Written call warrant	$	3,642		$	—
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		$	—

Information on the carrying value of the convertible notes, convertible bond hedge and written call warrant is provided in “Note 7—Convertible Notes.”

Comprehensive income (loss)

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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	April 6, 2008			April 1, 2007
Unrealized loss on available-for-sale investments, net	$	(812	)	$	(7	)
Foreign currency translation adjustments		(3,972	)		(1,085	)
Accumulated other comprehensive loss	$	(4,784	)	$	(1,092	)

Recently issued accounting pronouncements

In September 2006, the FASB issued SFAS No. 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 does not expect that the adoption of this statement will have a material impact on its consolidated financial position or results of operations.

In February 2007, the FASB issued SFAS No. 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 does not expect that the adoption of this statement will have a material impact on its consolidated financial position or results of operations.

In June 2007, the FASB ratified a consensus opinion reached by the EITF on EITF Issue 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities.” The guidance in EITF 07-3 requires the Company to defer and capitalize nonrefundable advance payments made for goods or services to be used in research and development activities until the goods have been delivered or the related services have been performed. If the goods are no longer expected to be delivered nor the services expected to be performed, the Company would be required to expense the related capitalized advance payments. The consensus in EITF 07-3 is effective for fiscal years beginning after December 15, 2007. The Company does not expect that the adoption of EITF 07-3 will have a material impact on its consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which expands the definition of a business combination and establishes principles and requirements for how an acquirer recognizes fair values of acquired assets, including goodwill, and assumed liabilities. SFAS 141R requires the acquirer to recognize 100% of the fair values of acquired assets, including goodwill, and assumed liabilities, even if the acquirer has acquired less than 100% of the target. As a consequence, the current step-acquisition model will be eliminated. Under SFAS 141R, contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration. SFAS 141R also requires that transaction costs be expensed as incurred and does not permit certain restructuring activities previously allowed under EITF No. 95-3 to be recorded as a component of purchase accounting. In addition, under SFAS 141R, acquired research and development value will no longer be expensed at acquisition, but instead will be capitalized as an indefinite-lived intangible asset, subject to impairment accounting throughout its’ development stage and then subject to amortization and impairment after development is complete. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Adoption is prospective and early adoption is not permitted. The Company is currently evaluating the impact of the adoption of this statement on its consolidated financial position or results of operations, but the impact will be limited to any future acquisitions beginning in fiscal 2010.

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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS 160”). This Statement establishes accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest should be accounted for as equity transactions, and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary should be initially measured at fair value. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company does not expect that the adoption of this statement will have a material impact on its consolidated financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this statement on its consolidated financial position or results of operations.

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other U.S. GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the impact of the adoption of this statement on its consolidated financial position or results of operations.

In May 2008, the FASB issued FSP Accounting Principles Board Opinion No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires cash settled convertible debt to be separated into debt and equity components at issuance and a value to be assigned to each. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value will be recorded as a debt discount and amortized to interest expense over the life of the bond. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and should be applied retrospectively to all periods presented in the financial statements. Early adoption is prohibited. The Company is currently evaluating the impact of the adoption of this statement on its consolidated financial position or results of operations.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company will adopt SFAS 162 once it is effective and is currently evaluating the impact of the adoption of this statement on its consolidated financial position or results of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 2.    Basic and Diluted Net Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with SFAS No. 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.

For each of the three years ended April 6, 2008, 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 (in thousands, except per share data):

	Year Ended
	April 6, 2008		April 1, 2007		April 2, 2006
Shares of common stock issuable upon conversion of convertible notes		3,995		3,995		4,615
Warrants outstanding		—		—		500
Shares of common stock issuable under stock option plans outstanding		12,217		11,233		8,979
Weighted average price of shares issuable under stock option plans	$	10.69	$	9.80	$	11.51

Note 3.    Balance Sheet Components

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

	April 6, 2008			April 1, 2007
Accounts receivable, net:
Trade accounts receivable	$	26,642		$	33,580
Unbilled receivable		12,044			7,561
Gross accounts receivable		38,726			41,141
Allowance for doubtful accounts		(376	)		(55	)
	$	38,310		$	41,086
Accrued expenses:
Accrued sales commissions	$	2,434		$	3,058
Accrued bonuses		5,352			10,623
Other payroll and related accruals		9,558			6,988
Acquisition accrual		3,349			6,960
Litigation settlement accrual		—			12,500
Accrued professional fees		1,441			4,101
Income taxes payable		1,791			3,866
Other		5,941			5,158
	$	29,866		$	53,254

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 4.    Acquisitions

Business Combinations

On February 26, 2008, the Company acquired Sabio Labs, Inc. (“Sabio”), a privately-held developer of analog design solutions for mixed-signal designers. Sabio’s software enables designers to create robust analog designs, port complex circuits to new process technologies in foundries efficiently, and explore system design trade-offs early in the design process. The purchase price for the acquisition was $16.5 million, consisting of approximately 1,574,000 shares of the Company’s common stock valued at $16.2 million and transaction costs of $270,000. The valuation of the Company’s common stock issued in connection with the acquisition was based on the average closing price per share of the stock for the ten-day period ended on the fourth day preceding the acquisition date. As part of the initial consideration, 127,195 shares of Magma stock valued at $1.3 million was associated with employee retention and will be earned and recorded as compensation expenses in accordance with pre-defined vesting schedules. The Company held back approximately 213,000 shares of Magma common stock valued at $2.2 million to secure certain indemnification obligations of Sabio that may arise for a 15-month period from the date of the acquisition. In addition, the Company agreed to pay up to $7.5 million of contingent consideration in the form of cash or shares of Magma common stock, at Magma’s discretion, to the former Sabio shareholders upon achieving certain product integration and booking milestones. The results of operations of Sabio have been included in the Company’s results of operations since the acquisition date. Pro forma information has not been provided as the effects of the acquisition do not materially change the Company’s results of operations.

On September 19, 2007, the Company acquired Rio Design Automation, Inc. (“Rio”), a privately-held electronic design automation (“EDA”) software company that provides package-aware chip design software. Rio’s software allows designers to analyze and optimize integrated circuit design within the context of the package and electronic system, further expanding the Company’s product offering. Prior to acquiring Rio, the Company had an 18% ownership interest in Rio, which was accounted for under the equity method with a carrying value of approximately $220,000 as of September 19, 2007. In accordance with SFAS No. 141, “Business Combinations,” this acquisition was accounted for as a step acquisition. The total purchase price for the step acquisition totaled $4.5 million, consisting of $526,000 in cash, approximately 278,700 shares of the Company’s common stock valued at $3.8 million, and transaction costs of $168,000. The valuation of the Company’s common stock issued in connection with the acquisition was based on the average closing price per share of the stock for the ten days before the signing date of the definitive merger agreement. The Company held back approximately 46,900 shares of Magma common stock valued at $638,000 to secure certain indemnification obligations of Rio that may arise for a 12-month period from the date of the acquisition. The results of operations of Rio have been included in the Company’s results of operations since the acquisition date. Pro forma information has not been provided as the effects of the acquisition do not materially change the Company’s results of operations.

On November 20, 2006, the Company acquired Knights Technology, Inc. (“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. 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 6, 2008. The results of operations of Knights have been included in Magma’s results of operations since the acquisition date.

On November 29, 2005, the Company acquired ACAD Corporation (“ACAD”), a privately-held company that develops circuit simulation software, to broaden its product portfolio into simulation, addressing a new

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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. 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 6, 2008, $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.

The results of operations from ACAD have been included in Magma’s results of operations from the acquisition date.

Summary of Purchase Price Allocation and Valuation Methodology

The acquisitions described above were 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 these acquisition and the amortization periods of the intangible assets acquired is as follows (in thousands):

	Fiscal 2008								Fiscal 2007		Fiscal 2006
	Sabio		Rio			Total			Knights		ACAD
Cash consideration	$	—	$	525		$	525		$	8,000	$	453
Equity consideration		16,181		3,789			19,970			—		—
Total consideration		16,181		4,314			20,495			8,000		453
Transaction and other costs		270		389			659			140		—
Total purchase price	$	16,451	$	4,703		$	21,154		$	8,140	$	453
Allocation of purchase price:
Net tangible assets acquired (liabilities assumed)	$	510	$	(926	)	$	(416	)	$	240	$	(3,931	)
Intangible assets acquired:
Customer relationship or base		1,200		1,065			2,265			1,000		110
Developed technology		2,000		819			2,819			2,600		1,860
Non-competition agreements		100		—			100			200		300
Acquired customer contracts		—		—			—			300		190
Trademarks		—		—			—			500		—
In-process research and development		1,600		656			2,256			1,300		450
Goodwill		11,041		3,089			14,130			2,000		1,474
	$	16,451	$	4,703		$	21,154		$	8,140	$	453
Amortization period of intangibles (in years)
Customer relationship or base		5-6		7-8						7		4
Developed technology		5		5						4-5		4
Non-competition agreements		3		—						3		3
Acquired customer contracts		—		—						3		1-2
Trademarks		—		—						7		—

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For each acquisition, the excess of the purchase price over the estimated value of the net tangible and intangible assets acquired was allocated to goodwill. Goodwill is not expected to be deductible for income tax purposes.

The values assigned to developed technologies related to each acquisition were based upon future discounted cash flows related to the existing products’ projected income streams using discount rates ranging from 11% 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 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 intangible assets included the value of customer relationship or base, non-competition agreements, acquired customer contracts and trademarks. The cash flows generated by these intangible assets were valued using discount rates ranging from 13% to 25%.

The portion of the purchase price allocated to in-process research and development (“IPR&D”) was recognized as a charge to operating expenses on the acquisition date. The in-process technologies acquired 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 flow derived from the in-process technology was discounted at rates ranging from 15-30%. The Company believes the rate used was appropriate given the risks associated with the technology for which commercial feasibility had not been established and there was no alternative use. The percentage of completion for in-process technology projects acquired 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. As of April 6, 2008, the in-process technology projects of Knights and ACAD have been completed, and the IPR&D projects of Rio and Sabio are expected to be completed in fiscal year 2009.

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 company’s management, using valuation methods that are in accordance with the generally accepted accounting principles.

Asset Purchases

On April 13, 2007, the Company acquired certain assets from a privately-held developer of EDA technology. Pursuant to the asset purchase agreement, the Company paid total consideration of $200,000 in cash.

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Based on management’s estimates and appraisal, the $200,000 consideration was allocated to patents and intellectual property, which was included in the intangible assets on the Company’s consolidated balance sheet, and is being amortized over the estimated economic life of three years.

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 assets on the Company’s consolidated balance sheets and 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. The $2.0 million initial license fee was included in the intangible assets on the Company’s consolidated balance sheets and is being amortized over the estimated economic life of five years.

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 agreed to pay additional fees of $0.5 million based upon achievement of certain technology milestones. The initial license fee of $2.5 million was included in the intangible assets on the Company’s consolidated balance sheets and is being amortized over the estimated economic life of five years.

On March 9, 2006, the Company acquired certain assets of Reshape, Inc., a privately-held developer of EDA and design flow technology, for a total fee of $750,000. Based on management’s estimates and appraisal, the $750,000 consideration was allocated to patents and intellectual property, which was included in the intangible assets on the Company’s consolidated balance sheets, and is being amortized over the estimated economic life of three years.

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. 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 cash paid for the licenses was $7.0 million. In addition, the Company 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. In August 2006, the warrant was exercised on a cashless net exercise basis and a total of 149,005 shares of the Company’s common stock were issued to IBM. The fair value of the warrants was estimated to be $6.16 per share using the Black-Scholes option pricing model. The license fee of $7.0 million and the $3.1 million fair value of the 500,000 shares of common stock warrant were included in the intangible assets on the Company’s consolidated balance sheets and is being amortized over the estimated economic life of three years.

Acquisition–Related Earnouts

For a number of Magma’s previously completed acquisitions, the Company agreed to pay contingent considerations in cash and/or stock to former stockholders of the acquired companies based on the acquired

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business’ achievement of certain technology or financial milestones. The following table summarizes the amounts of goodwill and intangible assets recorded by the Company for contingent considerations paid or payable to former stockholders of the acquired companies (in thousands):

	Year Ended
	April 6, 2008				April 1, 2007				April 2, 2006
	Cash		Common Stock Value		Cash		Common Stock Value		Cash		Common Stock Value
Goodwill:
ACAD Corporation	$	2,825	$	—	$	2,825	$	—	$	—	$	—
Other		25		—		—		—		—		—
	$	2,850	$	—	$	2,825	$	—	$	—	$	—
Intangible assets:
Mojave, Inc.	$	2,664	$	2,662	$	6,219	$	6,221	$	13,063	$	13,062
Other		3,003		—		1,500		—		1,182		1,081
	$	5,667	$	2,662	$	7,719	$	6,221	$	14,245	$	14,143

Note 5.    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 Note 4 (in thousands):

	Weighted Average Life (in Months)	April 6, 2008							April 1, 2007
		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Goodwill		$	64,877	$	—		$	64,877	$	48,499	$	—		$	48,499
Other intangible assets:
Developed technology	44	$	113,609	$	(85,759	)	$	27,850	$	104,464	$	(64,228	)	$	40,236
Licensed technology	40		41,097		(34,503	)		6,594		39,093		(29,667	)		9,426
Customer relationship or base	70		5,575		(2,429	)		3,146		3,310		(1,631	)		1,679
Patents	57		13,015		(11,205	)		1,810		12,690		(8,615	)		4,075
Acquired customer contracts	33		1,390		(1,090	)		300		1,390		(1,069	)		321
Assembled workforce	45		1,252		(1,221	)		31		1,252		(976	)		276
No shop right	24		100		(100	)		—		100		(100	)		—
Non-competition agreements	32		600		(325	)		275		500		(156	)		344
Trademark	67		900		(470	)		430		900		(382	)		518
Total		$	177,538	$	(137,102	)	$	40,436	$	163,699	$	(106,824	)	$	56,875

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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 6, 2008		April 1, 2007		April 2, 2006
Amortization of intangible assets included in:
Cost of revenue—licenses	$	18,078	$	23,368	$	15,964
Cost of revenue—bundled licenses and services		4,156		7,770		7,711
Operating expenses		8,043		11,011		11,849
Total	$	30,277	$	42,149	$	35,524

As of April 6, 2008, the estimated future amortization expense of other intangible assets in the table above is as follows:

Fiscal year	Estimated Amortization Expense
April 7 – May 4, 2008	$	2,410
2009		26,252
2010		4,807
2011		3,734
2012		1,871
2013 and beyond		1,362
	$	40,436

In accordance with SFAS 142, the Company performed an annual goodwill impairment test as of January 6, 2008 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 6.    Restructuring Charge

During fiscal 2008, the Company recorded a restructuring charge of $0.3 million for costs related to termination costs of 21 employees resulting from the Company’s realignment to current business objectives. As of April 6, 2008, all of these termination costs had been paid and the Company had not planned to incur additional costs related to this business realignment.

Note 7.    Convertible Notes

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

In May 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

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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, “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 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

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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.

The $15.2 million principal amount of the 2008 Notes and the related $10,000 of unamortized balance of transaction fees and debt issuance costs were included in current liabilities on the Company’s consolidated balance sheets as of April 6, 2008. 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. See Note 16, “Subsequent Events”, for disclosure on the repayment of the 2008 Notes in May 2008.

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 rank senior in right of payment to the 2008 Notes and junior in right of payment to Magma’s 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 per $1,000 principal amount. 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

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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. As of April 6, 2008, debt discount balance related to the 2010 Notes was $1.4 million.

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 6, 2008, the unamortized balance of debt issuance costs related to the 2010 Notes was approximately $0.9 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 8.    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 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.

In July 2007, the Company established a $10.0 million unsecured revolving line of credit facility with Wells Fargo Bank, N.A. This credit facility, which replaces the previous $5.0 million revolving line of credit facility, is available through July 2010 and bears an interest rate equal to the bank’s prime rate less 1.20% or LIBOR plus 1.00%. 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 6, 2008, the Company had no borrowings outstanding under the facility.

The credit facility requires that the Company maintain certain financial conditions and pay fees of 0.125% per year on the unused amount of the facility. As of April 6, 2008, the Company was in compliance with the financial conditions. 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

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amount for borrowing under the credit facility. In connection with the establishment of the credit facility, the Company repaid the $3.0 million outstanding borrowing under the previous $5.0 million credit facility. Letters of credit under the prior credit facility were transferred to the new $10.0 million credit facility. As of April 6, 2008, two letters of credit totaling $1.7 million were outstanding and the Company had a borrowing base availability of $8.3 million under the facility. Since the new credit facility is unsecured, the Company is not required to maintain restricted cash balances relating to the letters of credit under the facility.

Note 9.    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 6, 2008, there were options to purchase 1,311,037 shares outstanding under the Inducement Plan, and 234,070 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 6, 2008, there were options to purchase 10,097,435 shares outstanding under the 2001 Plan, and 3,050,439 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 6, 2008, 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 6, 2008, there were no outstanding options under the 1997 Plan and options to purchase 802,583 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 6, 2008, there were options to purchase 6,263 shares outstanding under the Moscape Plan.

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 6, 2008, 95,120 shares of restricted stock, net of forfeitures, were issued under the KC Incentive Plan.

2001 Employee Stock Purchase Plan

The 2001 Employee Stock Purchase Plan (“Purchase Plan” or “ESPP”) 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 Purchase Plan provided for a series of overlapping offering periods with a duration of 24 months, with new

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

offering periods, except the first offering period, which commenced on November 19, 2001, beginning in February, May, August, and November of each year. The Purchase Plan was amended in April 2008 to provide that future offering periods would commence on the first day of March, June, September and December of each year and that purchase dates under the new offering periods would be the last day of February, May, August and November. The maximum number of shares a participant may purchase during a single accumulation period is 4,000 shares. The 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 6, 2008, a total of 1,071,176 shares were issued under the Purchase Plan with an average price of $7.88 per share.

As of April 6, 2008, a total of 3,398,586 shares of common stock remained available for issuance under the 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 or the Compensation Committee of the Board.

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.

Repurchases of Common Stock

On February 21, 2008, the Company announced that its Board of Directors authorized Magma to repurchase up to $20.0 million of its common stock. In March 2008, the Company used approximately $5.0 million to repurchase 499,500 shares of its common stock in the open market, with repurchase prices ranging from $9.81 to $10.22 per share. The repurchased shares are to be used for general corporate purposes.

In May 2005, with the authorization by its Board of Directors, the Company used approximately $16.0 million to repurchase 2,000,000 shares of common stock in the open market, with repurchase prices ranging from $7.82 to $8.17 per share. 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 to be used for general corporate purposes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 10.    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.

Note 11.    Stock-Based Compensation

The stock-based compensation recognized in the consolidated statements of operations was as follows (in thousands):

	Year Ended
	April 6, 2008		April 1, 2007		April 2, 2006
Cost of revenue	$	1,680	$	1,253	$	78
Research and development expense		8,050		5,880		4,150
Sales and marketing expense		5,235		3,852		131
General and administrative expense		5,459		4,580		217
Total stock-based compensation expense	$	20,424	$	15,565	$	4,576

The Company has adopted several stock incentive plans providing stock-based awards to employees, directors, advisors and consultants, including stock options, restricted stock and restricted stock units. The Company also has an Employee Stock Purchase Plan which enables employees to purchase shares of the Company’s common stock. Stock-based compensation expense recognized under SFAS 123R in the consolidated statements of operations by type of award in fiscal 2008 and fiscal 2007 was as follows (in thousands):

	Year Ended
	April 6, 2008		April 1, 2007
Stock options	$	10,549	$	10,489
Restricted stock and restricted stock units		6,666		3,187
Employee stock purchase plan		3,209		1,889
Total stock-based compensation expense	$	20,424	$	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 2008 and fiscal 2007 was $4.86 per share and $3.62 per share, respectively. The Company uses the Black-Scholes option pricing model to determine the fair value of each stock option grant. The weighted average assumptions used in the model for fiscal 2008 and fiscal 2007 were as follows:

	Year Ended
	April 6, 2008		April 1, 2007
Expected life (years)	4.16		4.14
Volatility	39 – 45	%	41 – 50	%
Risk-free interest rate	2.16 – 4.91	%	4.49 – 5.15	%
Expected dividend yield	0	%	0	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of the changes in stock options outstanding and exercisable under the Company’s stock incentive plans during the year ended April 6, 2008 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 1, 2007	11,233		$	9.80		$	31,831
Granted	3,249		$	12.80
Exercised	(1,726	)	$	8.70
Forfeited	(447	)	$	9.90
Expired	(92	)	$	17.76
Options outstanding at April 6, 2008	12,217		$	10.69	3.95	$	11,918
Vested and expected to vest at April 6, 2008	11,424		$	10.69	3.91	$	11,284
Exercisable at April 6, 2008	7,691		$	10.53	3.93	$	8,694

The total intrinsic value of options exercised was $9.1 million and $446,000 during fiscal 2008 and fiscal 2007, respectively. Cash received from stock option exercises was $15.0 million during fiscal 2008 and $1.8 million during fiscal 2007. As of April 6, 2008, there was approximately $16.3 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 2.34 years.

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 6, 2008 is presented below (in thousands, except per share amount):

	Number of Shares		Weighted Average Grant Date Fair Value per Share
Shares nonvested at April 1, 2007	412		$	9.63
Granted	517		$	13.13
Vested	(488	)	$	10.78
Forfeited	(48	)	$	11.53
Shares nonvested at April 6, 2008	393		$	12.58

As of April 6, 2008, the Company had $3.1 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 1.02 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of the changes in restricted stock units outstanding during the year ended April 6, 2008 is presented below (in thousands, except per share amount):

	Number of Shares		Weighted Average Grant Date Fair Value per Share
Shares nonvested at April 1, 2007	27		$	7.11
Granted	190		$	12.60
Vested	(119	)	$	13.12
Forfeited	(5	)	$	12.14
Shares nonvested at April 6, 2008	93		$	13.53

As of April 6, 2008, there was $1.0 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 2.64 years.

The total fair value of restricted stock and restricted stock units that were vested was $7.9 million during fiscal 2008 and $3.4 million during fiscal 2007.

Employee Stock Purchase Plan

The weighted average estimated grant date fair value of purchase rights granted under the ESPP was $4.52 during fiscal 2008 and $2.75 during fiscal 2007. The Company uses the Black-Scholes option pricing model to determine the fair value of each purchase right granted under its ESPP. The weighted average assumptions used in the model for the year ended April 6, 2008 were as follows:

	Year Ended
	April 6, 2008		April 1, 2007
Expected life (years)	1.13		1.13
Volatility	39 – 45	%	41 – 51	%
Risk-free interest rate	2.13 – 4.91	%	4.93 – 5.11	%
Expected dividend yield	0	%	0	%

As of April 6, 2008, the Company had $5.6 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 1.7 years. Cash received from the purchase of shares under the ESPP was $8.4 million during fiscal 2008 and $7.0 million during fiscal 2007.

Stock-Based Compensation for Fiscal 2006

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, the Company recognized $4.6 million of stock-based compensation expense primarily for the intrinsic value of the restricted stock awards.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the year ended April 2, 2006, 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
Net loss attributed to common stockholders:
As reported	$	(20,937	)
Add: Stock-based employee compensation expense included in reported net loss		4,576
Deduct: Stock-based employee compensation expense determined under fair-value method for all awards		(22,972	)
Pro forma	$	(39,333	)
Net loss per share, basic and diluted:
As reported	$	(0.61	)
Pro forma	$	(1.15	)

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
Stock options	$	3.84
Employee stock purchase plans		2.68

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
Stock options:
Risk-free interest	4.02	%
Expected life	3.04 years
Expected dividend yield	0	%
Volatility	61	%
Employee stock purchase plans:
Risk-free interest	4.26	%
Expected life	1.16 years
Expected dividend yield	0	%
Volatility	62	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 6, 2008 are as follows (in thousands):

Fiscal Year	Operating Leases		Capital Leases
April 7 – May 4, 2008	$	539	$	216
2009		6,182		2,143
2010		5,101		1,335
2011		3,979		328
2012		2,189		34
2013 and beyond		214		10
	$	18,204	$	4,066

Rent expense for the years ended April 6, 2008, April 1, 2007 and April 2, 2006 was approximately $5.8 million, $4.0 million and $4.2 million, respectively.

Contingencies

The Company is subject to certain legal proceedings described below and from time to time, it is also involved in other disputes that arise in the ordinary course of business. The number and significance of these litigation proceedings and disputes are increasing as the Company’s business expands and grows larger. Any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. As a result, these litigation proceedings and disputes could harm the Company’s business and have an adverse effect on its 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 such litigation matters and disputes unless they are or are close to being settled. Liabilities are recorded when a loss is probable and the amount can be reasonably estimated. Accordingly, as of April 6, 2008, the Company recorded a liability of $1.1 million to cover legal settlement exposure related to the shareholder class action lawsuit and the derivative complaint, as described below, and has not recorded any liabilities related to other contingencies. However, any estimates of losses or any such recording of legal settlement exposure is not assurance that there will be any court approval of any settlement, and there is no assurance that there will be any final, court approved settlement. Litigation settlement and legal fees are expensed in the period in which they are incurred.

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. On November 30, 2007, the parties agreed to a settlement. Plaintiffs filed a motion for preliminary approval of the settlement on June 6, 2008. There is no assurance that the court will grant preliminary approval of the settlement or that the settlement will subsequently obtain final court approval.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. On January 8, 2008, the parties reached an agreement in principle with respect to certain aspects of settlement of the case and agreed upon the remaining terms of the settlement on February 21, 2008. The Company anticipates that plaintiff will file a motion for preliminary approval of the settlement on June 18, 2008. There is no assurance that the court will grant preliminary approval of the settlement or that the settlement will subsequently obtain final court approval.

Litigation and Settlement with Synopsys

From September 17, 2004 until March 29, 2007, Synopsys, Inc. and the Company were involved in various lawsuits against each other in California, Delaware, Germany and Japan, including claims and counterclaims of patent infringement as well as various other claims.

On March 29, 2007 Synopsys and the Company settled all pending litigation between the companies. As part of the settlement, Synopsys and the Company agreed 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 agreed not to initiate future patent litigation against each other for 2 years provided certain terms are met, and the Company agreed to make a payment to Synopsys of $12.5 million toward the settlement of this dispute; the payment was made during the first quarter of fiscal 2008.

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 6, 2008.

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 6, 2008.

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 6, 2008.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 6, 2008. 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 6, 2008			April 1, 2007			April 2, 2006
North America*	$	127,664		$	121,633		$	109,434
Europe		26,539			19,440			27,670
Japan		35,150			22,162			14,523
Asia-Pacific		25,066			14,918			12,417
Total	$	214,419		$	178,153		$	164,044
	Year Ended
	April 6, 2008			April 1, 2007			April 2, 2006
North America*		60	%		68	%		67	%
Europe		12			11			17
Japan		16			13			9
Asia-Pacific		12			8			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 6, 2008	April 1, 2007	April 2, 2006
Customer A	**	**	16	%

** Less than 10% of total revenue.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 6, 2008			April 1, 2007			April 2, 2006
Current:
Federal	$	516		$	(123	)	$	977
State		57			27			109
Foreign		4,664			1,152			1,531
		5,237			1,056			2,617
Deferred:
Foreign		(171	)		(54	)		(68	)
Total income tax expenses	$	5,066		$	1,002		$	2,549

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

	Year Ended
	April 6, 2008			April 1, 2007			April 2, 2006
United States	$	(23,146	)	$	(64,458	)	$	(20,251	)
International		(2,623	)		3,954			1,863
Total net loss before provision for income taxes	$	(25,769	)	$	(60,504	)	$	(18,388	)

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 6, 2008			April 1, 2007			April 2, 2006
Federal tax benefit at statutory rate	$	(9,019	)	$	(21,064	)	$	(6,436	)
Permanent differences		1,315			147			111
In process research and development		789			455			158
Tax benefit from extraterritorial income exclusion		—			—			(158	)
Goodwill and intangibles		516			—			601
State tax, net of federal benefit		57			—			85
Foreign tax withholding, not benefited for U.S. tax purposes		800			265			287
Foreign tax rate differential		4,612			(769	)		532
Credits		(2,365	)		(4,212	)		(1,881	)
Change in valuation allowance		8,361			26,275			9,289
Other		—			(95	)		(39	)
Total income tax expense	$	5,066		$	1,002		$	2,549

The Company has not provided for U.S. income taxes on undistributed earnings of a majority of its foreign subsidiaries because it intends to permanently re-invest these earnings outside the U. S. The cumulative amount of such undistributed earnings upon which no U.S. income taxes have been provided as of April 6, 2008 was approximately $11.0 million.

99

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 6, 2008			April 1, 2007
Deferred tax assets:
Capitalized costs	$	2,500		$	2,863
Accrued liabilities		3,304			3,138
Property and equipment		9,136			7,481
Accrued compensation related expenses		8,650			7,915
Net operating loss and credit carryforwards		66,034			62,173
Litigation settlement		2,837			4,809
Gross deferred tax assets		92,461			88,379
Valuation allowance		(80,053	)		(71,516	)
Total deferred tax assets		12,408			16,863
Deferred tax liabilities—acquired intangible assets		(12,408	)		(16,863	)
Net deferred tax liabilities	$	—		$	—

At April 6, 2008, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $133.7 million and $33.7 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 $11.4 million and $10.9 million, respectively, available to reduce future income subject to income taxes. The federal research credit carryforwards will begin to expire in 2012 through 2028, and the California research credits carry forward indefinitely.

The Company’s 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 6, 2008 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 6, 2008 and April 1, 2007 was an increase of $8.5 million and $24.3 million, respectively.

Approximately $21.4 million of the valuation allowance at April 6, 2008 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 6, 2008 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 to 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 $22,000 for fiscal 2008. No such tax benefits were recorded to additional paid-in capital in 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 $0.5 million in fiscal 2008. Again, no such benefits were recorded to reduce goodwill in fiscal 2007 due to taxable loss.

100

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 6, 2008, the Company had approximately $24.1 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.

The Company is currently under examination by certain foreign tax authorities. At the present time, it is difficult to predict the results of the tax examination and the timing of the final resolution. The Company management does not believe that the outcome of this examination would have a material impact to its financial statements. The Company’s larger jurisdictions provide a statute of limitation ranging from three to six years. In the U.S., the statute of limitations remains open for fiscal years 2004 and forward.

On April 2, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–An Interpretation of FASB Statement No. 109” (“FIN 48”). As a result of the implementation of FIN 48, the Company recognized a $0.5 million increase to liabilities for uncertain tax positions, which was accounted for as an adjustment to the April 2, 2007 balance of accumulated deficit. As of April 2, 2007, the Company had approximately $10.4 million of total gross unrecognized tax benefits, of which $3.5 million, if recognized, would favorably affect its effective tax rate in future periods and $1.6 million, if recognized, would result in a credit to additional paid-in capital. The remaining $5.3 million of unrecognized tax benefits, if recognized, would result in an increase in deferred tax assets. However, the Company currently has a full valuation allowance against its U.S. net deferred tax assets which would impact the timing of the effective tax rate benefit should any of such uncertain tax positions be favorably settled in the future. The Company recorded an additional unrecognized tax benefit of $1.4 million, all of which, if recognized in future periods, would favorably affect its effective tax rate.

Upon adoption of FIN 48, the Company also recognized additional long-term income tax assets of $6.9 million and additional long-term income tax liabilities of $6.9 million to present the unrecognized tax benefits as gross amounts on the consolidated balance sheet.

The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expenses. As of April 6, 2008 and April 2, 2007, the Company has approximately $0.35 million and $0.25 million, respectively, of accrued interest and penalties related to uncertain tax positions.

The following table shows the changes in the gross amount of unrecognized tax benefits as of April 6, 2008 (in thousands):

Balance as of April 1, 2007	$	10,431
Gross amount of increases in unrecognized tax benefits for tax positions taken in prior year		1,455
Decrease in unrecognized tax benefits resulting from the lapse of statute of limitation		(17	)
Balance as of April 6, 2008	$	11,869

101

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company does not anticipate that its total unrecognized tax benefits will significantly change due to settlement of examination or the expiration of statute of limitation during the next twelve months.

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 2008, 2007 and 2006, the Company recorded $0.6 million, $1.5 million and $1.7 million, respectively, of rent expense related to this lease and recognized $7.9 million, $7.9 million and $4.8 million, respectively, in revenue from the sale of software licenses to this customer.

Note 16.    Subsequent Events

Repayment of the 2008 Notes

In May 2008, the Company repaid the $15.2 million remaining principal amount of its 2008 Notes. In connection with the repayment, the remaining portion of the hedge and warrant expired at the same time.

Restructuring charges

In May 2008, the Company initiated a restructuring plan resulting from the Company’s realignment to current business objectives. The Company estimates that it will incur approximately $1.2 million to $2.2 million of restructuring charges in fiscal 2009 in connection with this business restructure, primarily for employee termination costs.

102

MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Schedule II—Valuation and Qualifying Accounts

Years Ended April 6, 2008, April 1, 2007 and April 2, 2006

(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 6, 2008
Allowance for doubtful accounts	$	55	562	(241	)	$	376
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

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 6, 2008. 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 2008
Revenue	$	50,165		$	53,493		$	55,747		$	55,014
Gross profit	$	37,571		$	41,519		$	43,607		$	42,368
Net loss	$	(11,269	)	$	(6,395	)	$	(5,943	)	$	(7,228	)
Net loss per share—Basic and diluted(1)	$	(0.29	)	$	(0.16	)	$	(0.14	)	$	(0.17	)
	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	)

(1) Earnings per share is computed independently for each of the quarters presented. The sum of the quarterly earnings per share in fiscal 2008 and 2007 does not equal the total computed for the year due to rounding.

103

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.

104

We assessed the effectiveness of our internal control over financial reporting as of April 6, 2008. 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 6, 2008.

Our independent registered public accounting firm has issued an audit report on the effectiveness of our internal control over financial reporting as of April 6, 2008. This report appears under Item 8 of this Annual Report.

Changes in Internal Control over Financial Reporting.    There were no changes in our internal control or to our knowledge, in other factors that could significantly affect our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

Not applicable.

105

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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 2008 Annual Meeting of Stockholders to be held on August 29, 2008. 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.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.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 AND DIRECTOR INDEPENDENCE

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 Registered Public Accountants—Audit and Non-Audit Fees” and “Ratification of Independent Registered Public Accountants—Pre-Approval Policies and Procedures” contained in our definitive proxy statement.

106

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.

107

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 16, 2008

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 16, 2008
/s/    PETER S. TESHIMA         Peter S. Teshima	Corporate Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	June 16, 2008
/s/    ROY E. JEWELL         Roy E. Jewell	President, Chief Operating Officer and Director	June 16, 2008
/s/    KEVIN C. EICHLER         Kevin C. Eichler	Director	June 16, 2008
/s/    SUSUMU KOHYAMA         Susumu Kohyama	Director	June 16, 2008
/s/    THOMAS ROHRS         Thomas Rohrs	Director	June 16, 2008
/s/    TIMOTHY J. NG         Timothy J. Ng	Director	June 16, 2008
/s/    CHET SILVESTRI         Chet Silvestri	Director	June 16, 2008

108

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
2.2	Agreement and Plan of Merger Dated as of December 20, 2007 by and among Magma Design Automation, Inc., Sabio Labs, Inc., Sabio Acquisition Corp., Sabio Labs, LLC and David Colleran, as Representative	8-K	000-33213	2.1	February 27, 2008
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	Form of Common Stock Certificate	S-1/A	333-60838	4.1	November 15, 2001
4.2	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
4.3	Form of Registration Rights Agreement, dated March 5, 2007, by and between Magma Design Automation, Inc. and certain other parties thereto	8-K	000-33213	10.2	March 5, 2007
4.4	Form of First 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 4.2)	8-K	000-33213	10.3	March 16, 2007
4.5	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 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
10.3#	Registrant’s 2001 Employee Stock Purchase Plan, as amended					X

109

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
10.4#	Registrant’s 2004 Employment Inducement Award Plan, as amended	8-K	000-33213	10.1	January 30, 2006
10.5#	1998 Stock Incentive Plan	S-1	333-60838	10.4	May 14, 2001
10.6#	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
10.7#	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
10.8#	Moscape, Inc. 1997 Incentive Stock Plan	S-1	333-60838	10.6	May 14, 2001
10.9#	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
10.10#	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
10.11#	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
10.12#	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
10.13	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
10.14#	Summary of Standard Director Compensation Arrangements for Non-Employee Directors					X
10.15#	Form of Indemnification Agreement Between the Registrant and certain directors and officers	S-1	333-60838	10.1	May 14, 2001
10.16(a)#	Summary of Compensation Arrangement for Certain Executive Officers					X
10.16(b)#	Schedule of Certain Executive Officers for the Summary of Compensation Arrangement Set Forth in Exhibit 10.27(a)					X
10.17	Office Lease Agreement between Registrant and CA-Skyport I Limited Partnership dated December 28, 2006, for the premises located at 1650 Technology Drive, San Jose, California	10-Q	0-33213	10.1	February 8, 2007

110

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
10.18	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
10.19	Amendment Number One dated January 24, 2007 to Lease dated June 19, 2003, between Registrant and 3Com Corporation (assumed by Marvell Semiconductor from 3Com)	10-K	000-33213	10.30	June 6, 2007
10.20	Settlement Agreement dated March 29, 2007 by and between Synopsys, Inc. and Registrant (Portions of this Settlement Agreement Exhibit have been omitted pursuant to a request for confidential treatment.)	10-K	000-33213	10.37	June 6, 2007
10.21#	Form Notice of Grant of Stock Options and Stock Option Agreement in connection with the Registrant’s 2001 Stock Incentive Plan					X
10.22#	Form Notice of Grant of Award and Stock Unit Agreement in connection with the Registrant’s 2001 Stock Incentive Plan					X
10.23#	Form Notice of Grant of Award and Restricted Share Agreement in connection with the Registrant’s 2001 Stock Incentive Plan					X
10.24#	Form of Notice of Stock Option Award and Stock Option Agreement (U.S. employees) for replacement options under the Registrant’s 2001 Stock Incentive Plan in connection with the Registrant’s Offer to Exchange Outstanding Options to Purchase Common Stock, dated June 27, 2005 (as amended August 5, 2005)	SC TO-I/A	005-77999	99(a) (10)(A)	August 5, 2005
10.25#	Form of Notice of Stock Option Award and Stock Option Agreement (for international employees other than those residing in China, Israel, India and the United Kingdom) for replacement options under the Registrant’s 2001 Stock Incentive Plan in connection with the Registrant’s Offer to Exchange Outstanding Options to Purchase Common Stock, dated June 27, 2005 (as amended August 5, 2005)	SC TO-I/A	005-77999	99(a) (10)(B)	August 5, 2005

111

Exhibit Number	Exhibit Description	Incorporated by Reference				Filed Herewith
		Form	File No.	Exhibit	Filing Date
10.26	Form of Notice of Stock Option Award and Stock Option Agreement (for employees residing in China, Israel and India) for replacement options under the Registrant’s 2001 Stock Incentive Plan in connection with the Registrant’s Offer to Exchange Outstanding Options to Purchase Common Stock, dated June 27, 2005 (as amended August 5, 2005)	SC TO-I/A	005-77999	99(a) (10)(C)	August 5, 2005
10.27#	Form of Notice of Stock Option Award and Stock Option Agreement (for employees residing in the United Kingdom) for replacement options under the Registrant’s 2001 Stock Incentive Plan in connection with the Registrant’s Offer to Exchange Outstanding Options to Purchase Common Stock, dated June 27, 2005 (as amended August 5, 2005)	SC TO-I/A	005-77999	99(a) (10)(D)	August 5, 2005
21.1	List of Subsidiaries	10-K	000-33213	21.1	June 6, 2007
23.1	Consent of Grant Thornton 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.

112

EX-10.1

Exhibit 10.1

MAGMA DESIGN AUTOMATION, INC.

AMENDED AND RESTATED 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)

(Amended and Restated by the Board on May 5, 2008)

TABLE OF CONTENTS

		Page
SECTION 1. ESTABLISHMENT AND PURPOSE
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
(c)	Committee Procedures	6
(d)	Committee Responsibilities	6

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

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

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SECTION 18. LIMITATION ON PARACHUTE PAYMENTS		20
(a)	Scope of Limitation	20
(b)	Basic Rule	20
(c)	Reduction of Payments	20
(d)	Overpayments and Underpayments	21
(e)	Related Corporations	21
SECTION 19. NO EMPLOYMENT RIGHTS		21
SECTION 20. DURATION AND AMENDMENTS		21
(a)	Term of the Plan	21
(b)	Right to Amend or Terminate the Plan	21
(c)	Effect of Amendment or Termination	22
SECTION 21. EXECUTION		22

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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 and was amended and restated on May 5, 2008. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options (which may constitute incentive stock options or nonstatutory stock options) or stock appreciation rights.

SECTION 2. DEFINITIONS.

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

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

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

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

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

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

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

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

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

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

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

(v) Both:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(u) “Plan” shall mean this Amended and Restated 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 12 (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).

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(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.

(ii) Each Outside Director who first joins the Board of Directors after May 5, 2008 shall receive an Award of twenty thousand (20,000) Stock Units (subject to adjustment under Section 12) on the first business day after his or her initial appointment or 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 May 5, 2008, each Outside Director who will continue serving as a member of the Board of Directors thereafter shall receive an Award of ten thousand (10,000) Stock Units, 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 Award of a pro rata portion of ten thousand (10,000) Stock Units 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 Stock Units resulting from such calculation shall be rounded up to the nearest whole number.

(iv) Settlement of vested Stock Units will be made in the form of shares.

(v) Each Award of Stock Units granted pursuant to this Section 4(b) shall be evidenced by a written Stock Unit Agreement between the Outside Director and the Company.

(vi)

(A) The vesting schedule for each Award granted under Section 4(b)(ii) shall be as follows, subject to the Outside Director continuing as a member of the Board of Directors on such date. Twenty-five percent (25%) of the Stock Units subject to each Award granted under Section 4(b)(ii) shall become exercisable on the first anniversary of the date of grant. The balance of the Stock Units (i.e., the remaining seventy-five percent (75%)) subject to each Award granted under Section 4(b)(ii) shall become exercisable quarterly over a three-year period beginning on the date which is three months after the first anniversary of the date of grant. Accordingly, the balance of Stock Units shall vest, from and after the date, which is three months after the first anniversary of the date of grant, at a quarterly rate of 6.25% of the total number of Stock Units subject to such Award.

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(B) The vesting schedule for the Shares subject to each Award of Stock Units granted under Section 4(b)(iii) shall be as follows. One hundred percent (100%) of the Stock Units subject to each Award 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 if the Outside Director continues as a member of the Board of Directors on such date.

(C) Notwithstanding the foregoing, each Award of Stock Units (whether granted under Section 4(b)(ii) or 4(b)(iii)) shall become exercisable in full (100%) in the event that a Change in Control occurs with respect to the Company.

(D) All provisions of the Plan not inconsistent with this Section 4(b) shall apply to Awards of Stock Units granted to Outside Directors, including but not limited to the provisions of Section 11.

(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(c) 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(c) 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.

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

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

SECTION 6. RESTRICTED SHARES.

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

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

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

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(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.

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(c), and the Exercise Price of an NSO shall not be less than the par value of the Shares subject to such NSO. Subject to the foregoing in this Section 8(c), the Exercise Price under any Option shall be determined by the Committee at its sole discretion. The Exercise Price shall be payable in one of the forms described in Section 9.

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

(e) Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10 years from the date of grant (five years for Employees described in Section 4(c)). 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.

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(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.

(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.

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(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 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 9(c).

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

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

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

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

SECTION 10. STOCK APPRECIATION RIGHTS.

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

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

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

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

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

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

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

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

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

SECTION 11. STOCK UNITS.

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

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

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

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

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

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

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

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

SECTION 12. ADJUSTMENT OF SHARES.

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

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

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

(iii) The number of Stock Units 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.

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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.

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

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

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

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

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

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

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

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

SECTION 13. DEFERRAL OF AWARDS.

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

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

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

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

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

SECTION 14. AWARDS UNDER OTHER PLANS.

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

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

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

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

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

SECTION 16. LEGAL AND REGULATORY REQUIREMENTS.

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

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

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

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

SECTION 19. NO EMPLOYMENT RIGHTS.

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

SECTION 20. DURATION AND AMENDMENTS.

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

(b) Right to Amend or Terminate the Plan. The Board of Directors may amend the Plan at any time and from time to time. Rights and obligations under any Option granted before amendment of the Plan shall not be materially impaired by such amendment, except with consent of the person to whom the Option was granted. An amendment of the Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable laws, regulations or rules.

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

SECTION 21. EXECUTION.

To record the adoption of the Plan by the Board of Directors effective as of May 5, 2008, 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-10.3

Exhibit 10.3

MAGMA DESIGN AUTOMATION, INC.

2001 EMPLOYEE STOCK PURCHASE PLAN

(Adopted by the Board on May 4, 2001)

(Amended by the Board on January 26, 2004)

(Amended by the Board on March 24, 2006)

(Amended by the Board on September 20, 2006)

(Amended by the Board on January 23, 2007)

(Amended by the Compensation and Nominating Committee on April 29, 2008)

Table of Contents

			Page
SECTION 1	Purpose Of The Plan		1
SECTION 2	Definitions		1
	(a)	“Accumulation Period”	1
	(b)	“Affiliate”	1
	(c)	“Board”	1
	(d)	“Code”	1
	(e)	“Code Section 423(b) Plan”	1
	(f)	“Committee”	1
	(g)	“Company”	1
	(h)	“Compensation”	1
	(i)	“Corporate Reorganization”	2
	(j)	“Eligible Employee”	2
	(k)	“Exchange Act”	2
	(l)	“Fair Market Value”	2
	(m)	“IPO”	3
	(n)	“Non-423(b) Plan”	3
	(o)	“Offering Period”	3
	(p)	“Participant”	3
	(q)	“Participating Company”	3
	(r)	“Plan”	3
	(s)	“Plan Account”	3
	(t)	“Purchase Price”	3
	(u)	“Stock”	3
	(v)	“Subsidiary”	3
SECTION 3	Administration Of The Plan		3
	(a)	Committee Composition	3
	(b)	Committee Responsibilities	3
SECTION 4	Enrollment And Participation		4
	(a)	Offering Periods	4
	(b)	Accumulation Periods	4
	(c)	Enrollment	4
	(d)	Duration of Participation	4
	(e)	Applicable Offering Period	4
SECTION 5	Employee Contributions		5
	(a)	Frequency of Payroll Deductions	5
	(b)	Amount of Payroll Deductions	5
	(c)	Changing Withholding Rate	5
	(d)	Discontinuing Payroll Deductions	5
	(e)	Limit on Number of Elections	5
SECTION 6	Withdrawal From The Plan		6
	(a)	Withdrawal	6
	(b)	Re-enrollment After Withdrawal	6

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SECTION 7	Change In Employment Status		6
	(a)	Termination of Employment	6
	(b)	Leave of Absence	6
	(c)	Death	6
SECTION 8	Plan Accounts And Purchase Of Shares		6
	(a)	Plan Accounts	6
	(b)	Purchase Price	6
	(c)	Number of Shares Purchased	7
	(d)	Available Shares Insufficient	7
	(e)	Issuance of Stock	7
	(f)	Unused Cash Balances	7
	(g)	Stockholder Approval	7
SECTION 9	Limitations On Stock Ownership		8
	(a)	Five Percent Limit	8
	(b)	Dollar Limit	8
SECTION 10	Rights Not Transferable		8
SECTION 11	No Rights As An Employee		9
SECTION 12	No Rights As A Stockholder		9
SECTION 13	Securities Law Requirements		9
SECTION 14	Stock Offered Under The Plan		9
	(a)	Authorized Shares	9
	(b)	Antidilution Adjustments	9
	(c)	Reorganizations	10
SECTION 15	Rules for Foreign Jurisdictions		10
	(a)	Compliance with Foreign Law	10
	(b)	Non-423(b) Plan Component	10
SECTION 16	Amendment Or Discontinuance		10
SECTION 17	Execution		10

- ii -

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) “Affiliate” shall mean any Subsidiary or other entity in which the Company has an equity interest.

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

(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.

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(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).

(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.

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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 March 1, June 1, September 1 and December 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 March 1, June 1, September 1 and December 1, except that the first Accumulation Period shall commence on the date of the IPO and end on January 31, 2002.

(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.

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(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.

(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.

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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.

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

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(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.

(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.

7

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.

(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).

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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.

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 Committee. 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.

9

(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.

(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 or the Committee 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.

SECTION 17 Execution.

To record the further amendment of the Plan on April 29, 2008, after its amendment on January 26, 2004, March 24, 2006, September 20, 2006, and January 23, 2007, and adoption by the Board on May 4, 2001, the Company has caused its authorized officer to execute the same below.

For: Magma Design Automation, Inc.
By:	/s/ Rajeev Madhavan
	Rajeev Madhavan
	Chief Executive Officer

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EX-10.14

EXHIBIT 10.14

MAGMA DESIGN AUTOMATION, INC.

Summary of Standard Director Compensation Arrangements for Non-Employee Directors

Description of Director Compensation (effective as of May 5, 2008)

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 $30,000 per year and $2,500 per Board or committee meeting attended ($1,000 for teleconference meetings) for services as a member of the Board of the Directors. In addition, the Chairman of the Audit Committee receives a fee of $20,000 per year, and the Chairman of the Compensation and Nominating Committee receives a fee of $15,000 per year; the other members of the Audit Committee receive a fee of $10,000 per year, and the other members of the Compensation Committee receive a fee of $7,500 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, as amended, which was approved by Magma’s stockholders, each non-employee director receives an initial award of 20,000 restricted stock units upon appointment or election. The initial award vests as to 25% on the first anniversary of the award date. The remainder of the award vests quarterly over 12 quarters. Following the conclusion of each regular annual meeting of stockholders, each continuing non-employee director receives an additional award of 10,000 restricted stock units. When a non-employee director is appointed to the Board of Directors at a time other than at an annual meeting, such director receives an interim award that is a pro rata portion of the annual 10,000 restricted stock unit award. The annual awards and the interim awards 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 awards will vest fully upon a change in control of Magma, as set forth under the 2001 Stock Incentive Plan.

EX-10.16(A)

EXHIBIT 10.16(a)

MAGMA DESIGN AUTOMATION, INC.

Summary of Compensation Arrangement for Certain Executive Officers

Exhibit 10.16(b) lists the executives for which this Exhibit 10.16(a) applies. In addition, Exhibit 10.16(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 10.16(b) may have the same or similar compensation as set forth in this Exhibit 10.16(a) and in Exhibit 10.16(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.

The variable or bonus compensation paid to each executive officer (if any) is earned for achievement of performance goals for each fiscal year of the Company. The applicable performance goals are set by the Compensation Committee of Magma’s Board of Directors at the beginning of each fiscal year. The Committee may choose financial, strategic or operational goals, including EPS, Operating Margin, Annual Bookings or Revenue goals. The Committee sets a target bonus for each officer, which is a percentage of his or her base salary. Such target bonuses for each officer are set forth in Exhibit 10.16(b). The actual bonus payable to any officer may be higher or lower than his or her target bonus, depending on whether actual performance meets, partially meets, or exceeds the predetermined performance goals. Bonuses are paid in the first fiscal quarter of the fiscal year following the fiscal year in which the bonus was earned. An officer generally must remain an employee of Magma through the payment date in order to receive a bonus. The Committee has discretion to increase or decrease the bonus otherwise payable to any executive. The Committee also has full discretion to make all determinations with respect to executive officer bonuses.

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 10.16(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 (as defined in Mr. Teshima’s offer letter). However, such executive officers may be entitled to accelerated vesting of their outstanding stock options in connection with a change in control or similar transaction and certain terminations of employment related to a change in control. Specifically, for options granted on or after October 22, 2003, if a change in control of Magma occurs, 25% of their unvested options will become immediately vested and exercisable and, if the executive officer is involuntarily terminated without cause (as described in further detail in the Company’s Proxy Statement dated July 23, 2007) within the first year following the change in control, an additional 50% of his unvested options will become vested and exercisable. However, any potential accelerated option vesting upon or following a change in control is subject to the 2001 Plan’s general parachute payment limitation.

EX-10.16(B)

EXHIBIT 10.16(b)

MAGMA DESIGN AUTOMATION, INC.

Schedule of Certain Executive Officers for the Summary of Compensation Arrangement set forth in Exhibit 10.16(a)

The compensation arrangements for the below listed executives are set forth in Exhibit 10.16(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	%
Bruce Eastman	Corporate Vice President, Worldwide Sales	$	300,000	100	%
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	%

EX-10.21

Exhibit 10.21

	Magma Design Automation, Inc.
	ID: 77-0454924
Notice of Grant of Stock Options	1650 Technology Drive
and Option Agreement	San Jose, CA 95110

[Name]	Option Number:
	Plan:
	ID:

Effective MM/DD/YYYY, you have been granted a(n) [Non-Qualified Stock Option] [Incentive Stock Option] to buy x,xxx shares of Magma Design Automation, Inc. (the Company) stock at $x.xxxx per share.

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

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

Shares Vest Type Full Vest Expiration

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

Magma Design Automation, Inc.	Date
[Name of Optionee]	Date

STOCK OPTION AGREEMENT

TERMS AND CONDITIONS

MAGMA DESIGN AUTOMATION, INC.

2001 Stock Incentive Plan

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

1. Exercise

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

2. Term

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

3. Regular Termination

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

4. Death or Disability

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

5. Cause

If your Service with the Company or a Subsidiary terminates for Cause, this Option will expire on the date seven days following your Termination Date. For purposes of this section, “Cause” shall mean (i) continued failure to perform substantially your duties, which standard of duties shall be referenced to the standards set by the Company at the date of this Agreement (other than as a result of

sickness, accident or similar cause beyond your reasonable control) after receipt of a written warning and your being given thirty (30) days to cure the failure; (ii) willful misconduct or gross negligence, which is demonstrably injurious to the Company or any of its Subsidiaries, including without limitation willful or grossly negligent failure to perform your material duties as an officer or employee of the Company or any of its Subsidiaries or a material breach of this Agreement, your employment agreement (if any) or your Proprietary Information and Inventions Agreement with the Company; (iii) conviction of or plea of nolo contendere to a felony; or (iv) commission of an act of fraud against, or the misappropriation of property belonging to, the Company or any affiliated company, employee, customer or supplier of the Company.

6. Leaves of Absence

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

7. Restrictions on Exercise

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

8. Notice of Exercise

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

9. Form of Payment

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

10. Withholding Taxes and Stock Withholding

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

11. Restrictions on Resale

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

12. Transfer of Option

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

13. Retention Rights

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

14. Stockholder Rights

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

15. Adjustments

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

16. Applicable Law

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

17. The Plan and Other Agreements

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

18. Severability

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

19. Electronic Delivery

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

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

TERMS AND CONDITIONS DESCRIBED IN THE NOTICE OF GRANT, THE

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

RECEIPT OF A COPY OF THE PLAN

EX-10.22

Exhibit 10.22

	Magma Design Automation, Inc.
	ID: 77-0454924
Notice of Grant of Award	1650 Technology Drive
and Award Agreement	San Jose, CA 95110

[Name]	Award Number:
	Plan:
	ID:

Effective MM/DD/YYYY, you have been granted an award of xxx,xxx restricted stock units. These units are restricted until the vest date(s) shown below, at which time you will receive shares of Magma Design Automation, Inc. (the Company) common stock.

The current total value of the award is $xxx,xxx.xx.

The total price of the award is $xx.xx.

The award will vest in increments on the date(s) shown.

Shares Full Vest

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

Magma Design Automation, Inc.	Date
[Name]	Date

MAGMA DESIGN AUTOMATION, INC.

STOCK UNIT AGREEMENT TO THE

MAGMA DESIGN AUTOMATION, INC. 2001 STOCK INCENTIVE PLAN

Unless otherwise defined herein, the terms defined in Magma Design Automation, Inc.’s 2001 Stock Incentive Plan (the “Plan”) shall have the same defined meanings in this Stock Unit Agreement (Stock Units) (the “Agreement”).

You have been granted Stock Units (“Stock Units”) subject to the terms, restrictions and conditions of the Plan, the Notice of Grant of Award (“Notice of Grant”) and this Agreement.

1. Settlement. Settlement of Stock Units shall be made within 30 days following the applicable date of vesting under the vesting schedule set forth in the Notice of Grant. Settlement of Stock Units shall be in Shares.

2. No Stockholder Rights. Unless and until such time as Shares are issued in settlement of vested Stock Units, Participant shall have no ownership of the Shares allocated to the Stock Units and shall have no right to dividends or to vote such Shares.

3. Dividend Equivalents. Dividends, if any (whether in cash or Shares), shall not be credited to Participant.

4. No Transfer. The Stock Units and any interest therein shall not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of.

5. Termination. If Participant’s continuous employment with the Company or any of its subsidiaries shall terminate for any reason, all unvested Stock Units shall be forfeited to the Company forthwith, and all rights of Participant to such Stock Units shall immediately terminate. In case of any dispute as to whether Termination has occurred, the Committee shall have sole discretion to determine whether such Termination has occurred and the effective date of such Termination.

6. Acknowledgement. The Company and Participant agree that the Stock Units are granted under and governed by this Agreement, the provisions of the Plan and the Notice of Grant (incorporated herein by reference). Participant: (i) acknowledges receipt of a copy of the Plan and the Plan prospectus, (ii) represents that Participant has carefully read and is familiar with their provisions, and (iii) hereby accepts the Stock Units subject to all of the terms and conditions set forth herein and those set forth in the Plan and the Notice of Grant.

7. Tax Consequences. Participant acknowledges that there will be tax consequences upon settlement of the Stock Units or disposition of the Shares, if any, received in connection therewith, and Participant should consult a tax adviser regarding Participant’s tax obligations prior to such settlement or disposition. Upon vesting of the Stock Units, Participant will include in income the fair market value of the Shares subject to the Stock Units. The included amount will be treated as ordinary income by Participant and will be subject to withholding by the Company. The Company will satisfy any withholding obligations by reducing the number of Shares deliverable upon settlement by such an amount to satisfy such withholding requirements at the minimum statutory rate. Alternatively, or in addition, the Company may in its sole discretion sell or arrange for the sale of Shares to be issued on the vesting of Stock Units to satisfy the withholding obligation or withhold applicable taxes from Participant’s wages or other cash compensation payable to Participant by the Company. Information

on possible alternative tax payment arrangements, (whether by cash, check or other method approved by the Company), can be obtained from the Company. Upon disposition of the Shares, any subsequent increase or decrease in value will be treated as short-term or long-term capital gain or loss, depending on whether the Shares are held for more than one year from the date of settlement. Please note that the forgoing is for United States income taxpayers only, and that the tax consequences may be different for Participants residing outside the United States or Participants who transfer outside the United States after the grant of the Stock Units.

8. Compliance with Laws and Regulations. The issuance of Shares will be subject to and conditioned upon compliance by the Company and Participant with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company’s Common Stock may be listed or quoted at the time of such issuance or transfer.

9. Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement will be binding upon Participant and Participant’s heirs, executors, administrators, legal representatives, successors and assigns.

10. Severability. The Plan and Notice of Grant are incorporated herein by reference. The Plan, the Notice of Grant and this Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof. If any provision of this Agreement is determined by a court of law to be illegal or unenforceable, then such provision will be enforced to the maximum extent possible and the other provisions will remain fully effective and enforceable.

11. NO GUARANTEE OF EMPLOYMENT. PARTICIPANT UNDERSTANDS AND AGREES THAT HIS OR HER EMPLOYMENT WITH THE COMPANY OR ITS SUBSIDIARIES IS FOR AN UNSPECIFIED DURATION AND CONSTITUTES “AT-WILL” EMPLOYMENT. PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE VESTING OF STOCK UNITS’ PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY OR ITS SUBSIDIARY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED STOCK UNITS OR BEING ISSUED SHARES HEREUNDER). PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER, AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH PARTICIPANT’S RIGHT OR THE COMPANY’S AND/OR SUBSIDIARY’S RIGHT TO TERMINATE PARTICIPANT’S EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE.

12. Code Section 409A. Notwithstanding the foregoing to the contrary, the Company reserves the right, to the extent it deems necessary or advisable in its sole discretion, to unilaterally alter or modify the Plan or this Agreement to ensure all Stock Units provided to Participants who are U.S. taxpayers are made in such a manner that either qualifies for exemption from or complies with Section 409A of the Code; provided, however that the Company makes no representations that the Plan, any Agreement, or any Stock Units granted thereunder will be exempt from or comply with Section 409A of the Code and makes no undertaking to preclude Section 409A of the Code from applying to the Plan, the Agreement or any Stock Unit award made thereunder.

By Participant’s signature and the signature of the Company’s representative on the Notice of Grant, Participant and the Company agree that this Stock Unit is granted under and governed by the terms and conditions of the Plan, the Notice of Grant and this Agreement. Participant has reviewed the Plan, the Notice of Grant and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement, and fully understands all provisions of the Plan, the Notice of Grant and this Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, the Notice of Grant and this Agreement. Participant further agrees to notify the Company upon any change in Participant’s residence address.

EX-10.23

Exhibit 10.23

	Magma Design Automation, Inc.
	ID: 77-0454924
Notice of Grant of Award	1650 Technology Drive
and Award Agreement	San Jose, CA 95110

[Name]	Award Number:
	Plan:
	ID:

Effective MM/DD/YYYY, you have been granted an award of xx,xxx shares of Magma Design Automation, Inc. (the Company) common stock. These shares are restricted until the vest date(s) shown below.

The current total value of the award is $xxx,xxx.xx.

The total price of the award is $x.xx.

The award will vest in increments on the date(s) shown.

Shares Full Vest

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

Magma Design Automation, Inc.	Date
[Name]	Date

MAGMA DESIGN AUTOMATION, INC.

2001 Stock Incentive Plan

RESTRICTED SHARE AGREEMENT

THIS RESTRICTED SHARE AGREEMENT (this “Agreement”), together with the Notice of Grant of Award (the “Notice”) to which this Restricted Share Agreement is attached, constitute the Restricted Stock Agreement referred to in the Magma Design Automation, Inc. 2001 Stock Incentive Plan (the “Plan”) with respect to the restricted share award granted to you pursuant to the Notice. To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Plan.

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

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

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

4. Restrictive Legends and Stop Transfer Orders.

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

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

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

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

5. Company’s Lapsing Right of Repurchase.

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

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

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

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

8. Miscellaneous.

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

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

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

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

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

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

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

9. Withholding. With respect to an award of Shares hereunder, any tax withholding obligation of the Company shall be satisfied by the Company withholding a number of Shares from the total number of Shares deliverable pursuant to the award, the aggregate Fair Market Value of which is equal to the minimum statutory withholding tax obligation in accordance with rules and procedures established by the Company. The value of each Share withheld shall be the Fair Market Value per share of Common Stock on the date the award becomes taxable. Partial Shares shall not be used to satisfy withholding obligations. In the event the minimum statutory withholding obligation is not equal to the aggregate Fair Market Value of a whole number of Shares, the number of Shares withheld shall be rounded down to the next whole Share with any remaining statutory withholding obligation to be satisfied in a manner acceptable to the Company.

10. Section 83(b) Election. Purchaser hereby acknowledges that he or she has been informed that, with respect to the purchase of the Shares, an election may be filed by the Purchaser with the Internal Revenue Service, within 30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase (the “Election”). Making the Election will result in recognition of taxable income to the Purchaser on the date of purchase, measured by the excess, if any, of the Fair Market Value of the Shares over the purchase price for the Shares. Absent such an Election, taxable income will be measured and recognized by Purchaser at the time or times on which the Company’s Repurchase Right lapses. Purchaser is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election. PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER’S SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO TIMELY FILE THE ELECTION UNDER SECTION 83(b) OF THE CODE, EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER’S BEHALF. If Purchaser does file a Section 83(b) with the Internal Revenue Service, Purchaser agrees to deliver a copy of such election to the Company with 5 business days of filing such election.

11. Acknowledgment. By Purchaser’s signature and the signature of the Company’s representative on the Notice, Purchaser and the Company agree that the Shares are granted under and governed by the terms and conditions of the Plan, the Notice and this Agreement. Purchaser has reviewed the Plan, the Notice and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement, and fully understands all provisions of the Plan, the Notice and this Agreement. Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions relating to the Plan, the Notice and this Agreement. Purchaser further agrees to notify the Company upon any change in Purchaser’s residence address.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our reports dated June 12, 2008, with respect to the consolidated financial statements, schedule, and internal control over financial reporting included in the Annual Report of Magma Design Automation, Inc on Form 10-K for the year ended April 6, 2008. 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. 333-108346, effective February 13, 2004 and File No. 333-141886, effective April 30, 2007) and on Forms S-8 (File No. 333-74278, effective November 30, 2001, File No. 333-92324, effective July 12, 2002, File No. 333-108348, effective August 29, 2003, File No. 333-112326, effective January 30, 2004, File No. 333-122656, effective February 9, 2005, File No. 333-132333, effective March 10, 2006, and File No. 333-143551, effective June 6, 2007).

/s/ GRANT THORNTON LLP

San Jose, California

June 12, 2008

EX-31.1

Exhibit 31.1

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

as Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

for the Period Ended April 6, 2008

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 16, 2008

/s/    RAJEEV MADHAVAN        

Rajeev Madhavan

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

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

as Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

for the Period Ended April 6, 2008

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 16, 2008

/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 6, 2008, 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 6, 2008 (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 16, 2008

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 6, 2008 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 6, 2008, 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 6, 2008 (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 16, 2008

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 6, 2008 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.